FEATURE ARTICLE, DECEMBER 2004

2005 Outlook

Richmond, Virginia

Industrial

Richard Porter CCIM, SIOR Porter Realty Company, Inc.

For next year, interest rates need to stay close to their current levels for the market to begin to stabilize over the next 12 to 18 months and the supply/demand of industrial facilities to balance out.

Area manufacturing consolidations hopefully will diminish from what we have recently witnessed, such as Meade Westvaco’s (MW) closure of more than 500,000 square feet of various manufacturing plants in the Richmond area. On the upside, all but one of these MW manufacturing plants have been re-absorbed into the market.

In 2004, there was more than 1 million square feet of gross absorption (for industrial space 40,000 square feet and up), but the area also has experienced more than 1 million square feet that has come available, which includes large facilities such as the 317,000-square-foot former Mazda facility, located near the Richmond International Airport, and Brown & Williamson’s 332,000-square-foot manufacturing complex, which will be available in 2006. A local real estate developer has added approximately 523,000 square feet of new product to the Northwest quadrant off Interstate 95 at the Enterchange at Northlake this year, as well as 242,000 square feet in Chesterfield County off I-95 South.

Leasing activity continues to be moderately strong throughout most of the market this year, and has recently seen an increase in the Southside area due to Ryder Logistics taking an additional 88,000 square feet, plus an extra 129,000 square feet for short-term overflow. Sales pending of freestanding facilities include GCX (100,000 square feet) off Route 10, along with serious interest being shown on the 108,000-square-foot shell building in South Point Business Park to the south in Prince George County. This new absorption continues the momentum recently witnessed in the Metro area.

In the Southeast quadrant, new shell space in Chesterfield County, along I-95 South, is poised to be the recipient of new tenants as opportunities are abundant. Coupled with this is the Hewlett Packard (HP) complex totaling over 300,000 square feet. The complex, located in River’s Bend (I-295 and Rt. 10), and is becoming available as a result of HP’s consolidation into existing space near Richmond International Airport.

Projected areas of growth also include the corridor surrounding the fall 2004 opening of the new Route 288 extension which now connects Richmond’s far West End to the southwest quadrant of the metro area to the west/southwest. Users have already begun to see the benefits, as the drive from the busy Route 60/Midlothian Southside corridor to the West End’s “West Creek Business Park” is now only 12 minutes.

— Richard Porter, CCIM, SIOR, Porter Realty Company, Inc.

Office

Dean Meyer Senior Vice President Thalhimer/ Cushman & Wakefield

Due to an improving economy, the Richmond suburban office market experienced a modest rebound from negative absorption during the third quarter of 2004 to almost 200,000 square feet of positive absorption during the third quarter. Should the U.S. economy continue to rebound and unemployment remains low in 2005, businesses will gain confidence and start to expand and grow, resulting in the demand for office space.

With an improving economy and an increase in demand for office space, the Richmond market appears to be poised to have positive absorption as available space is leased. Higher demand will result in higher rental rates and less rental concessions being given by landlords. In addition, we anticipate that demand for quality office condominium projects will remain high from small office users looking to own property.

Innsbrook Corporate Center continues to be the premier suburban office park within the Richmond market. Innsbrook is home to many of the major corporations located in Richmond. The Innsbrook Corporate Center has approximately 5.1 million square feet of Class A office space with approximately 272,065 square feet available for lease, which equates to a vacancy rate of 5.3 percent. It is anticipated that available space in the Innsbrook area will continue to tighten into 2005.

The Innsbrook Corporate Center is outperforming the rest of the office market in the Northwest quadrant (north of the James River). The Northwest quadrant contains approximately 7.72 million square feet of Class A office space. Currently, there is approximately 605,040 square feet of Class A office space available for lease, which translates into a vacancy rate of 7.56 percent.

Office condominium construction continues to be the trend in the Richmond suburban marketplace. To date, there is a total of approximately 300,000 square feet of office condominiums that have been completed in the Richmond suburban market. Most of the existing space has been sold due to the high demand from small office users looking to own versus lease. Due to the high demand, currently there is another 500,000 square feet of condominium space under construction with approximately 40 percent pre-sold. Some of the new projects scheduled for completion in 2005 are the Glenside Office Condos (developed by JLW Associates), consisting of 50,000 square feet; the Westerre Office Condos (developed by Westerre Commons LLC), consisting of 99,000 square feet; and the Strader Commons Condos (developed by Gibson Property Company), consisting of 20,000 square feet. In addition, there is another 300,000 square feet of condominium space in the planning stages. With between 800,000 and 1 million square feet of condominium space potentially available for sale it, remains to be seen whether the condominium market has been over saturated. High quality projects such as Shrader Commons, Glenside Office Condos and Westerre Office Condos will do well due to the high level of construction and the fact that they are strategically located in the Northwest quadrant of the Richmond market.

In addition to the strong condominium market, the suburban office market in the Northwest sector appears to be gaining strength. Recently, Highwoods Properties started construction on a build-to-suit for Saxon Mortgage, which will be leasing 115,000 square feet in a new Class A office building in the Innsbrook Corporate Center. In addition, Bostwick Labs recently leased approximately 68,000 square feet at the former Dominion Telecom building in Innsbrook. Further evidence of a recovering suburban office market was the recent sale of the former Capital One office buildings, totaling 412,000 square feet. RER/New Boston West Broad Street LLC purchased the buildings with the expectation that demand will pick up for office space in the Richmond suburban market place in 2005.

— N. Dean Meyer, CCIM, senior vice president, Thalhimer/Cushman & Wakefield


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