SOUTHEAST SNAPSHOT, JULY 2008

Richmond Office Market

Richmond’s downtown continues to be the center of activity in the metropolitan area. Philip Morris has occupied its new 450,000-square-foot research center in the Bio Tech Park, the Federal Courthouse Building is nearing completion and the Miller & Rhoades department store site under construction is bringing a new hotel and residential unit to the Broad Street corridor, which is just north of the Central Business District (CBD). All of this activity continues to add to the vibrant office market. MeadWestvaco has started construction on their new headquarters on the James River in the CBD. The Class A market remains extremely healthy with the current vacancy around 3.5 percent but will soon be shaken by Wachovia Securities putting on the market approximately 350,000 square feet for sublease as they transition to their new home in St. Louis. The Class B market has continued to worsen over the past 24 months with the vacancy rate rising north of 25 percent. The downtown market has its soft spots, but overall it continues to grow and attract new business. The expansion of the Medical College of Virginia, the Biotech Park, Virginia Commonwealth University and the larger law firms continue to deliver job and office space growth.

The Northwest suburban Class A market also continues to be a strong job growth corridor for the metropolitan area. The current vacancy is 8.4 percent with a bulk of that vacancy concentrated in a few large blocks of space vacated by Saxon Mortgage, Owen & Minor, Encore Credit, Capital One and Car Max. Additionally, Wachovia Securities will be subleasing 192,000 square feet in this market, which represents the largest block of space available. On the other end of the space spectrum, there are over 71 buildings with 2,800 to 5,000 square feet available. The Class A market has had a positive 112,000-square-foot net absorption in the first quarter of last year. Northwestern Mutual is expanding and will relocate from Westere II to Westere IV in the Innsbrook submarket. Other firms like the Cellco Partnership and Pediatex Medical Group also have expanded and relocated to the Innsbrook submarket. The Northwest quadrant, similar to the CBD, has some uncertainty with its relocation of MeadWestvaco office in the northwest quadrant to its new headquarters in downtown. This will leave a vacancy of approximately 200,000 square feet in 2010. Also, a possible merger of Circuit City with Blockbuster could result in Circuit City headquarters employment being reduced and additional square footage being placed on the market. The most significant new building deliveries are the 200,000-square-foot Reynolds Crossing Building and the 80,000-square-foot Westere IV. These new deliveries will create new vacancy to be backfilled in the Glen Forest Office Building and Westere II by tenants relocating to these new buildings.

The last office quadrant to be discussed is the Southwest market. This market was plagued in late 2006 and last year by some large corporate relocations and firms exiting the Richmond market. The first was MeadWestvaco leaving 100,000 square feet at Boulder Center for the Innsbrook market. This was driven by their relocation of its headquarters to Richmond and doubling in size. The second was LandAmerica’s consolidation of three locations in the Southwest quadrant to a new campus in Innsbrook. These two transactions, along with Trailblazer Insurance closing its operation and Philip Morris USA consolidating, left a 315,000-square-foot hole to be re-leased.

This market had some very strong activity in the first quarter with Northrop Grumman leasing 96,000 square feet in Patriot Tower and Alstrom Power leasing 40,000 square feet in the Gateway II building. These two transactions, along with several other deals, have resulted in over 60 percent vacated space being leased.

The current Class A vacancy is 17.8 percent with the Class B vacancy showing a strong 6.5 percent vacancy rate. The most significant event to report in the Southwest quadrant occurred in the third quarter last year with Brandywine Real Estate Trust acquiring four buildings in the Boulders Office Park, giving them a significant market share advantage over all of the competitors. This acquisition could position the market for strong rental rate growth in the future with its newly established market dominance.

In conclusion, the first quarter saw an uncertain market with good deal flow continue to moderately grow, with the smaller, locally based companies providing the growth. Rates have remained stable through all three major office submarkets. The forecast for the rest of the year should remain the same with some uncertainty attached to the vacancy created by final relocation of the Wachovia Securities operation to St. Louis.

— Joseph P. Marchetti is managing director of the CB Richard Ellis office in Richmond, Virginia.

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