CITY HIGHLIGHT, FEBRUARY 2009

RICHMOND CITY HIGHLIGHTS
Jeffrey S. Bisger, Richard W. Porter, Mark E. Douglas

Richmond Multifamily Market

Richmond is considered by many to be recession resistant due to its diverse employment base of state government, large banks and law firms and  the 14 Fortune 1000 companies based in the city. The metro also houses the Fort Lee army base, a property that has greatly benefited from BRAC consolidation and closures. Forbes recently ranked Richmond number 4 of its list of top 10 cities for job growth; the area’s unemployment rate currently stands at just 4.4 percent, up from 3.1 percent at the same time last year. 

Since jobs are the cornerstone of apartment leasing, it is instructive to assess what has been happening on that front recently. During the first half of 2008, numerous firms established offices or expanded their presence in the area despite the recession that reportedly began in December of 2007. Mirroring the local economy, the apartment market held up reasonably well during that time. Beginning last September, several large area employers suffered severe downturns resulting in large numbers of job losses with warnings of more to come. Circuit City and LandAmerica, both based in Richmond, recently filed for bankruptcy protection. Genworth Financial, also headquartered in Richmond, announced 400 local job cuts. Qimonda, a large computer chip manufacturer in Richmond’s East End, announced that as many as 1,200 people of its 3,000 person workforce would be cut. Wachovia Securities is in the process of letting go of more than 900 people as a result of its merger with A.G. Edwards. Many other area companies have followed suit by cutting jobs or delaying hiring themselves. It is too early to judge the impact of Wells Fargo’s purchase of Wachovia Bank on Richmond’s economy.

Richmond’s apartment market consists of almost 60,000 units. With more than 2,500 units either delivered or under construction in the area, 2008 was the most active period of apartment development since 2004. Much of the area’s apartment growth occured in the southern part of town, including Chesterfield County and the Tri-Cities area, in anticipation of Fort Lee’s expansion. As a result of these deliveries, projects planned to start in 2009 and a lackluster economy, expect supply to exceed demand well into 2010 in most submarkets.

Rental rates rose modestly during the first half of 2008 but remained flat for the second half of the year when widespread concessions appeared. Free rent for 1 to 2 months or reduced rent is widely available now. The shadow market of unsold houses, condominiums and townhouses continues to grow and compete with apartments, particularly Class A communities. Record low mortgage interest rates will likely spur some first time home buyers to purchase rather than rent, assuming they feel secure about their jobs.

Apartments in and near the CBD are faring the best in terms of occupancies and rent increases. The vacancy rate in these areas is approximately 4 percent, versus 6 percent or more for the overall market. The eastern part of the city carries the highest vacancy of any submarket with a rate of more than 10 percent. Last year, multifamily sales continued to decline from prior years, totaling $135.6 million in seven transactions. Two newly built Class A properties traded hands last year averaging $140,000 per unit. Three Class B properties were sold at prices ranging from $63,000 to $80,000 per unit.

Given the upheaval in the financial markets during the past few months, I am reticent to make predictions about the near term apartment market outlook. Absent significant additional job cuts and support from the federal government, Richmond’s economy will once again demonstrate its resilience and prove to be somewhat recession resistant.

— Jeffrey S. Bisger is an executive vice president with Thalhimer/Cushman & Wakefield in Richmond.

Richmond Industrial Market

Landlords active in the Richmond industrial market have their antennas up and are starting to become much more in tune with the growing softness in demand. Many tenants are affecting a wait and see attitude and are not necessarily rushing to take advantage of relocating to properties that will most certainly experience price moderation in the coming months.

The slowdown in commercial lending is starting to be keenly felt in real estate circles as sale velocity slows and inventory, along with lease and sublease opportunities, rise.  Having witnessed the reduced business volume in their respective sectors, industrial businesses, particularly those directly related to the housing industry, are trying to reposition themselves through cost cutting measures or downsizing and consolidating space. Lenders are generally now requiring more equity in deals and are shying away from non-owner user projects. Lending activity on previously higher leveraged transactions has, for the most part, been put on hold or removed from the market place.

1301 Battery Brooke Parkway, a 317,319-square-foot manufacturing complex in the James River Industrial Park, was vacated by a tenant last year.

The commercial market is just now starting to mirror the housing market downturn. In Richmond, we’re witnessing an increased volume of local employee layoffs and facility closings. Fallout in the retail sector from LandAmerica and Circuit City is only aggravating the problem. Alcoa has announced its plans to close its two foil manufacturing facilities by mid-year 2009, with a total loss of 490 jobs. These sites, which are located on opposite sides of the James River and are proximate to downtown, have continued to draw interest from mixed-use developers. A plastic shopping cart manufacturer has also shut down operations at 1301 Battery Brooke Parkway, a 317,319-square-foot complex in the James River Industrial park. The decision left 117 employees out of work. The property, located near the interchange of Interstate 95 and Willis Road, should attract interest from various parties due to ample labor availability and Enterprise Zone benefits. Through a recent consolidation, Wyeth has relocated its operations to another Richmond-area facility and plans to vacate its 272,0000-square-foot manufacturing facility at 1405-1407 Cummings Dr.

There is, however, positive news for Richmond. Sabra Dipping Company has purchased a 45-acre site on Port Walthall Drive in Chesterfield County. The firm plans to construct a 110,000-square-foot manufacturing facility, scheduled to be opened mid-year 2010. An estimated 260 jobs will be created. Rolls Royce has also begun site work on its new 1,000-acre aerospace manufacturing facility.  The property is expected to be operational in 2010, with the first phase of component manufacturing expected to create 150 new jobs. Future growth is expected to create 500 new jobs and bring a total investment of more than $500 million.

In the third and fourth quarters of 2008, Sunrise Construction leased the 317,400-square-foot former Mazda distribution facility at 5700 Audubon Dr. In December, Capital Warehouse leased 130,961 square feet on Ruffin Mill Road. Virginia T’s has relocated their headquarters to Chesterfield County signing a lease for 208,115 square feet. In the industrial sales department, Virginia Sealing Products has purchased a 108,350-square-foot warehouse. The property was on the market for 25 months prior to settlement. The company plans to utilize half of the space and to lease the balance. Approximately seven other sales, ranging from 40,000 to 80,000 square feet, occurred in the metro area in 2008. This light number is evidence of the current slowdown in transaction velocity.

Occupancy in Class A facilities is at 83 percent, with current vacancy in non-owner occupied industrial product of 40,000-square-foot RBA minimum at 22 percent or 4.87 million square feet. These numbers are based on a total of 22.15 million square feet in 149 existing buildings.  CoStar has reported a slight increase in warehouse vacancy, from 6.8 percent to 6.9 percent, with a negative net absorption of 221,318 square feet in the fourth quarter. CoStar’s reported rate is for a total of 100.5 million square feet in 2,386 existing buildings. To the optimist, things can only get better. As we navigate our way through 2009, there will be an increasing number of opportunities for various companies to capitalize and to expand. Newly available space will allow established companies to reposition themselves in the marketplace. 

— Richard W. Porter, CCIM, SIOR, is an executive vice president with Porter Realty Company Inc./CORFAC International.

Richmond Office Market

The Richmond economy, typically a little more recession proof than most U.S. economies, experienced some difficulties throughout late 2008 due to the global recession. The highlight of 2008, however, was our central business district.

In late 2008, the state of Virginia purchased Main Street Centre, located 600 E. Main St., One Capitol Square at 830 E. Main St. and the former United Dominion Realty Trust Building at 400 E. Cary St. The state’s acquisition of these buildings, and Dominion Power’s acquisition of 707 E. Main St. in early 2008, took several multi-tenant office buildings out of play in our CBD. The state has also signed a lease for 160,000 square feet of space in Wytestone Plaza, located at 801 E. Main St., to house the Department of Social Services. For the past 5 years, the department had leased space at 800 E. Main St. and 7 N. 8th St., and the move freed up square footage in those properties. The net result of this activity is that several tenants have been pushed out into the marketplace.

A further highlight is the planned parking deck on the west side of  Franklin Street between 6th and 7th streets. The deck will be immediately adjacent to Main Street Centre and the proposed expansion of the Community Development Authority (CDA) parking deck located across the street. The amount of parking added with these proposed decks should ease the parking shortage downtown and slow the progression of upward-climbing monthly parking rates. 

While the state of Virginia will continue to relocate agencies from leased space, we hope the trade of tenants will break even and not negatively impact our overall downtown absorption. In comparing spaces totaling more than 20,000 square feet through the end of 2008 with the same period in 2007, we find strong absorption in downtown among the large block spaces of approximately 440,000 square feet. However, due to tenants relocating within the marketplace and a large block of sublease space at the Riverfront Towers, we are actually showing a negative absorption of 82,000 square feet for last year.

In the suburbs, the overall absorption of approximately 300,000 square feet was handicapped by several large subleases that hit the marketplace. Wachovia, Saxon Mortgage and Bear Stearns represented approximately 300,000 square feet of sublease space in the Innsbrook submarket alone. The inventory of large blocks of suburban office space has increased from 1.2 million square feet at year-end 2007 to 1.5 million square feet at year-end 2008. This is compared to 1.71 million square feet of space at year-end 2006. 

A remaining question is the availability of an additional 300,000 square feet of sublease space as a result of the LandAmerica bankruptcy. Furthermore, Circuit City has announced they will be closing all their retail stores. While the total impact to the Richmond office market is yet to be determined, Circuit City occupies several buildings in the Richmond area which could add an additional 700,000 square feet to the marketplace.

Active development of condominiums includes Lingerfelt Development’s Westerre Commons at Cox Road and Broad Street at Innsbrook, Chris Rice’s Ridgefield Condominiums and HHHunt’s Rutland Center at Route 301 and Interstate 295. As absorption of space in the marketplace occurs, it will be evidenced primarily in the Glenside, Broad and Innsbrook areas, with Midlothian Turnpike following the trend.

A recent trend is office tenants signing short-term renewals or leases with expensive termination clauses. This affords them flexibility as they deal with the effects of the ongoing recession, a practice which will continue to be popular in 2009.

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

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