CITY HIGHLIGHT, NOVEMBER 2004

RICHMOND WELCOMES ROUTE 288

The Richmond, Virginia, metropolitan statistical area has finally topped the million mark in terms of population, continues to be above the national average in terms of income, and continues to attract new companies willing to relocate their headquarters and facilities to take advantage of the quality of life and minimal commute times. This positive outlook on Richmond is reflected in the consistent growth in the retail market. The biggest complaint is the lack of inventory in desirable markets.

TGM Development has opened Westgate at Wellesley, which is anchored by Panera Bread, Bertucci’s and Starbucks Coffee.

Current retail vacancies in the market continue to hold steady at less than 9 percent, with the Northwest and Southwest submarkets encompassing more than 88 percent of the retail square footage at 4.25 percent and 12.49 percent respectively. Rental rates have continued to rise with rates for new construction exceeding $20 per square foot in most areas; the highest rates are in the Short Pump area, with some projects reaching into the upper $30s.

New retail developments continue throughout all quadrants. In Mechanicsville, Hanover Square South, anchored by Target and PetsMart, is under development, and new retail projects continue along the corridor including a proposed Lowe’s Home Improvement Warehouse. In Colonial Heights, Circuit City recently opened and Blackwood Development is expanding Dimmock Square by adding Best Buy and Old Navy. The northwestern quadrant continues to feed on the excitement of Forest City’s Short Pump Town Center with Parc Place breaking ground, the opening of TGM Development’s Westgate at Wellesley anchored by Panera Bread, Bertucci’s and Starbucks Coffee, the construction of Promenade Shops anchored by Hearth & Home, as well as Short Pump Town Center’s own Lord & Taylor replacement being lead by the opening of The Cheesecake Factory and the signing of Orvis. The Chester market has Kohl’s back-filling a vacant Lowe’s and the Stratford Hills area of Richmond is home to a new Target and Ukrop’s, both of which are under construction. Downtown and its immediate surrounding markets continue to hold their own with the continued interest in loft housing and urban living spurring new retail developments and redevelopments. The northern quadrant isn’t to be left out with the completion of the newly relocated Atlee/Elmont interchange in the Virginia Center Commons submarket spurring several new developments including the Northcross Center to be anchored by The Home Depot.

The most significant new development to affect retail since the arrival of two malls within one month isn’t a new retail development — it’s a freeway. Route 288 is due to be completed by the end of 2004 and will finally connect I-95 south of Richmond with I-64 to the west, linking some of the most affluent areas in the MSA. The completion of Route 288 is expected to shorten commuting times by up to 45 minutes and generate additional growth along this corridor. The true impact of Route 288 and its influence on the shopping community as well as the reality of new developments along this corridor will be told over the next few years.

— Connie Jordan Bradford, vice president, Thalhimer/Cushman & Wakefield

Suburban Office

The Richmond suburban office market saw a significant office building sale this summer with the transfer of two landmark buildings to a partnership based in Northern Virginia. RER Equities Inc. and its partner New Boston Fund paid $16 million for the former headquarters complex of Capital One, one of the nation’s largest credit card companies. (Please see sidebar below for more details.)

Capital One, now the largest employer in the Richmond MSA, began as the credit card division of Bank of Virginia, which later changed its name to Signet Bank. Signet sold off the division, which became Capital One. Capital One experienced tremendous growth in Richmond, driving the office market during the late 1990s. In 2000, Capital One acquired a large tract of land west of Innsbrook in a project called West Creek. Capital One has since constructed close to 1 million square feet in the complex and located its corporate headquarters in the Tysons Corner area of Northern Virginia. During the last few years Capital One has vacated substantial speculative office space in favor of its own campus. Capital One will lease back the office buildings through the fall of 2005.

Bruce Levy, CEO of RER Equities Inc., sees the acquisition as an excellent opportunity to offer large blocks of office space to Richmond’s corporate community. Although Richmond is experiencing vacancy of about 11 percent overall, there are few opportunities for those office users seeking blocks of contiguous space in excess of 50,000 square feet. Both buildings have floor plates of more than 40,000 square feet, which is rare in the Richmond speculative market. Due to their age, the buildings would be considered Class B in the suburban market. The new owner plans to take advantage of their prime location and upgrade the buildings to Class A status. RER Equities Inc.’s partner New Boston Fund has acquired numerous office building investments in Boston, Indianapolis and the Washington, D.C., area. The former Capital One complex represents its first venture in Richmond.

— Jeffrey Cooke, SIOR, senior vice president, Thalhimer/Cushman & Wakefield

Multifamily

The apartment market in Richmond has held steady over the last 18 months. Occupancy rates range from the mid to low 90s throughout most of the area’s submarkets. Henrico County, with its high concentration of office parks, remains one of the region’s top employment areas. The apartment market in this area is capitalizing on its proximity to employment. The area has the highest occupancy rates in Richmond according to the latest report from Real Data, which tracks apartment market statistics throughout the Southeast. Rental rates among existing communities are up approximately 2.5 percent in the last 12 months, according to Charles Dalton at Real Data.

Despite the announcement earlier this year by Capital One that it would lay off 2,500 employees in the area, Richmond’s employment base has expanded over the last year. The most notable announcement was Infineon Technologies’ plan to expand its Henrico facility by 1,200 employees.

With developers adding approximately 600 new units every 6 months and the number of renters expanding by slightly more than 650 every 6 months, supply and demand have remained in equilibrium over the last 18 months. As of August, there were 12 separate apartment communities under construction. Development activity is concentrated along the James River in the center of Richmond and in Chesterfield County along Route 288.

In central Richmond, Forest City Residential continues to add units in its River Lofts of Tobacco Row development. The former Luck Strike building is next up with 142 units. Daniel Corporation is developing apartments as part of its mixed-use project on Brown’s Island, which is on the James River. Several other projects are either underway or planned along the James River and downtown Richmond, including the redevelopment of the John Marshall Hotel into 178 upscale apartments.

Route 288 is the catalyst for development in Chesterfield County. The extended thoroughfare will enable commuters and residents to quickly traverse Chesterfield County from I-95 in the south to the employment areas of Innsbrook in western Henrico County. The Bogese Companies has 536 units under construction or planned in Chesterfield County. The Belvidere is under construction and the River Forest is expected to begin construction this fall. Other developers in the area include Crowne Partners, EWN Properties, NRP Group and Edward Rose Company.

With more than 1,600 units under construction, occupancy rates for the overall market are expected to remain in the low 90s through 2005, according to Dalton at Real Data.

Industrial

Absorption in the Richmond industrial market continues to occur with a boost expected in the Southside metro area and Virginia/Tri-Cities region. Currently, there are a minimum of three companies needing approximately 100,000 square feet each, which have collectively centered their search on sites located in the city of Richmond, Chesterfield County and Prince George County.

Colortree Inc. recently purchased the 98,000-square-foot former Ben Hogan manufacturing facility on Villa Park Drive.

Examples include Ryder Logistics, which has just taken an additional 87,769 square feet located on Bells Road; the former 100,000-square-foot GCX distribution facility located off Route 10, which is proceeding toward settlement; and two other large distributors (both local and out of state) that are looking to expand their presence in the metro Richmond/Tri Cities market. One party has shown interest in a 108,960-square-foot shell facility in Southpoint Business Park located in Prince George County and the other party is entertaining leasing new shell space at The Enterchange off Ruffin Mill Road in Chesterfield County.

Upcoming vacancies include the former 80,000-square-foot Lumber Liquidators’ facility fronting I-95 in Colonial Heights, which is now available as a result of its recently announced relocation. In addition, Brown & Williamson’s former 332,000-square-foot cigarette manufacturing facility on 147 acres in Chesterfield County has decided to close as a result of its recent merger with R.J. Reynolds.

Related to new construction, Devon USA continues to be one of the few developers which has delivered new speculative, multi-tenant warehouse space over the last 2 years. By late fall Devon is expected to finish its new 215,068-square-foot warehouse space at the Enterchange at Northlake in Hanover County.

Projected areas of growth include the corridor surrounding the opening of the new Route 288 extension to the west/southwest. Users have already begun to see the benefits, as the drive from the busy Route 60/Midlothian corridor to West Creek takes only 12 minutes.

Recent sales include the Interflex facility, a 55,000-square-foot fully air-conditioned property located in the Ashcake Industrial Park that just sold to Woodworth Virginia LLC for use as a metal heat treating operation. Also, Colortree Inc., a local printer, recently purchased the 98,000-square-foot former Ben Hogan manufacturing facility on Villa Park Drive.

The vacancy rate for non-owner/user industrial properties 50,000 square feet and up has inched up slightly to 31 percent, but is expected to decline over the next few months.

— Richard Porter, CCIM, SIOR, Porter Realty

Office Condominiums The condominium office development in Richmond is a relatively new phenomenon. Condominiums developed in 2001 represented only a small percentage of the marketplace with a handful of condominiums sold, totaling 30,000 square feet of area in the $100 per-square-foot range. In 2002, with the cost of construction and sharp developers realizing a niche market, other condominiums were developed with approximately 56,000 square feet sold in 2003 with pricing jumping to the low $120,000s. Thus far in 2004, approximately 56,000 have been sold with another 20,000 square feet under contract, with pricing ranging from $116 to $135 per square foot, cold dark shell. Not wanting to miss an opportunity, several developers are now in the marketplace with approximately 151,500 square feet of space under construction and another 258,000 square feet of planned construction in the west end of Richmond alone. This development and these sales are obviously driven by low interest rates and the availability of ownership opportunities. Professional companies that are investing in office condominiums typically occupy space from 1,500 to 10,000 square feet in size. These investors are usually small- to medium-size firms, medical practices in particular, showing a keen eye to those developments located near medical facilities. The suburban office market absorbed 352,100 square feet of lease area in 2003. This does not include the condominium absorption of 56,000 square feet. As of mid-year 2004, our suburban marketplace has shown a negative absorption of 198,752 square feet of office space. In that time period, the condominium market grew by 56,000 square feet of sold absorption. The shock to the whole system could be that, in both suburban submarkets, west end of Richmond and south Richmond, the projected total development of condominiums, in terms of phased development, could total more than 1 million square feet of future development. It remains to be seen if there is sufficient demand on the part of small business to absorb all of the projected condominium development in a timely manner. If one assumes a continuation of the favorable interest rates and mortgage climate currently in place, condominium developers should continue to prosper. — Mark Douglas, CCIM, SIOR, senior vice president, Thalhimer/Cushman & Wakefield

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