The robust economy of the 1990s provided the Hampton Roads area of Virginia with steady growth and low vacancies in the office, industrial, retail and hospitality sectors. However, the slowing economy and the events of September 11 have altered the outlook for the Hampton Roads market. Corporations have been forced to lay off employees and several major retailers have declared bankruptcy, causing significant shifts in the market. Despite the challenging economic conditions, proven retailers and office developers in Hampton Roads are demonstrating continued growth.

Office

Numerous office and mixed-use projects are underway throughout Hampton Roads. The Virginia Beach Town Center project, Oyster Point Town Center in Newport News and New Town in Williamsburg are designed as new urban developments in areas formerly considered suburban office markets.

The Virginia Beach Town Center project, which is being leased and managed by Divaris Real Estate, is master planned to accommodate 1.8 million square feet of mixed-use development. Armada/Hoffler Development Company of Chesapeake is currently constructing a 225,000-square-foot office tower with delivery planned for this fall.

Oyster Point Town Center is a 40-acre mixed-use office, retail, hotel and residential development. It is expected to include 1 million square feet of office space, 150,000 square feet of retail, entertainment and restaurant space, a high-quality apartment community and two hotels. Phase I is 100 percent pre-leased and is scheduled for delivery in July. The Oyster Point Town Center Project Team includes Newport News Economic Development Authority, the city of Newport News, owner/developer Newport News Town Center, LLC, CMSS Architects and NAI Harvey Lindsay Commercial Real Estate.

The New Town development in Williamsburg is concluding its planning phase with construction plans for 2003. New Town Associates LLC and Armada/Hoffler are developing this project.

In addition to the town center developments, ECPI College of Technology and Symantec Software Company recently completed construction of two buildings totaling 160,000 square feet in Newport News. Both companies consolidated multiple office locations into owner-occupied buildings, which include approximately one-third speculative space.

The net effect of this new construction is an increase in vacancy rates. Companies are leaving large vacancies in older office buildings and moving to newly constructed buildings. To fill such vacancies, rental rates are beginning to decrease in these older buildings.

Industrial

The industrial market in Hampton Roads benefited in the 1990s from high-tech and manufacturing companies entering the market. However, not all of these companies were able to weather the recent softening economy. By the fourth quarter of 2001, Gateway laid off a majority of its work force, leaving 421,000 square feet of industrial space vacant in the Hampton market. In addition, Evercel moved its rechargeable battery operation to China, dumping nearly 100,000 square feet of industrial space in Newport News. Other casualties of the economy include the custom boat builder, Orca Yachts, which occupied a 143,000-square-foot industrial building on 53 acres in Chesapeake.

Because company downsizing has left so much vacant space in Hampton Roads, developers will shy away from building additional speculative industrial space in the market until the current vacancies are filled. The industrial segment needs to attract new companies capable of filling voids left by such downsizing.

Retail

The retail landscape in Hampton Roads has changed over the past year as major retailers such as Montgomery Ward, Frank's Nursery & Crafts and Service Merchandise voided leases through the bankruptcy courts. The vacant retail space caused by bankrupt tenants allowed for expansion of existing retailers in the market.

Montgomery Ward's location in Hampton provided an opportunity for Burlington Coat Factory to secure a prime location in Coliseum Mall. In Chesapeake Square Mall, Target secured an anchor location formerly occupied by Wards. The former HQ building in Newport News is another example of a retail property recycled from a bankrupt company. Best Buy retrofitted the building in 2001 and Babies "R" Us and Value City Furniture are currently under construction in the balance of the building.

Based on preliminary reports, it appears that Hampton Roads will not be severely affected by Kmart's recent Chapter 11 bankruptcy filing; however, the owners of the Power Plant development in Hampton elected to halt construction of a Super Kmart until the bankruptcy court decides the ultimate fate of Kmart's leases.

The largest retailer in the world, Wal-Mart, is actively developing new Supercenter stores and repositioning existing smaller stores in the market. Over the past year, the company opened a Supercenter store at Red Mill Commons in Virginia Beach and is in the process of completing two new Supercenter locations on US 17 in Gloucester and Yorktown. Wal-Mart is also relocating an older store from the Chesapeake Crossing Shopping Center in Chesapeake to a new location on Taylor Road. The Chesapeake store will accommodate a Supercenter next to Sam's Club.

The retail sector in Hampton Roads continues to experience growth despite changes in the economy. Space left vacant by bankrupt companies in desirable locations is being leased quickly and Wal-Mart's growth provides spin-off benefits. Additional anchor stores, smaller retailers and outparcel users will open stores within these Wal-Mart-anchored developments.

Overall, the outlook for retail development in the region is positive. The shifting of retailers will bring stronger tenants to the core markets. The vacancies created by tenants relocating will force developers to rehab older projects. Wal-Mart's addition of three Supercenters will contribute over 600,000 square feet of new retail with additional retail to follow in these Wal-Mart-anchored centers.

Hospitality

The aftermath of September 11 and the weakening economy have noticeably affected the hospitality market in Hampton Roads. Occupancy rates and average daily rates have fallen considerably compared to last year. Fortunately, the height of the tourist season was not affected in the tourist destinations of Hampton Roads, such as Williamsburg and Virginia Beach.

Lenders are paying careful attention to the drop in occupancy and room rates. They are reluctant to extend financing for new hotels. Financial institutions that are lending to hotels are requiring more equity, thus making it difficult for smaller operators to develop new products in the Hampton Roads market.

The hospitality sector is in a wait-and-see mode until business and tourism travel returns to the levels seen prior to September 11.

Christopher E. Rouzie, CPA serves as assistant vice president of Insignia Thalhimer in Newport News, Virginia.


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