After 5 years of solid growth, the Richmond, Virginia, real estate market, like much of the United States, experienced its first significant downturn in activity during 2001. Vacancies increased and tenant activity diminished in market sectors, including office, industrial, retail and multifamily. This trend, which began in late 2000 and early 2001, accelerated following the terrorist attacks of September 11.

Suburban Office

Of all market sectors, suburban office development has by far been the most active category in Richmond. During the past 5 years, 4 million square feet of inventory was added to the suburban market, with 1.6 million square feet coming on line in 2001 alone. However, after experiencing an average net absorption of over 500,000 square feet in recent years, 2001 saw a dramatic decline to just over 269,000 square feet. In addition to a dramatic decrease in net absorption, vacancy nearly doubled between 2000 and 2001, increasing from 5.42 percent to 10.68 percent.

In addition to this vacancy in landlord space, a large increase in sublease space raised the effective vacancy to over 14 percent. In previous years sublease space totaled less than 100,000 square feet. Due to company downsizing and dot-com failures, the Richmond area experienced a substantial increase in sublease space, which exceeded 650,000 square feet during 2001. Combined with 1.8 million square feet of available landlord space, the total vacancy of over 2.4 million square feet represents several years' supply under normal conditions.

This sharp increase in supply has created pressure on rents. While some institutional landlords have resisted rent reductions, some Class A space can be leased in the Richmond area below the $18 to $19 average for first generation Class A space. It is expected that this downward pressure on rents will continue as landlords compete for fewer prospects. It is highly unlikely that any landlord will launch a speculative office project during the next year.

CBD Office

As the state capital of Virginia and regional headquarters of the Federal Reserve Bank, the downtown Richmond office market has remained reasonably healthy, although the vacancy rate has consistently been almost twice that of the suburban market. The downtown Richmond office market has less than half the inventory of the fast-growing suburban market. This inventory, at about 7.8 million square feet, has held steady and even declined somewhat over the past 5 years. The decline in this space was caused by the conversion of several older Class B and C buildings to residential or hospitality uses. Class A space remains relatively tight, at about 7 percent vacant, while there is an abundance of Class B and C space, averaging over 20 percent vacant.

Located at the confluence of Interstates 95 and 295 and Parham Road, Windsor Business Park is a planned development under single ownership that presents a consistent, professional look throughout its business park. An outstanding professional team of designers, engineers, and planners has contributed to create a work environment unique in the Richmond area. When complete, the park will consist of over 550,000 square feet of office and office/service space in 11 separate buildings. Downtown Richmond had its first new speculative office building completed during 2001 with the development and occupancy of the Turning Basin Building, adding approximately 95,000 square feet to the office inventory. Downtown Richmond is currently experiencing a high level of public/private investment in a new convention center and the development of the Riverfront Project, which features a reconstruction of the old Richmond canal system. The Riverfront Project is expected to attract new development, as there are several new building sites on the canal. A mandate from the General Services Administration to relocate suburban federal offices to the central business district has helped occupancy in downtown recently. The Department of Housing & Urban Development occupies more than 30,000 square feet in a downtown building after moving from the nearby suburbs. With a downtown employment population of over 70,000 people, Richmond's CBD should remain stable.

Industrial

Mirroring the amount of suburban office development, Richmond's industrial market grew by more than 4 million square feet between 1997 and 2001. Led by developers such as locally-based Devon USA, Highwoods Properties of Raleigh, North Carolina, and Malvern, Pennsylvania-based Liberty Property Trust, development during that period consisted of high-bay Class A distribution space. While vacancy has held steady, averaging about 12.5 percent over the past 5 years, there has been a series of ups and downs in annual absorption.

Most of the swings in absorption have been due to the activities of Hewlett-Packard in the Richmond market. In the mid-1990s Hewlett-Packard entered the market with a major operation assembling and distributing laser printers and printer supplies. Hewlett-Packard came into the market and absorbed most of the vacant space that was leftover from the recession of the early 1990s. During the last few years Hewlett-Packard has occupied build-to-suit space in excess of 1.4 million square feet on an industrial campus near the Richmond International Airport. As new buildings were completed Hewlett-Packard vacated existing space. A good deal of the Hewlett-Packard vacancy was back-filled as American Home Products consolidated and expanded its distribution needs to support its manufacturing operation in the Richmond area.

DuPont Company is expected to affect vacancy numbers as Hewlett-Packard did; the company will soon occupy an 800,000-square-foot build-to-suit. In a deal handled by Porter Realty, DuPont will vacate DuPont Warehouse Complex, a three-building property totaling approximately 452,000 square feet for the more modern space that the build-to-suit will provide. Rental rates are stable in the $4.25 to $4.50 per square foot range for newly constructed space. Developers have been building to the market and it is expected that the market will remain stable during the next few years.

Smaller industrial/flex buildings for sale, such as those priced below $1 million, continue to receive decent activity as low interest rates have kept activity level afloat for this price range, according to Dick Porter of Porter Realty. Investment sales within this category also remain moderately strong.

Significant land sales along key interstate interchanges have occurred as well, such as Porter Realty's sale to RLR Investment (RLR Carrier), which consists of a 50-acre purchase for a 120-door truck terminal currently under construction at Walthall/Ruffin Mill Road and I-95 South. At the Lewistown Road Exit (I-95 North) there were 100- and 120-acre parcel sales to two separate investors.

A major factor in the manufacturing sector has been the shutdown of several large plants in the Richmond area during the past 3 years. Industrial names such as International Paper, AMF Reece, Viasystems and Stanley Home Products have vacated manufacturing facilities in Richmond. With the manufacturing economy in the U.S. in a period of decline, it is unlikely that these large manufacturing centers will be re-occupied rapidly. Look for conversions of manufacturing facilities to warehouse space or demolitions of some well-located sites that are suited for other uses.

Office/Warehouse

The office/warehouse market during the past 5 years has shown a moderate increase in new construction from approximately 5.8 million to 6.7 million square feet of space. Absorption has held steady, averaging about 250,000 square feet per year, with the exception of 2001, which saw a decrease to just over 90,000 square feet. The office/warehouse market has been subject to an increase in sublease space with the failure of some of the technology companies and corporate downsizing. Construction levels have remained moderate, which has resulted in only a slight increase in the average vacancy over the past 5 years. Look for the current vacancy to gradually work off as the economy slowly improves.

Retail

Like most U.S. cities, Richmond has experienced a rapid pace of retail development as big box users such as Wal-Mart, Home Depot, Lowe's Home Improvement Warehouse, Target and Kohl's have ringed the city with new stores. Inventory over the last 5 years has increased from just over 18 million to almost 28 million square feet of space. After 4 years of steadily increasing absorption, 2001 saw a dramatic decline to the first negative absorption for the period. This negative absorption was largely attributable to bankruptcies and closures as retailers reacted to the general economic decline. Vacancy was up almost 2 percentage points during 2001, topping out at 9.65 percent. The Richmond metro market experienced its first example of infill development with Lowe's and Kroger stores near the downtown area, and closer-in sites are being redeveloped for Wal-Mart and other local and national retailers. With many major retailers experiencing poor performance, the development of traditional power centers has declined. Retailers are expected to fill market gaps during the next 2 years, but major construction of large strip centers and big box centers is not expected.

Of great interest to the Richmond area are two potential regional malls. Short Pump Town Center is planned by Cleveland-based Forest City Development and is expected to have over 1 million square feet of gross leasable area and will feature the first appearance in the Richmond market of Nordstrom and other upscale retailers. The Taubman Company of Bloomfield Hills, Michigan, recently broke ground on Stony Point Fashion Park, a 690,000-square-foot open-air center that is scheduled to open in September 2003.

Multifamily

The Richmond apartment market has remained steady. Overall occupancy has declined just slightly to 96.5 percent, which would be considered very healthy in any market. The development of new projects has been somewhat moderate as developers are exercising caution to prevent overbuilding. There have been numerous sales in the Class B category of projects between 10 and 15 years old. These projects have been bought by individuals as opposed to apartment real estate investment trusts, primarily because of their attractiveness for renovation and repositioning in the marketplace. At present, over 1,000 new apartments are under construction in the metro area. These new units should be absorbed without disrupting the general stability of the market.

Jeffrey A. Cooke, SIOR is senior vice president of Insignia Thalhimer in Richmond, Virginia.


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