Like most cities, Richmond, Virginia, is reflecting the national economic downturn with a decrease in market velocity across every commercial real estate sector. The office market is experiencing negative absorption and double-digit vacancy rates for the first time in many years. "More corporations are consolidating offices and retrenching after many years of outstanding growth," says Charles Polk, executive director at Advantis Real Estate Services Company. "In 2001, we have had a number of large corporate facilities placed on the market, including over 1.25 million square feet from Reynolds Metals, Fort James, Heilig-Meyers and Dominion Resources." As a result, the Richmond office landscape is dotted with existing buildings containing large blocks of available space, particularly in Class B and suburban properties.

There are several pockets of positive activity, according to Polk, particularly downtown in the Shockoe Slip and Shockoe Bottom areas. The recently completed 90,000-square-foot Turning Basin building was 80 percent pre-leased. "The Riverfront area is one of the bright opportunities for new office space, and the success of the Turning Basin building has sparked interest in several other projects along the canal," says Polk. The Watkins Cottrell building, a historic rehabilitation, will also contribute 33,000 square feet of retail and office space in the Canal area.

Downtown - Core Area Market. Net absorption was negative for the first half of 2001, with a 40,000-square-foot drop in occupied space. The overall vacancy rate has increased slightly to 14 percent. Class A vacancy is 5.56 percent, while B and C are 21 percent and 22.35 percent, respectively. Effects of the Wachovia/First Union merger are not yet known, but it is likely to free up some Class A space.

One bright spot in the Class B market has been the renovation of WyteStone Plaza, formerly the Ross Building. This 246,000-square-foot property now features an attractive lobby, modern offices, conference rooms and other benefits for users. The property owners are also renovating the old Trust Company Building, which promises to become one of the more remarkable office buildings in the city.

Other major projects in downtown Richmond include the new Richmond Convention Center, which is undergoing a major expansion, and Main Street Station in Shockoe Bottom. This multi-modal station will be Richmond' transportation hub, combining bus service, train service and high-speed rail to Northern Virginia.

Suburban Markets. Richmond' suburban office markets are defined by the northwest and southwest quadrants. The northwest quadrant contains approximately 14 million square feet; the southwest, approximately 5 million square feet. This year, the softening economy, corporate downsizing and dot-com casualties have put an unprecedented 500,000 square feet of space on the market. Vacancy for all classes in the northwest quadrant is over 10 percent. Asking rates have held steady, but concessions are more common.

Capital One has committed to developing its campus in West Creek Business Park, and this will increase space availability in Innsbrook as the company moves its operations. Heilig-Meyers, which went bankrupt this year, has made available its 210,000-square-foot headquarters in West Creek.

Another large tenant that has helped the suburban office market is Trigon, which has leased 62,000 square feet in Glen Forest and 50,000 square feet in Park Central, and plans to expand further in the Richmond area.

Two of this year' most prominent build-to-suits are Charter One and K-Line. Charter One pre-leased approximately 102,000 square feet of a 118,750-square-foot building in Virginia Center Commons, and K-Line pre-leased 45,000 square feet of the 108,000-square-foot Stony Point III property. New construction will be limited to build-to-suits, with no speculative building announced for next year.

Rents/Lease Terms. Downtown, effective Class A rents range from $16.50 to $25 per square foot, and Class B from $10 to $16 per square foot. Class C was the only class to show positive absorption in the first half of the year, with rents averaging $10 per square foot.

In the suburbs, asking rates for Class A space ranged from $16.50 to $20 per square foot, Class B from $13.50 to $16.50, and Class C from $12 to $13 per square foot.

Across the board, downward pressure has been felt on effective rates due to the large amount of sublease space available and lower demand for space.

Outlook. 2002 will be a year of slow but steady improvement, with rates holding in Class A space and a slight decrease for Class B space. Polk expects the Class B market downtown to provide a tremendous opportunity for users. "Depending upon a company' goals and objectives, the owners of various properties will offer a significant amount of concessions," he says. "These concessions can come in the form of free rent, reduced rental rate, extraordinary tenant improvement allowances or other perks. Landlords will need to be creative in order to increase occupancies."

The suburban market in 2002 should experience some absorption of sublease space and a minor correction in rental rates.

Overall, Polk remains cautiously optimistic. "The health of the Richmond market will depend primarily on the growth of the local, regional and national economies," he says. "Historically, we have been able to withstand economic fluctuations much better than other, less diversified cities. We hope that we will continue to flourish."


©2001 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.