Suburban Richmond Office Market
by Mark Douglas

Build, build, build. That has been the trend in suburban office development in Richmond over the last two years for both build-to-suits and speculative construction, according to Mark Douglas, senior vice president at Insignia Thalhimer. “Very often, speculative projects were 100 percent leased prior to substantial completion of construction,” he says. “However, during the first quarter of 2001, we have noticed a marked slowdown in construction. For example, we currently have 673,000 square feet of space under construction with a vacancy of 371,500 square feet, or 44.8 percent pre-leased.”

Due to the lack of available zoned office land in the major office quadrants such as Glenside and Broad and the Innsbrook Office Park, Douglas says there is scattered property development for the first time in recent memory. Virginia Center currently has two Class A office buildings under construction. This is a first for this 15-year-old mixed-use development located in north Richmond. West Creek will be the new home for Performance Food Group and Capital One. Westgate I and Westgate II at Wellesley are also new Class A office developments. “These outlying developments will pull tenants from existing facilities in the more established office developments such as the Commerce Center, Paragon and Innsbrook,” says Douglas.

Currently, all new construction in the suburban office market is being developed by existing Richmond developers such as Robinson Development, Pruitt Properties, Highwoods Properties and Liberty Property Trust. Douglas points out that 93 percent of the new construction in suburban Richmond is occurring in the northwest quadrant (West End). “This is logical growth as 68 percent of the suburban office market is in the West End,” he says. In recent years the majority of suburban space has been absorbed by tenants like First Union and Capital One, he notes.

Major new leases in West End include HRH Insurance as a lead tenant/build-to-suit in the North Shore Commons building taking approximately 40,000 square feet of space. SunCom will occupy approximately 90,000 square feet in the Westgate I building, which is currently under construction. Charter One Mortgage will take approximately 100,000 square feet in the new Charter One building in Virginia Center, also currently under construction. Performance Food Group will take 35,000 square feet in a facility under construction in West Creek.

The West End of Richmond will continue to dominate both absorption and growth sectors of the suburban office market, according to Douglas. There will be limited new construction for build-to-suit prospects on both sides of the river with announcements to be made on the Gateway Office Park, Commerce Center and Innsbrook forthcoming, he adds.

Class A rental rates for new construction in the suburban office market’s hottest developments like Glen Forest and Innsbrook are being quoted as high as $20 per square foot, with an average rate for new construction of $19.50 per square foot. As new construction costs increase, older, existing buildings follow suit by raising their rates, notes Douglas. “In essence,” he says, “there are several products that may be 15 to 20 years old that are getting $17.50 rates while new construction is receiving rates in the $19 to $19.50 range.”

Vacancy rates during 1999 and 2000 hovered around 2 percent for the West End and 4 percent for the southside of Richmond. “Currently there is a vacancy rate of approximately 2.5 percent in the West End and a 5 percent vacancy rate in southside for Class A and B+ marketable space,” says Douglas. “The reality of the situation, however, is that with approximately 650,000 square feet of sublease space and 371,500 square feet of vacant new construction, we have a blended vacancy rate of 11 percent market wide for the suburbs.”

Over the last 3 years, the market has grown at a tremendous rate in its attempts to meet the demand of tenants as they grow in the Richmond marketplace, absorbing over 775,000 square feet of space in 1999 and 1.3 million square feet of space in 2000. During the first quarter 2001, the area showed negative absorption of 25,000 square feet market wide. “While we are currently tracking approximately 70 office prospects with a combined need of just under 800,000 square feet, this represents absorption of just over 400,000 square feet of space on both sides of the river,” says Douglas. With 650,000 square feet of sublease space on the market and more coming on-line, strong tenants have been able to negotiate lease incentives in recent months as they secure new office facilities, he adds. “We do not expect to see any additional speculative construction in our marketplace until the market reaches equilibrium at approximately 95 percent occupancy.”


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