CITY HIGHLIGHT, FEBRUARY 2005

RICHMOND EXPERIENCES OFFICE CONDO CRAZE

Like many other southeastern cities, Richmond, Virginia’s office market is seeing an increase in the commercial condominium sector. There are 19 condominium projects either completed or coming on line in the next year in Richmond. The retail sector saw a large number of new retailers enter the market in 2003 with the opening of two malls; even so, it is expected that existing retailers will continue to add new units and that new retailers will continue to enter the market. In the industrial market, last year positive but relatively slow for Richmond.

Office

The biggest story in the Richmond office market, as in many others, is the commercial condominium craze. The combination of low interest rates and investors seeking to diversify their holdings has made office condos a win-win option for business owners and developers alike. Currently, there are 19 condominium projects either completed or coming on line in the next year. The traditional medical user is being joined by more mainstream businesses such as accountants, day care centers and law firms.

One of the most significant recent events is the completion of Route 288, which now has Richmond commuters traveling between the West End (Henrico) and South Side (Chesterfield) in a toll-free 20 minutes versus a 50-minute commute previously. As expected, land prices along this corridor have shot up dramatically.

In the central business district, landlords that had the foresight to buy or stay on Broad Street are beginning to see the rewards of their vision as the Community Development Association marches forward with its plans for new office, retail, hotel, parking and performing arts complexes in the area. “In the next few years, downtown will become a convention, theatre and entertainment district with ample parking, additional luxury hotels and other amenities,” says former mayor Rudy McCollum.

Complementing the city’s $55 million investment in the historic canal area is Daniel Corporation’s Riverside of the James, the largest mixed-use development on the riverfront with 230,000 square feet of office space, 122 apartments, 70,000 square feet of entertainment/retail space and an 800-car parking deck on the 4.2-acre site. Still almost a year away from projected completion, Riverside is already 74 percent leased. Further down the river, another large mixed-use development, Rockett’s Landing, has been approved, and will unfold over the next 10 years.

Looking forward, expect a climate of moderate growth, particularly from mid-size companies as they commit to more expansion than in the past several years. Consequently, Class A suburban space occupancy should experience a slight increase, but Class B will remain flat and compete with high vacancy rates and concessions. As interest rates and the price of construction materials rise, demand for office condos may decrease from its current accelerated pace.

— Jimmy Appich, director - commercial properties, Advantis Real Estate Services Company/GVA

Retail

The 40,000-square-foot Promenade specialty center opened with rents near $40 per square foot.

At of the end of the third quarter of 2004, retail space in the Richmond metropolitan statistical area totaled approximately 33 million square feet, with a vacancy rate of approximately 8 percent. Even with an unusually large influx of space and new retailers in 2003 with the addition of two large malls, it is expected that existing retailers will continue to add new units and that new retailers will continue to enter the market. This is based on the Richmond area’s strong retail track record and the final completion of the Route 288/295 outer loop.

Stony Point Fashion Park is one of two malls that opened in Richmond, Virginia, in September of 2003.

In north Richmond, The Home Depot signed a lease near Simon Property Group’s Virginia Center Commons Mall in a power center on Sliding Hill Road. In the west, Forest City Enterprises’ new Short Pump Town Center dominates the landscape. The Cheesecake Factory opened in the area formerly designated for Lord & Taylor, with Orvis and Saxon Shoes slated to open this year. Across Broad Street, two 40,000-square-foot specialty centers opened with rents near $40 per square foot. Circuit City added a store adjacent to the mall and PetsMart is under construction.

Along Hull Street Road in southwest Richmond, expansions are planned for Commonwealth Center and Village at Swift Creek. Retail growth is expected to continue along this already heavily traveled corridor. In south Richmond, Kohl’s is under construction in Chester and Best Buy has a new store in Colonial Heights. In the northeast, the retail focus is along Route 360. Cousins Properties is building a Target- and PetsMart- anchored center and further east on Route 360 a new Lowe’s is planned. Development also continues in some of Richmond’s more mature markets, notably at the intersection of Forest Hill and Chippenham, where Target, Office Depot and Ukrop’s will be opening this year.

The Shops at Stratford Hills is a Target/Ukrop’s-anchored center under construction at Forest Hill and Chippenham.

The introduction of the two malls in 2003 also had negative effects. Regency Square, just 4 miles from the new Stony Point Fashion Park, experienced a decrease in sales and tenant turnover. Kroger, however, opened near Regency and Wal-Mart announced plans to open in a former Kmart in nearby Parham Plaza. Willow Lawn, closer to the city, lost Dillard’s when it opened in the two new malls, and a de-malling and renovation is planned. At Chesterfield Towne Center in south Richmond, one of Dillard’s two boxes will be demolished to allow for a mini lifestyle center. Chesterfield County purchased the 50-acre Cloverleaf Mall at Chippenham and Midlothian Turnpike with hopes to revitalize this struggling but high profile property.

The new Route 288/295 beltway promises to keep the spotlight on the high growth corridors along West Broad Street to the Goochland County line; along Hull Street Road; and along the new interchanges of Route 288. Expect major retail announcements next year for the Watkins Tract at 288/Midlothian Turnpike and for CenterPointe at 288/Powhite Parkway.

— Kent Cardwell, Divaris Real Estate, Inc.

Industrial

Devon USA recently delivered building E at the Enterchange at Walthall project in Richmond, Virginia.

2004 was a positive but relatively slow year for the Richmond industrial market. Activity in the market is typically measured by looking at the net absorption for the year. Net absorption is the net change in occupied space over a given period of time. The total absorption for the year was positive 308,038 square feet, which surpassed the net absorption for 2003, which we called a flat year, by nearly 130,000 square feet. Despite the increased absorption for the year the vacancy rate increased slightly from 14.69 percent in 2003 to 14.78 percent for 2004. This is due to the development of new speculative building in the market, which increased the amount of available space.

Leasing Activity

Tenants moving out or announcing move-outs of large blocks of space include the IRS, which will vacate 230,000 square feet in 2005 from its facility near the Fairgrounds Distribution Center; The Wella Corporation, which, due to its sale to Proctor & Gamble, will vacate approximately 600,000 square feet in the east end of Henrico; Mazda, which vacated 317,000 square feet that it leased near the RIC airport; and Hewlett Packard, which announced that it would close two facilities of 158,400 and 146,000 square feet that it leases in the RiversBend Industrial Park near I-295 and Route 10.

Tenants moving into large blocks of space in 2004 included Ryder Logistics leasing 130,000 and 60,000 square feet on Tranport Street in the city of Richmond; BWI of Virginia leasing 76,000 square feet on Transport Street; Ferguson Enterprises leasing 45,000 square feet in the Brittons Hill Distribution Building; Central Virginia Health Network leasing 55,000 square feet in the Brittons Hill Distribution Building; Cebco leasing 103,000 square feet on Carolina Avenue; Uquality Automotive Parts leasing 43,000 square feet at 4215 Eubank Rd.; and Southwest Plastics Binding Corporation leasing 25,000 square feet in the Highwoods Distribution Center.

Sales Activity

With interest rates relatively low, there were a number of significant sales of vacant buildings. The 98,000-square-foot former Ben Hogan facility, which had been on the market for 3 years, sold to ColorTree Inc. of Virginia for $3.85 million. Woodworth Virginia purchased the 55,000-square-foot modern manufacturing facility from Interflex for $2.7 million.

New Construction

The Richmond industrial market grew slightly with the delivery of one speculative building. Devon USA, a developer of warehouse, distribution and light manufacturing facilities in the Mid-Atlantic area, delivered building E at the Enterchange at Walthall project. Building E is 262,000 square feet and is a state-of-the-art, Class A distribution facility that features insulated pre-cast concrete panels, ESFR (early suppression fast response) “wet” sprinkler systems, 32-foot clear ceiling heights, numerous dock doors, and abundant automobile and trailer parking. This is the fifth building developed to date at the Walthall project and brings the park to more than 1.4 million square feet of space. Enterchange at Walthall is located in a green field Enterprise Zone that provides numerous tax benefits and incentives to tenants. In addition, this same developer has two other buildings that are under construction and will be delivered early this year. These two buildings are being developed at Enterchange at Northlake in Hanover County, Virginia, and will contain 508,186 square feet of space. This is extremely significant as no other developer is currently constructing speculative warehouse buildings in this market, and Devon’s two projects will effectively bookend the Richmond area with two Class A warehouse parks.

Outlook

The fourth quarter absorption made up nearly 75 percent of all of the recorded absorption for 2004. This indicates that after a long lull, the market is showing significant signs of increased activity. Expect 2005 to be more active than 2004 with more leasing activity than Richmond has seen in several years. With nearly 15 percent of the market vacant and landlords ready to agree to reasonable terms, the Richmond industrial market is in a great position to welcome new tenants and the growth of existing tenants.

— Evan Magrill, CCIM, SIOR, senior vice president, Thalhimer/Cushman & Wakefield

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