SOUTHEAST SNAPSHOT, JUNE 2006

Richmond Office Market

The Richmond office market has shown tremendous resilience during the last 5 to 7 years as a variety of large corporate users left the speculative market. For example, Capital One purchased 300 acres in West Creek and during the last 4 or 5 years relocated from more than 1 million square feet of leased space as their corporate campus developed. Reynolds Metals was purchased by Alcoa in 2000, and that corporate headquarters, consisting of approximately 500,000 square feet, left for Pittsburgh. Circuit City, headquartered in Richmond, historically accounted for 50,000 to 60,000 square feet of absorption every couple of years, but has actually gone the other way, putting 177,000 square feet on the market in 2004. Most recently, Carmax and Owens & Minor have both left more than 100,000 square feet of leased space for their own newly constructed campuses. However, Philip Morris’ corporate headquarters moved to Richmond, taking more than 400,000 square feet of suburban space and placing a 475,000-square-foot research and development facility under construction downtown. In the past 3 months, Richmond also won the corporate headquarters for Mead Westvaco, which will soon be taking 200,000 square feet of former Capital One space in the Northwest quadrant of Richmond. In addition, LandAmerica, riding the national, commercial and residential boom, went Fortune 500 and almost doubled their occupancy by taking 300,000 square feet of former Capital One space, also in the Northwest quadrant.

Regarding new construction, Liberty Property Trust recently completed a 100,000-square-foot building in the Northwest quadrant and Brandywine Realty Trust has a 75,000-square-foot building that will be finished this summer, also in the Northwest quadrant. Highwoods Properties has a 100,000-square-foot building that is under construction in the Southwest quadrant with a significant pre-lease. In 2005, Daniel Corporation delivered a 220,000-square-foot, Class A tower downtown on the James River, which had a significant pre-lease to Troutman Saunders and now stands 95 percent leased. That success story was at the expense of existing Class B and B+ buildings downtown.

With more than 20 office buildings in the suburbs and downtown capable of satisfying a 30,000- square-foot need, large scale speculative development will be kept at bay for the near future.  New Class A rents downtown, excluding parking costs, likely run $26 per square foot and up compared to $20 per square foot in the suburbs. There are no new office developers to the market as there is an ample supply of well-capitalized and very capable developers to handle the demand and provide competitive alternatives for office tenants.

The significance to the market of the completion of the 288/295 loop around Richmond cannot be overemphasized. Suburban projects to keep an eye on in Richmond are West Creek and Reynolds Crossing in the Northwest quadrant and Watkins Center and Center Pointe in the Southwest quadrant. Downtown there are several possibilities with NewMarket Corporation’s Foundry Park deserving the most attention.

Richmond’s office vacancy rose from 12 to 14.5 percent in the past 12 months. Expect vacancy rates to continue to tick up in 2006, with the most dramatic increase in the Southwest quadrant.  New suburban development will likely prosper at the expense of existing inventory. Rising vacancy rates and construction costs will keep totally speculative development under wraps for the near future.

To sum it up, Richmond’s office market is healthy with the weakest section of the market being the Class B buildings, both downtown and suburban. Limited new construction will solve those problems in the near future.

— Steve Gentil, SIOR, CCIM, is chairman of Grubb & Ellis/Harrison & Bates in Richmond, Virginia.

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.