CITY HIGHLIGHT, NOVEMBER 2006

HAMPTON ROADS CITY HIGHLIGHTS
John Crumpler III, Scott Godbout, Robert Phillips Jr. and Steven Brincefield

Hampton Roads Retail Market

The Hampton Roads’ retail sector continues to enjoy strong growth throughout the region. This trend is evidenced by the introduction of numerous new retailers to the market, the expansion of existing projects and the announcement of new developments to the region.

Lifestyle centers in Hampton Roads remain a popular vehicle for the introduction of new retailers to the market, and they also create new focal points for the retail activity in the area. Armada Hoffler’s Virginia Beach Town Center is a prime example of the strength lifestyle centers have instilled in our market. Currently, phase III of this center is under construction. This phase will contain a Westin Hotel and Residence, additional condominiums and a McCormick and Schmick’s Seafood restaurant, which will join P.F. Chang’s, The Cheesecake Factory, Gordon Biersch Brew Pub, Ruth’s Chris Steakhouse, California Pizza Kitchen and “346” Brooks Brother’s. The Town Center’s success has revitalized the Pembroke area, and it will continue to drive additional new developments and attract retailers not presently in Hampton Roads. 

In Newport News, the City Center at Oyster Point, another lifestyle center complemented by the smaller Port Warwick project located across Jefferson Avenue, has created a new hub for fashion retailing on the peninsula. City Center at Oyster Point, a true mixed-use center developed by HL Development Group, a division of NAI Harvey Lindsay Commercial Real Estate, consists of 230,000 square feet of retail space, 1 million square feet of Class A office space, approximately 55 retail units and a 256-room, full-service Marriott Hotel and Conference Center. NAI Harvey Lindsay reports strong retail sales and high occupancy in all sectors of the project. The list of retail tenants who opened this spring include, Ann Taylor Loft, Coldwater Creek, JoS A. Banks, Talbots, Chico’s, J. Jill, Great Wraps, Red Star Tavern, MaggieMoo’s and Firkin & Frigate Pub. City Center draws on an area that extends across the river into Yorktown, Jamestown, Gloucester, and Mathews counties, effectively expanding the traditional market of the Virginia peninsula.

New Town Shops on Main, a lifestyle center by Developers Realty Corp. is providing additional retail strength to an already vibrant Williamsburg corridor. This fall, Barnes & Noble, Old Navy, Anne Taylor Loft, Lane Bryant, Cacique, and Pac Sun will join Consolidated Theaters at New Town. In addition, Opus 9 Steakhouse, California Tortilla, and Ichiban Japanese Restaurant are slated to open spring 2007. Also in this corridor, the small tenant retail space in S.L. Nusbaum’s Windsor Meade Marketplace, which is anchored by Belk, Bed Bath & Beyond, Pier One Imports, PetSmart and Office Depot, opened this spring and is now fully leased. 

Another important trend driving the substantial retail activity in the market is the growth of big-box power centers. Trader Joe’s opened their first and currently only location in Hampton Roads at Goodman and Company’s Jefferson Commons in Newport News. In Chesapeake, Super Wal-Mart has opened in Ellis Gibson’s Cahoon Commons, and a project being developed jointly by Ellis Gibson and Precon Development, Edinburgh Commons, will be anchored by Target and Home Depot.

The Old Dominion University Center for Real Estate reports retail vacancy at 7.55 percent across the MSA, dropping from 8.87 percent to 6.69 percent on the Southside, and down from 10.44 percent to 9.18 percent on the peninsula. At such low vacancy rates, competition for small shop space is very strong, particularly in the prime submarkets.

As the year progresses, retail projects will continue to develop to satisfy the current demand. City Center at Oyster Point and the Virginia Beach Town Center will continue to expand into their respective next phases, and grocery store chains, which are currently very active in the market, will continue to seek new locations or replace outdated stores. Power center owners plan to pursue additional phases, and Wal-Mart is ushering in new retail opportunities in older established urban submarkets in Norfolk and Portsmouth. HL Development Group, Sandler Development, S.L. Nusbaum and other local and national developers should remain active in response to the strong demand for retail space.

Bolstered by the area’s strong and growing port, it’s substantial tourism industry, and it’s multiple military bases, the Hampton Roads retail real estate market is healthy and should continue to remain active during the coming months.

— John R. Crumpler III is vice president of retail leasing with NAI Harvey Lindsay Commercial Real Estate.

Hampton Roads Office Market

In Hampton Roads, the tell-tale signs that fall has arrived are the crisp night air, the scent of the fire and of course, the return of our youth to school; however, in the world of commercial real estate, it’s the money man requesting year-end projections. In keeping with that tradition, we all take a forward view hoping that most transactions will close before year-end. However, while we are always looking forward to the next transaction, it’s often best to take a look back and review where we’ve been.

The third quarter has ended and the overall consensus is that it was not as hot as the temperature had been this summer. The Hampton Roads market, which extends from Williamsburg to Virginia Beach, showed slightly less activity than last year. Much of that may be due in part to the lack in volume of new product. Rental rates for all classes have been stable with a bias to upscale buildings. Class A buildings are commanding rates in the $22 to $25 per square foot range. The soon-to-be-completed Liberty III Building in Chesapeake, is quoting rates of $21.50 per rentable square foot. New Class B product, such as the Circle South Building and Central Center buildings in Norfolk, are priced at $17.50 per rentable square foot. Newer suburban hubs, such as City Center in Newport News and Town Center in Virginia Beach, have delivered strong occupancy levels with rates that are some of the strongest in the area. While landlords have been able to maintain rates and limit concessions, the activity level for new business locating to the area has been slow.

With an overall market size of 23 million square feet, absorption is estimated at 200,000 rentable square feet for the quarter, creating an overall vacancy rate of 8 percent. The Class A vacancy rate is slightly lower than Class B; however, overall there is an estimated 1.85 million rentable square feet of vacant space. Most soon-to-be-delivered buildings are largely vacant; however, prospect interest has been increasing. The Class B rate for existing buildings has remained strong, as rates across the region have been in the $16 per rentable square foot range for a full-service lease. Occupancy levels for Class B buildings also remained strong, averaging 91 percent.

All cities in Hampton Roads have significant projects under construction, relatively low vacancy levels and steadily increasing rates. With each city developing an urban center, the market has become further segregated. For example, companies may now have multiple branches as opposed to one office for the region. While new prospects to the area have been in short supply, the steady growth of existing business and their spin-offs is developing a region that is multifaceted with no one sector having the ability to dramatically impact the overall market.

Significant transactions for the quarter included new leases by Progressive Insurance, Lockheed Martin and a renewal by Harris Publishing Corporation that totaled 130,000 rentable square feet. Additionally, Dominion Enterprises will complete its new 220,000 rentable square foot building in January 2007. Market drivers for the area continue to be the military and associated defense contracting, transportation and international shipping and light manufacturing. With the anticipated opening of the Maersk Shipping Terminal in 2007 and continued military spending, the Hampton Roads market has shown slow, but steady growth. 

Overall, despite the fact that the third quarter did not exhibit huge strides in terms of square footage leased or developed, the Hampton Roads area continued to build a sturdier base in which downside risk will be minimized for the future.

— Scott M. Godbout is vice president and director of NAI Harvey Lindsay’s office division.

Hampton Roads Industrial Market

Industrial development in Hampton Roads, Virginia, is at historical high levels in terms of acquisition of land and planning and delivering of new or upgraded warehousing/distribution product to meet the continued flow and predicted wave of Asian containerized goods through the Port of Virginia terminals.

Despite the recent announcement by Ford Motor Company that it will close its Norfolk Truck (F-150) Assembly Plant next year and its impact on suppliers located in this market, a future closing by BASF, and transportation infrastructure pains common to all growing markets, Hampton Roads continues to have a stable economic base. This base is rooted in steady defense spending and the strategic, timely infrastructure investment by the Virginia Port Authority. Additionally, Maersk’s APM Terminal, a $500 million private port facility, remains on schedule to ship containers by next summer. This construction will double the capacity of the Virginia ports in phases beginning next year.

Current trends in the market include the purchase of existing warehousing or former manufacturing facilities for repositioning to warehouse/distribution space. Ashley Capital purchased the 720,000-square-foot former General Electric manufacturing plant in Suffolk and is remodeling and updating the facility to meet modern warehousing requirements. First Potomac REIT entered the market in a monstrous way, purchasing 700,000 square feet of the DD Jones portfolio, the 300,000-square-foot  Bay Warehouses property in Chesapeake and the 421,000-square-foot former Gateway Computers property in Hampton, repositioning it for multi-tenant opportunities.  The Bay Warehouses property will see an additional 100,000 square feet added in the near future. Cambridge Hanover purchased an older 130,000-square-foot property on 12 acres in Cavalier Industrial Park in Chesapeake and has invested more than $1 million in improvements converting the facility to multi-tenant warehouse use.

Recently completed warehouse / distribution product and space that is under construction and scheduled for delivery before year end totals under 1.5 million square feet. Depending upon the estimate used, up to 20 million square feet of warehouse and distribution space is attainable in the next 3 to 5 years should demand materialize.

BPG Properties controls 787 acres suitable for development of up to 8 million square feet of rail-served warehouse/distribution space on Route 58 in Suffolk. The Regional Companies anticipates delivering 1.1 million square feet of rear loaded warehouse/distribution space at the Route 460 split off of Route 58 in Suffolk. McDonald Development is active in the market, recently purchasing the 115-acre Kenyon Road site and chasing additional acreage near the existing Target Import Distribution Center in Suffolk. Devon USA remains on the tee box with its planned Enterchange at Suffolk development of 761,259 square feet of warehouse/distribution space in 2 buildings. Next door, publicly traded Liberty Property Trust has purchased 68 acres for its Commerce Center Hampton Roads development, planned for up to 1 million square feet. 

Other significant and recent developments include ProLogis’ entry into Hampton Roads in the form of a build-to-suit for NYK Logistics. The $26 million cross dock warehouse center will be located close to the Port of Virginia terminals to handle primarily Target product. The approximate 120,000-square-foot building and supporting 36-acre storage yard is expected to handle 45,000 containers in its first year.

The majority of warehouse and distribution development is taking place in southern and western Hampton Roads as, quite simply, because of affordable land and met drayage tolerances. Speculative warehouse and distribution development is taking place throughout the market. There are numerous sites available for distribution centers located within 20 to 40 miles of the Port of Virginia.

Some of the more active developers in the market include Liberty Property Trust, which is completing its second building of 168,000 square feet at Bridgeway Commerce Center in Northern Suffolk along Interstate 664. This the second of three buildings scheduled for Bridgeway Commerce Center. Ashley Capital has completed its 230,000-square-foot rail-served Indian River Distribution Center in Chesapeake. The high-bay facility, completed in July, is the closest new distribution warehouse to Norfolk International Terminals and is expected to lease-up by year-end.

Johnson Development Associates is completing its 329,000-square-foot (expandable to 802,000-square-foot) cross dock facility in Shirley T. Holland Commerce Park this month.  In conjunction with this completion, design and permitting has begun on an additional 540,000-square-foot facility (expandable to 1.3 million square feet) in the same park, with construction expected to begin early next year. Devon USA is completing the first of two buildings in Hampton along I-664. The first 243,000-square-foot building of precedes a planned 458,000-square-foot second building. Powers Holdings is completing two 150,000-square-foot buildings at Northgate Logistics Center in Suffolk.

Massimo Zanetti Beverages USA, which purchased the coffee business from Sara Lee last year (including the roasting, grounding and packaging plant in Suffolk) leased the long-vacant 220,000-square-foot former Dan River office and warehouse facility in Portsmouth.

In all, strong demand continues for purchase of high-bay warehouse properties and local industrial product of all sizes. Hampton Roads has witnessed a doubling of industrial land prices during the last 24 to 36 months.

— Robert L. Phillips, Jr. is a first vice president and Patrick L. Mumey, SIOR, is a first vice president with Thalhimer/Cushman & Wakefield.

Hampton Roads Multifamily Market

The Hampton Roads market is divided into two distinct areas separated by the James River. Primary access between the two markets is by way of Interstate 64 through the Hampton Roads Tunnel. A second primary access is via the Interstate 264 loop connector from Hampton to and through Chesapeake, Suffolk and around to Portsmouth, Norfolk back to I-64 and through to Virginia Beach. This connects the Southside markets of Norfolk, Virginia Beach, Portsmouth, Chesapeake and Suffolk. The market north of the James River comprises Hampton, Newport News, Williamsburg and York County. There are approximately 85,000 multifamily units located in these two market areas.

The Southside market contains approximately 60 percent of all of the multifamily units, with the city of Virginia Beach accounting for approximately half of all multifamily units within this market. North of the James River is often referred to as the Peninsula market and accounts for the remaining 40 percent of multifamily units.

The Souhside and Peninsula markets are distinct to residents of the area as to choice of housing because of dense commuter traffic and unreliable travel times to employment. Therefore the choice of housing location is usually aligned with proximity to job location and commute time.

Overall vacancy for the area is very low and is estimated to be approximately 3.5 percent. This compares favorably against a national average of 5.7 percent. Absorption of new units built with in the past 12 months has exceeded 1300 units. This is historically greater than in previous years where absorption historically averages less than 1000 units annually. The average rent area wide is approximately $792 per month. Rental rates for one-bedroom units average $698 per month; two bedroom units average $796 per month; and three bedroom units average $931 per month.

The development of new multifamily units has increased during the prior year. In 2005 to 2006, approximately 3090 units were constructed and more than 1500 units were planned to be built. Most of the new development opportunities have occurred in the Chesapeake and Suffolk submarkets in the Southside and in the Hampton and Williamsburg submarkets in the Peninsula. These two sub-market areas are experiencing the majority of development activity in both multifamily and single family housing. This is primarily related to several factors including the availability of developable land, favorable business and political climates and opportunities for future expansion to nearby commercial developments.

Major developments fueling multifamily expansion include the Town Center of Virginia Beach in the Southside and the City Center at Oyster Point and the Port Warwick development in the Peninsula.

The Town Center of Virginia Beach is being developed by the area’s largest developer, Armada Hoffler. The project will span 17 city blocks and will provide 4.3 million square feet of mixed-use space, including 832,550 square feet of retail, 600 luxury residential units, 800,000 square feet of class A office space. The office space includes the completed Armada Hoffler Tower, the second largest office building in Virginia. The development also includes two luxury hotels and 3200 parking spaces. On the Peninsula, the City Center at Oyster Point is a 54-acre mixed-use urban-scale development of Class A office space, retail, hotel and apartments totaling more than 1 million square feet. Port Warwick is a 150-acre mixed-use urban village development that includes apartments, condominiums, single-family homes, offices and retail shops.

Expect rents to increase slightly in the coming year. The Hampton Roads area is experiencing a robust economic and real estate development environment.

— Steven B. Brincefield, CPM, is a senior vice president of Thalhimer/Cushman & Wakefield.

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