Although many Southeast office markets are experiencing slower growth compared to previous years, developers are looking toward the future — and the new year — with optimism. Most office markets in the Southeast are holding steady, and some are even going strong, as evidenced by the continued development in many major markets. To provide an overview of the Southeast’s office markets, four key areas will be highlighted, focusing on current developments and future trends in those markets.

Washington, D.C.

Vacancy and absorption rates in Washington, D.C.’s office market are currently at their historical averages, according to Randy Lennon, senior managing director at Insignia/ESG. The District’s vacancy rate, which is now at 4.2 percent, excluding sublease space, will stay about the same or possibly increase slightly, he says. The net absorption rate will stay at its 10-year average, which is around 2 million square feet per year.

Although current growth has not been as spectacular as in the last 3 to 4 years, Lennon says that one must look at the market in context. There is still a demand for space, but there is not as much competition for it as in previous years.

Currently, the majority of office development is taking place in Washington, D.C.’s central business district (CBD) and the East End market, which runs from 22nd Street to Sixth Street between Massachusetts Avenue and Pennsylvania Avenue. This area, according to Lennon, is appealing for many law firms and prestigious trade associations. “This is also where most of the available land has already been assembled and where developers can get the highest rent,” says Lennon.

Significant office developments in the area include Lincoln Square near the city’s Metro Center at 555 11th St. Developed by New York-based Lawrence Ruben Company, it has already delivered 360,000 square feet of space — 185,000 of which has been leased to the law firm of Latham and Watkins.

Union Labor Life Insurance Company is the owner of a 375,000-square-foot facility that is under construction in the CBD at 1625 Eye St. It is slated to come on line at the beginning of the year with the law firm O’Melveny and Myers as a lead tenant. The facility is being developed by the Trammell Crow Company, and Skidmore Owings & Merrill is the architect.

Terrell Place, a 470,000-square-foot development located at 575 Seventh St. on the East End, is also set to deliver some time this year. The developer is CarrAmerica Urban Development, and Venable Baetjer Howard & Civiletti will occupy 235,000 square feet.

These new developments are having a positive influence on the market, according to Lennon. “They’re helping to satisfy pent-up demand as well as create opportunities for the redevelopment of the buildings those tenants are vacating.” Once vacated, Lennon says improvements can be done on these buildings to attract new tenants.

Other active developers in the area include The John Akridge Companies, which has two buildings that will deliver in 2004 and two that will deliver in 2005, all in the East End. The Kaempfer Company is developing the 200,000-square-foot Bowen Building at 875 15th St., and it is also partnering with Forest City Washington on the 2 million-square-foot Waterfront Mall in the Southwest market. Boston Properties has a 535,000-square-foot facility at 901 New York Ave. set to deliver in 2005.

The submarket to keep an eye on in the future, according to Lennon, is Capital Hill. Several new developments are being planned for the area, including a new headquarters for Alcohol, Tobacco and Firearms, a metro station and a tremendous amount of residential space. “As this all fills in, the infrastructure will be there for office development to merge with the existing Capital Hill developments,” Lennon notes.

The Southeast submarket is also an area to keep on the radar screen, says Lennon. Last year almost 1 million square feet of development took place there, and it really wasn’t even considered a submarket at the time. The Navy moved a headquarters to the area, and now the Department of Transportation plans to move into a new 1.4 million-square-foot complex as well. “When that happens, we expect that there will be further development to handle other government and contractor requirements,” Lennon says.

Although Lennon says many developers are somewhat cautious as a result of the economy, he believes that Washington, D.C., will continue to be a healthy market to invest in. “This is absolutely one of the areas that everyone wants to buy into, and we are getting record numbers for some buildings,” Lennon explains. “People want a stronghold in Washington.”

Charlotte

It’s a great time for tenants in Charlotte, North Carolina’s office market, according to Rob Cochran, executive vice president at Colliers Pinkard. He says that landlords are scrambling for tenant business and offering aggressive deals with extra tenant improvements and reduced rental rates.

In order to attract tenants to Meridian Corporate Center in Charlotte’s University Research Park, the 1.8 million-square-foot facility will soon undergo a repositioning. A partnership of Blackacre Capital Management and other New York-based investors recently acquired the building from Meridian Group. Currently home to IBM, Solectron, MSL and Strayer University, Meridian Corporate Center has approximately 335,000 square feet available. “Meridian Corporate Center contains the largest block of contiguous space available in the Charlotte market, and likely the region,” says Peter Conway, director of leasing for Trinity Partners, the exclusive leasing and management agent for the building. “This fact should enable it to compete for most regional and national call center requirements.” Originally built exclusively for IBM, the new ownership team plans to reposition Meridian Corporate Center as more of a multi-tenant facility providing greater individual identity to its tenants.

The current vacancy rate in Charlotte’s office market is 14.5 percent, excluding sublease space. To date, absorption is nearly 650,000 square feet. Cochran predicts activity this year will be much the same as it was in 2002, with the tenant in control and demand weak.
Most major office developments in the Charlotte area are currently taking place in two areas, Ballantyne and Lake Norman. The Bissell Companies has a 125,000-square-foot speculative facility underway in Ballantyne near Interstate 485. Lichtin Corporation has two buildings under construction, Toringdon II and Toringdon III. Both are in Ballantyne and will be 75,000 square feet each. One building is already 75 percent leased and the other is completely speculative.

Pizzagalli Development’s 52,600-square-foot facility at NorthPointe Executive Park recently came on line in the Lake Norman area at Sam Furr Road just off of Interstate 77. Newell Rubbermaid will be a major tenant there, leasing space for a regional sales office. Pizzagalli is also planning another building for NorthPointe Executive Park, and this one will be completely speculative.

The office growth in the Ballantyne and Lake Norman areas is a result of residential growth. “If you’re a new company in town and you’ve got executives, they are probably either going to live in the south near Ballantyne or up north at Lake Norman.” He points out that developments like Toringdon and Ballantyne have been successful because of their proximity to things that are important to its users, such as residential, retail, restaurants, hotels and transportation hubs. Cochran believes that because developments in these two areas will continue to be attractive to corporations, developers like Lichtin and Bissell are willing to take the risk in building there, even in a soft market.

An area to keep an eye on for future development, Cochran notes, is the Southwest submarket near the intersection of South Tryon Street and I-485, just south of the airport. “This is where we’re going to see some new construction in the coming years because of the proximity to the airport and the interstates, as well as several large residential developments near Lake Wylie that should open in the next few years,” says Cochran. Atapco Properties has purchased land at an I-485 interchange in the southwest quadrant, with plans to build office space, hotels and some service retail in the future.

Despite current developments in Ballantyne and Lake Norman, there is little demand for space in other Charlotte markets. “The sublease space is a factor that’s looming out there,” says Cochran. “A lot of developers know they are going to be getting some space back over the next few years, so that’s factoring into their decisions.” The demand is also so slow right now that it only justifies building in very few markets. “Developers are simply waiting for demand to pick up and for some of the vacant space to get absorbed,” says Cochran.

Richmond

Vacancy rates in Richmond, Virginia, have gone up considerably since 2000, according to Jeff Cooke, senior vice president at Thalhimer. In 2000, the year-end vacancy rate was approximately 5.42 percent. At the end of 2002, it went up to around 10.85 percent, excluding sublease space.

The amount of sublease space in Richmond has also gone up considerably. “In past years we’ve typically carried less than 100,000 square feet of sublease space, but now we have over 650,000 square feet of space, which raises the available space to around 15 percent of the market. This high rate is keeping developers from building new speculative product,” says Cooke. He also notes that while the absorption rate at the third quarter of 2002 was approximately 280,000 square feet compared to 1.3 million in 2000, the 2002 rate is still slightly higher than 2001, which is an improvement.

The majority of office growth over the last 5 years has been in Richmond’s suburban market. In that time, it’s gone from 13.3 million square feet to 17.3 million square feet. This growth, according to Cooke, has primarily taken place in the northwest section of town and has been driven by the road network and housing trends.

Currently there is no major office construction underway in Richmond. Major office builders in the market have pulled back considerably. Provided that business starts to expand again, Cooke sees expansion on the horizon beginning in the second half of the year.

An expanded road network will fuel future growth. Work is currently being done to complete the last portion of Route 288, an interstate highway to circle the city, and the final section will include a new bridge across the James River, northwest of the city. “This will allow a much easier commute from one side of the river to another,” says Cooke.

An area to keep an eye on for future development, according to Cooke, is along the new Route 288 corridor that will run from Innsbrook in the northwest quadrant across the James River into the southwest quadrant. “There’s quite a bit of land that’s already approved for development along that corridor, so we think it will continue to the north and west of the city, mainly because of the new roads,” says Cooke.

Cooke remains cautiously optimistic about the future of office development in Richmond. “In traveling around the country and talking to people, I’ve noticed that Richmond seems to be in the same boat that most people are in now,” he says. “But Richmond has been a pretty steady economy, so we don’t expect things to be negative for a long time. We’ll come out of it in the next year or so.”

Biloxi/Gulfport

Several new developments will be coming on line in the Biloxi/Gulfport area this year, according to Doug Molyneaux, senior advisor at Grubb & Ellis/Sawyer Commercial.

The first phase of Concourse Office Park near the airport in north Gulfport is currently nearing completion and will consist of approximately 45,000 square feet. Developed by Gulf Breeze Properties II, 26,347 square feet of the facility has been completed so far and 9,000 square feet is under construction. An additional 10,000 square feet is being planned.

In downtown Gulfport, a new 208,000-square-foot federal courthouse building is underway, and it will come on line in October or November of this year. “This project will spur significant office development in the downtown area,” says Molyneaux. The Davis & Feder Law Firm is developing 15th Place, a new four-story, 32,000-square-foot mixed-use development near the new courthouse. The building will come on line late this summer at 1712 15th St. It will feature retail, restaurant and office space.

Just west of downtown Gulfport is the Gulfport Medical Office Building, a 78,000-square-foot Class A development. Only 7,800 square feet has been leased to Memorial Hospital of Gulfport, and according to Molyneaux, this adds significantly to the area’s vacancy rate.

The majority of office development is currently taking place in the suburban areas of Ocean Springs, Biloxi and Gulfport, according to Molyneaux. The area to keep an eye on in the future, he says, is the Cedar Lake corridor in north Biloxi. “This is going to be an active market in terms of new development,” says Molyneaux. “It is well located, it has easy interstate access, and there is a lot of residential growth in the area.”

Cedar Lake Physicians Center, a very successful medical office park, has been developed in the Cedar Lake corridor. A new Home Depot deal has also recently been announced for this corridor. “Combine that with some road improvements that are currently underway, and you have a pretty active corridor,” he says.

Gulfport’s current vacancy rate is approximately 20 percent, according to Molyneaux. “New tenant activity in the market has been pretty slow,” he says. “We’re probably seeing, just in the Gulfport area, about 20,000 square feet of absorption per year.”

In the future, Molyneaux sees continued, slow absorption. “With interest rates so low, I see a lot of new product coming on line.” He says that most new developments will be 10,000- to 15,000-square-foot speculative projects. This is because people have started putting their money into speculative development rather than into the stock market. “This is going to keep our vacancy rates higher than normal,” he says.

Molyneaux does look for the downtown Gulfport market to tighten up later this year once the new federal courthouse comes on line. He says it will create a demand from law firms that want a presence near the new courthouse. While the downtown Gulfport vacancy rate is around 15 percent, he explains, this doesn’t equate to a lot of square footage because of the relatively small amount of office space currently in the area. “It will only take a few deals to fully absorb the current vacant space,” says Molyneaux.

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