CITY HIGHLIGHT, FEBRUARY 2008

RICHMOND CITY HIGHLIGHTS
David Williams, Steven B. Brincefield, Zachary W. Means and Mark E. Douglas

Richmond Industrial Market

Greater Richmond, Virginia’s industrial sector is experiencing sound activity and growth. Grubb & Ellis Company research calls for the industrial real estate to outperform most market segments, and this appears to be true for Richmond. The warehouse distribution sector in general, and eastern Henrico and Chesterfield Counties in particular, are hot spots for industrial activity in the Greater Richmond area. A 317,000-square-foot warehouse, formerly occupied by Mazda, sold for $8.75 million ($27.60 per square foot) to an investor, who is splitting the building for more-typical 100,000-square-foot prospective tenants. A 230,978-square-foot facility, formerly occupied by Wella Hair Care, was purchased for $5.95 million ($25.76 per square foot) by Premier Woodworking.

Speculative warehouse construction announcements include 100,000 square feet at Woodlands Center III and 116,000 square feet at Airport Distribution Center Building C. Both buildings are designed to cater to smaller tenants in the 20,000- to 50,000-square-foot range. Lease rates for new Class A warehouse space average $4.50 to $5 per square foot NNN, but bargains can still be found on reasonably functional space at “1980’s prices” as low as $2.50 per square foot annually.

Other major activity includes a big win for Prince George County, just south of Greater Richmond, with the announcement by Rolls-Royce that it will develop an assembly and test facility for its civil aerospace operations, opening in 2009. The Enterchange at Walthall completed leases with GlaxoSmithKline for 261,922 square feet and Mazda for 48,448 square feet to backfill space recently vacated by Antioch Company and Sharper Image. The U.S. Postal Service purchased a 61-acre site on Technology Boulevard in eastern Henrico County from a local investor for $125,000 per acre for a major distribution center. Liberty Property Trust broke ground for a 149,000-square-foot build-to-suit for Interline Brands at Eastport VII. Completion is expected in April. The Airport Distribution Center will deliver 115,957 square feet of Class A distribution space early in the first quarter, although no leases have been announced. Demand remains high for small industrial buildings in good locations, but the best deals are on older industrial buildings, which can be purchased in the upper $20s per square foot.

An increase in regional demand for warehouse space resulting from enlargement of the Port of Hampton Roads has so far not materialized mainly due to transportation to inland ports, but to a lesser degree from devaluing of the U.S. dollar. A weak dollar benefits outgoing product which favors U.S.-based manufacturing more than imports.

The flex sector continues to show good fundamentals and an upward trend in rents. Flex projects of varying sizes are under development throughout the market with opportunities for users to lease, purchase a condo, or buy a small freestanding building. Asking rates for lease are $9 per-square-foot shell or $10 per-square-foot blended with 20 percent office and 80 percent warehouse build-out while condos for sale run about $105 to $130 per square foot for shell space. Examples include 52,800 square feet underway at Air Park Commons off Sliding Hill Road, 20,000 square feet at Lakeridge/Northlake in Hanover and 110,000 square feet planned for Parham Forest West on Parham Road in western Henrico.

Land prices are holding steady in the $1 to $3 per square foot range as industrial zoned land in good locations for development are still a reasonable buy.

With the help of more activity, overall vacancy declined to just 7.3 percent for the third quarter, and ticked up a little to 7.8 percent by the end of 2007. If demand continues in 2008, as projected, vacancy should stabilize despite new construction and some closures showing up in our statistics.

— David Williams, SIOR, CCIM, is a managing director with Richmond, Virginia-based Grubb&Ellis|Harrison&Bates.

Richmond Multifamily Market

The multifamily rental market in Richmond cooled off in the second half of last year. The investment sale volume of multifamily housing remained vibrant as average sale prices declined.

Third and fourth quarter leasing and absorption appear to have not performed as predicted at the beginning of last year. By mid-year, overall market vacancy had declined from the mid-6 percent range to below 5.5 percent. However, in the second half of the year, vacancy advanced to close at 5.73 percent. Absorption slowed and vacancy took an upturn in the fourth quarter as consumer confidence waned and worries over the sub-prime mortgage crisis, gasoline prices, a falling stock market and cautionary holiday retail sales reports all made headline news. Apartment communities have reported lower traffic and fewer qualified applicants in the second half of this year. The expected migration from sub-prime borrower to renter has not materialized as expected, leaving leasing performance flat at year end.

Rental rates remained stable with only a slight upturn. Average rentals barely broke the $800 per month threshold with the average apartment rental at year-end of $802 per month. However, this increase is attributable to new rental product additions to the market at above average rents causing a modest escalation in the average rent calculation based on averaging. Although rent levels have advanced slightly, the effective rents gained last year were marginal. Declines in traffic and qualified prospects have required marketing incentives in the form of one half to one month’s free rent in many communities, particularly in the West End market, where the greatest number of multifamily units are located. Interestingly, renovated loft style apartments in the Central Downtown market appear to have attracted many of the younger first time renters into the urban setting. Richmond’s Downtown market experiences the lowest vacancy rate of all submarkets at 3.6 percent at year end.

Reported sales of multifamily properties totaled $166.67 million, down from the 2006 sales volume of approximately $220 million. The 2928 units sold last year was higher than the 2006 volume of 2526 units. However, the average sale price last year declined to $56,922 per unit versus $86,937 per unit in 2006. This significant decline in the average sale price is primarily attributable to the sale of The Park at Lakewood (720 Class C units), which traded for $34,722 per unit, and Andover Place (192 Class C units), which sold for $26,823 per unit. The highest per unit sale was Creeks Edge at Stoney Point consisting of 202 units completed in 2006 and sold last August for $159,901 per unit. Most of the sell off of multifamily product in Richmond has already occurred and therefore do not expect to see sustained volume of sales in this year as in the recent past. There are two large properties currently under contract this year, but may not close until the second quarter. Uncertainty in the capital markets will affect transactions.

The economic outlook for multifamily Richmond this year should be described as cautiously optimistic. Since new construction has declined in the past year, expect absorption to approach equilibrium with demand, and move vacancy to the 5.5 percent range. The local economy remains strong and employment is stable. Many owners of multifamily will likely opt for sustained occupancy over pushing rents, so don’t expect rents to escalate much higher this year.

— Steven B. Brincefield, CPM, is senior vice president in the Richmond, Virginia, office of Thalhimer, Cushman & Wakefield Alliance.

Richmond Retail Market

The Richmond retail market has seen unprecedented growth continue strong into 2008, with no signs of slowing in the near future, and retail developers have raced to catch up with the housing growth the Richmond MSA has experienced in the past 5 years. Projects run the gamut from Forest City and Pruitt Associates’ White Oak Village, a 900,000-square-foot power center, to Unicorp National Development’s West Broad Village, a new urbanist multi-use project with office, retail, hospitality and multifamily components, both significant to their respective submarkets and to the MSA as a whole.

There is no shortage of projects either under construction or in pre-development stages; in fact all together they will combine for 5 million square feet of development, on top of an existing inventory that exceeds 61 million square feet in an MSA whose population is just over a million. These projects include in the Northwest Quadrant West Broad Village, The Corner at Short Pump, Short Pump Station and Winding Brook.

The most significant projects underway in the Southwest Quadrant are Zaremba’s 900,000-square-foot West Chester Commons, a Target anchored power center that will feature a lifestyle component, and Hancock Village, a 425,000-square-foot development boasting the first non-mall JCPenney in the market and a high-end Wal-Mart. Also of note, Midlothian Towne Center and North American Properties’ highly anticipated Courthouse Marketplace will feature 900,000 square feet of big box and category killer retail, which will fill one of the biggest voids in the Richmond market and southern Chesterfield County. Richmond’s east end is also filling up with new projects that include White Oak Village, Laburnum Station, The Crossroads, Audubon Retail Center and Drybridge Commons. During the next few years, these projects will bring more than 1.5 million square feet to the Southeast quadrant, which previously had less than 500,000 square feet of inventory.

Many household names have been getting their heavy machinery dirty in Richmond, including the likes of North American Properties, Zaremba, Forest City Enterprises, AIG Baker, Unicorp National Development, Retail South, Archon, Crosland and the James Doran Companies. In 2008, Richmond will welcome Trader Joe’s, Whole Foods Markets, REI, Bass Pro Shops, Gander Mountain, Dave & Busters, Noodles & Company and Bar Louie.

Heading into this year, direct vacancy is a staggering 5.8 percent, a sign of a very healthy local economy. It will be interesting to see at what rate these projects are absorbed with many retailers pulling back or at least slowing growth. With Forest City-owned Short Pump Towne Center leading the charge, there is no fear that the surrounding projects will prosper.

As local municipalities pressure to integrate multiple uses into retail projects and interest in LEED certified green developments grows, it will be interesting to observe how many traditional developers evolve to meet new urbanist standards. It all sounds good on paper, but diversifying isn’t as easy as charged by local planning staff.

— Zachary W. Means is a senior associate with Richmond, Virginia-based The Wilton Companies.

Richmond Office Market

The rapid expansion of Richmond office space will take a temporary breather as the market works through existing supply. The overall vacancy rate will likely rise in 2008 following a decline from 9.1 percent in 2006 to 7.9 percent in 2007. 

The reason for the increase: capital markets. Financial services and mortgage lenders are releasing large-block space, mostly in the suburbs. Meanwhile, a slowing economy has caused companies to scale back growth. The suburbs are saturated with a 4-year supply of space, in part because of the slowdown in the housing market. Encore Credit released 35,000 square feet at Highwoods Commons in Innsbrook while Saxon Mortgage plans to give back approximately 135,000 square feet in Innsbrook. Capital One no longer needs 66,000 square feet at Overlook II or at Liberty Plaza (135,000 square feet). Layoffs are also pending at Wachovia Securities, which in 2007 announced a move to St. Louis as part of a merger with AG Edwards. The brokerage firm will release space in Riverfront Plaza, much of which will likely be subdivided.  Bank of America, meanwhile, is also cutting back its wholesale operation.  The added supply should help stabilize prices, which rose $1 per square foot in 2007 to $18.85, on average for class A space. The sublease market will see increased activity as sublessors try to fill vacated space.

For the time being, most developers are putting new projects on hold and investors are taking more of a wait-and-see approach. Projects already in the pipeline, however, continue as scheduled. In the West End, Reynolds Crossing will complete the 200,000-square-foot Reynolds Office Building in 2008. Major tenants signed include Alcoa, James River Insurance and Reynolds Development. Across town, Southside will see considerable absorption in 2008. Alstom Power has executed a lease for 35,000 square feet at Gateway Center II in Chesterfield County. There are also several new businesses eyeing large blocks of space in the Arboretum, Gateway and the Boulders projects.

Sometimes, what’s bad for big-block space is good for the smaller players. There was a noticeable up-tick in leasing volume at executive suites in the fourth quarter of 2007. Layoffs inspire workers to start new firms. Many displaced financial services professionals who wish to remain in Richmond have ventured out on their own. That trend will likely continue into 2008.

Long-term growth prospects, meanwhile, remain strong. Richmond’s unemployment rate was 3.0 percent in November 2007, according to the Bureau of Labor Statistics, far below the national average of 4.5 percent. The area continues to attract the attention of national companies seeking low-cost alternatives. Residential and commercial construction is booming downtown. In 2007, Philip Morris moved into its $400 million, 450,000-square-foot research and development center in the growing biotechnology park. A few blocks away, progress continues on the new 250,000-square-foot riverfront headquarters of MeadWestvaco, which should open in 2008. Other deals of note include the investment group BH Rosenberg’s purchase of an 18-story building at 700 E. Main Street for $8.15 million. Rosenberg plans on a multi-million dollar renovation. And the SunTrust Mid-Atlantic headquarters recently sold for $76 million as a sale-leaseback investment sale to Parmenter Realty, who plans on building renovations and putting an additional 125,000 square feet of class A space for lease in the downtown market.

— Mark E. Douglas, CCIM, SIOR, is a senior vice president with the Richmond office of Thalhimer, a Cushman & Wakefield Alliance.

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