CITY HIGHLIGHT, FEBRUARY 2006

RICHMOND CITY HIGHLIGHTS
Wink Ewing, Edward Salyers, Della Conti, Richard W. Porter

Multifamily Market

The most apparent trend in the Richmond MSA is the voracious appetite of condominium converters moving out of the primary markets, seeking opportunities in secondary and tertiary markets. The commercial real estate community is standing by to see how fledgling, garden-apartment conversions, such as The Links and Ashley Terrace, turn out, while new condominium product is being offered in the central business district, such as Riverside on the James and The Vistas.

The general consensus is that a large percentage of the product is being acquired by individual investors looking to either make a quick buck by flipping the units or holding on to the property with hopes of charging market rents. With vacancy rates decreasing (down to 6.3 percent in July 2005 from 8.5 percent in July 2004), solid employment growth (4 percent growth rate), strong demand, with 1,900 units absorbed since July 2004 (a 45 percent increase from the previous year), and slowed development activity, Richmond remains optimistic the rental and ownership markets can be sustained at these levels as long as there are no major spikes in long-term interest rates.

As for new development, approximately 70 percent of the new product under construction or just beginning lease-up in the Richmond MSA is in the South-2 submarket (Chesterfield County). However, as of last summer, there were 1,079 apartment units proposed, with the majority being proposed for development in the Central and East submarkets. This represents a shift in the prevailing trend of the last several years of building in the South-2 submarket.

— Wink Ewing is part of the Central Virginia Multi-Housing Group of CB Richard Ellis of Virginia, Inc.

Retail Market

The Richmond retail market just continues to roll on, seemingly unobstructed. Even as development continues, the overall vacancy rate (inclusive of sublet space) has declined from a high of 9.5 percent at the end of 2004 to approximately 6.5 percent at the conclusion of last year. Moreover, last year's delivery total of 887,000 square feet was significantly higher than the 268,000 square feet of space in 2004, further illustrating the strength of the market.

Additionally, the retail market contrasts favorably to that of the 12.3 percent office vacancy rate and the 13.5 percent industrial vacancy rate at the end of last year.

In the face of all this new construction, Richmond is experiencing only scattered pockets of weakness and new centers are quick to fill up. A good example is Harper Associates' 350,000-square-foot Shops at Stratford, which was 99 percent leased shortly after opening last summer.

Willow Lawn, a formerly enclosed mall within minutes of the central business district, is undergoing an $18 million overhaul to a more open-air facility. The makeover is highlighted by the elimination of the 65,000-square-foot former Dillard's store, which has been vacant for 2 years, to open up the mall to face West Broad Street. This is evidence that Richmond is still following the national trend toward open-air malls started with the 2003 openings of Taubman's Stony Point Fashion Park and Forest City's Short Pump Town Center. Currently, The Short Pump Town Center continues to welcome new tenants including The Orvis Company, Saxon Shoes, Eddie Bauer and Elizabeth Arden Red Door Spa. Confirmed future tenants include Urban Outfitters taking 10,000 square feet of space and West Elm grabbing 16,000 square feet of space.

There is some other noteworthy activity in the area. Richmond-based Pruitt Associates and Forest City are pursuing the redevelopment of the 600,000-square-foot former Viasystems manufacturing plant, located on South Laburnum Avenue near the airport, into a new retail center. The Breeden Company is set for construction of Towne Center West, a new 125,000-square-foot retail center in the Short Pump. Breeden hopes to capitalize on $40 rental rates, the highest in the area. And Old Navy has leased 19,000 square feet of space at Chesterfield Towne Center after a 4-year search.

Phase I of Winterfield Village, which will feature retail and multifamily units, is scheduled to be completed in fall 2007.

More mature shopping destinations also are experiencing activity. The Carytown area is thriving once again as customers returned after trying out the newer shopping alternatives. Last year, retailer activity included the return of beauty boutique Soak and Lex's move to a location approximately three times larger than its original women's clothing store. Carytown holds a 0.5 percent vacancy rate, down from 7.8 percent in first quarter 2005. There is only one significant vacant space, totaling 2,500 square feet, in the entire Carytown area.

One area to watch for future development is the recently completed Route 288 corridor between highways 60 and 360. New development includes a Kroger slated for Charter Colony and the Watkins families' massive Watkins Centre proposal, with 3.9 million square feet of commercial space and 1,200 new housing units.

— Edward Salyers is director, retail properties, and Della Conti is a director with GVA Advantis in Richmond.

Industrial Market

Richmond's industrial properties have recently experienced higher occupancy rates, which is a welcome trend. As Richmond's industrial market steadily improves, it needs its large players to stay active in the market. First Potomac, a REIT, is continuing its due diligence on the purchase of two area industrial complexes. One property includes four buildings within a six-building complex at Rivers Bend in Chesterfield County, while the other is located at Northlake Business Park in Hanover County.

Currently, two large users in the market are seeking to relocate. Hughes Supply, who presently occupies space near Richmond's airport, is seeking to relocate to approximately 280,000 square feet of distribution space. USPS is seeking a 40- to 60-acre site to build a 400,000- to 500,000-square-foot processing facility in the east end of Richmond. Several selected sites are under final consideration. Additionally, 10 big box facilitates, all measuring more than 200,000 square feet, are available for sale or lease in the Richmond area.  

Richmond's suburbs have seen a steady growth in industrial transactions as well. Redemtech leased 115,000 square feet at Rivers Bend IV in Chesterfield County last November. Surface Technology Corporation purchased a 57,558-square-foot facility, located at 7421 Ranco Road in Henrico County, for $33.88 per square foot. BMDA 2101 LLC purchased a 225,000-square-foot warehouse facility at 2101 Bermuda Hundred Road in Chesterfield County for $23.55 per square foot. BMG Metals Affiliate purchased 6301 Gorman Road, a 55,000-square-foot former Ryerson Steel distribution facility, for $42.71 per square foot. And Bethlehem Storage LLC purchased 4825 Bethlehem Road, a 105,723-square-foot combination warehouse and mini storage facility off Staples Mill Road, for $37.83 per square foot at a cap rate of 8.5 percent.  

The metro area's investment sales remain strong with achievable cap rates falling between 7.5 and 9 percent for quality properties. With vacancy declining and large users seeking expanded space, Richmond's industrial market will continue to show steady improvement throughout this year.    

— Richard W. Porter, SIOR, CCIM, is executive vice president with Richmond-based Porter Realty Company, Inc.

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