CITY HIGHLIGHT, NOVEMBER 2007

HAMPTON ROADS CITY HIGHLIGHTS
Steven B. Brincefield, S. Drew Haynie, Jonathan Guion and Teresa K. Gibbs

Hampton Roads Multifamily Market

Declining unemployment rates and a rising job forecast havehelped to create a healthy environment for apartments in the Hampton Roads region. At 3.5 percent, unemployment in Hampton Roads is among the lowest in the country. Major planned expansion of the area’s port facilities and continued positive in-migration will be beneficial to the overall Hampton Roads economy and multifamily housing sector.

Although construction of new apartments has declined from the pace of previous years, new construction has pushed vacancy rates higher, particularly in the Newport News and Virginia Beach submarkets. The Hampton-West submarket leads all areas in new construction with 455 units. In Newport News, the highly regarded Town Center mixed-use development has delivered 186 units at Park Place. However, the market continued its strong absorption, with more than 900 units leased of the more than 1,200 units added to supply.

Although vacancy rates have edged upward, this year is expected to end with a vacancy rate of about 4.8 percent, which is still low relative to other multifamily markets. The lowest vacancy rate is 2.5 percent in the Chesapeake/Suffolk submarket, where new construction has yet to exceed demand.

As new units are planned for construction, the declining cost of construction materials in the last 2 quarters has heightened expectation of new construction activity. However, mortgage lending is in turmoil and developers are competing for a shrinking pool of construction and long-term financing.

Apartment rents continued to rise during the year, with the average rental rate currently at $847 per month, or approximately $0.91 per square foot. Virginia Beach continues its exceptionally strong development activity, and boasts the area’s highest average rents at nearly $1,000 per month. Market-wide, rental rates have risen by 4 percent during the last 12 months.

Investment sales totaled $241 million through the third quarter and have already outpaced the entire volume of $222 million experienced in 2006. The largest transaction of the year, by dollar volume, was the sale of Bristol at Ghent in Norfolk. The 268-unit mid-rise community sold for a reported $48.3 million, or $180,224 per unit. The new development was approximately 80 percent lease-up at the time of sale.  The average sale price for multifamily units in Hampton Roads measured $93,720 per unit this year, up from $86,500 per unit in 2006.

Thalhimer expects the Hampton Roads multifamily market to remain strong as it moves into 2008. As demand moves toward supply equilibrium, rental rates should rise and vacancy will move downward into the historical range of approximtely 4.5 percent.

— Steven B. Brincefield, CPM, is senior vice president with Richmond,  Virginia-based Thalhimer, a Cushman & Wakefield Alliance.

Hampton Roads Retail Market

The advancement of the lifestyle/town center-style development continues with significant live/ work/play-themed projects underway throughout Hampton Roads. The focus on pedestrian-friendly, multi-use offerings includes Armada Hoffler’s two new projects, Benn’s Grant in Isle of Wight and The Town Center at Virginia Beach.  AIG Baker has broken ground in Williamsburg for Settler’s Market, and Mall Properties and Steiner are underway on the redevelopment of Coliseum Mall into the open-air Peninsula Town Center.  Likewise, Harvey Lindsay is continuing the advancement of the City Center at Oyster Point in Newport News with the opening of two mixed-use buildings and the addition of Banana Republic to its retail line-up.

Grocery competition is heating up, as Food Lion scrambles to convert and re-brand up to 20 percent of its 90 stores — the chains first Bottom Dollar conversions are now complete and the emergence of new Bloom stores are just around the corner. Farm Fresh is coming in with the opening of its first urban upscale  store at the Market at Harbour Heights in downtown Norfolk. Wal-Mart’s presence is being felt with the announcement of its first Neighborhood Market grocery stores coming to Norfolk. Harris Teeter continues to broaden its market-reach with new leases in Virginia Beach and a proposed Williamsburg store.  Trader Joe’s rounds out the grocery roster with a new store announced for Williamsburg.

Active Developers:

Ellis Gibson Development (Edinburgh, Red Mill Commons)

AIG Baker (Settler’s Market, Williamsburg)

Mall Properties/Steiner & Associates (Peninsula Town Center, Hampton)

Sembler Properties (Midtown Shopping Center in Portsmouth)

Premier Properties (The Marquis-York County)

Harvey Lindsay (City Center –Oyster Point, Newport News)

On the upside, vacancies remain very low. Steady absorption continues throughout the Hampton Roads area, with the overall vacancy rate dropping from 4.5 percent last quarter in the Southside area to 4. percent at the end of September. The Peninsula showed similar results, droppiing from an overall vacancy rate of 5.6 percent to 5.4 percent.

On the downside, casual themed restaurants the likes of Ruby Tuesdays and Darden Restaurant’s Smokey Bones Barbeque and Grill are dead in the water or have halted expansion.  Keep an eye on the Isle of Wight area as Armada Hoffler advances the Benn’s Grant development through the final leg of a lengthy rezoning. The 500,000-square-foot retail offering will front more than 1,000 new homes and be flanked by a medical campus.  Virginia Beach’s Pembroke area will see a significant redevelopment on a 13-acre former headquarters site, where an extension to the thriving Town Center will be developed. Williamsburg is coming of age with many major big-box players planting flags, and department store and wholesale club players intending to bring more stores into that submarket.

— S. Drew Haynie is a commercial sales-leasing associate with the Newport News, Virginia, office of  Thalhimer, a Cushman & Wakefield Alliance.

Hampton Roads Industrial Market

Increasing activity through the Port of Hampton Roads, one of largest ports on the East Coast, keeps the Hampton Roads industrial market growing, but what catapults the area into the “thriving” category is its ability to build on the Port’s success through a balanced foundation that also includes the area’s military support operations and a strong manufacturing base.

With a total inventory of 100 million square feet, the growth rate of Hampton Roads’ industrial space has remained consistent at 2 to 3 percent—or 2 to 3 million square feet of new space—per year. In 2007/2008, however, the area may exceed these traditional totals, primarily through the delivery of speculative distribution warehouses built by regional developers, national developers and REITS such as Ashley Capital, Liberty Property Trust and McDonald Development.

More than 2 million square feet of speculative industrial space is either recently completed, under construction or will break ground soon. This includes the 300,000-square-foot Northgate Logistics Center in Suffolk, the 459,000-square-foot Enterchange in Hampton, and the 168,000-square-foot Bridgeway III in Suffolk. Bridgeway II, which totals 126,000 square feet, is under construction, as is 385,000 square feet of the Virginia Commerce Center in Suffolk, which when completed will total 1.3 million square feet. In addition to this speculative building, there is also a strong amount of growth from existing operations that are expanding their facilities.

While demand for Hampton Roads industrial space is almost keeping up with supply—the average vacancy rate is still a healthy 6 percent and rents average from a low of $4.50 per square foot for older product to $6 per square foot and better for newer space—there is some concern about a potential pipeline of new industrial developments.

It’s difficult to tell if there will be overbuilding, particularly in light of events like the opening of APM Terminal’s $450 million, 291-acre container terminal and the nation’s growing appetite for imported products, which keeps the nearby, million-plus-square-foot Wal-Mart, Target and CostCo distribution centers hopping. Local manufacturing also remains active, since companies can bring parts into the Port, have their products made in America and then send them out from what is now the fifth largest metro area in the Southeast United States.

Under this model, the most valuable land in Hampton Roads is located closest to the Port. Yet with the ocean to the east, swamps to the south and water cutting through the middle of the market, growth is confined primarily westward in areas such as Suffolk and further west in the Isle of Wight. Land here is trading for $50,000 to $130,000 per acre and up, depending on proximity to the Port and Interstate 64. Although Hampton Roads is a thinner, more metered industrial economy than superpowers like California’s Inland Empire, this level of activity illustrates that developers and businesses recognize the value of the market and are jockeying to be part of its future.

— Jonathan Guion,  SIOR, is managing director in Sperry Van Ness’ Virginia Beach, Virginia, office.

Hampton Roads Office Market

Hampton Roads (the Virginia Beach-Norfolk-Newport News, VA-NC Metropolitan Statistical Area) enjoys a solid office market. Low vacancy rates, particularly for class A space, and ongoing demand driven by continued economic growth create a number of opportunities for developers and investors, but the market remains accessible enough that tenants still can find value. Trends of note include:

Mixed-use and town center-type developments: In the past, office projects were developed as individual sites or as separate entities in discrete, single-use parks. Now the most successful and visible developments are those that combine office product with other uses, primarily retail and residential. Denser than traditional suburban developments, these make better use of scarce land and offer workers convenient amenities, making tenants more attractive in a tight labor market. Examples include the Town Center of Virginia Beach, which will have 1.76 million square feet of office and retail space when complete, and City Center at Oyster Point, a 500,000-square-foot lifestyle development in Newport News. Development of Harbour View Town Center, a project in northern Suffolk with 700,000 square feet of office space planned, has just begun.

Municipal and university involvement: Desirable land for office development is becoming more difficult to obtain, and infrastructure in outlying areas is limited. Cities have taken the lead in assembling parcels and issuing requests for proposals for both redevelopment and market expansion. The town center developments in both Virginia Beach and Newport News benefited from considerable municipal involvement, and Portsmouth has put together 135 acres for Victory Crossing Business Park, an office park at the heart of a major mixed-use redevelopment project. Universities have also begun to participate in office development. Old Dominion University has partnered with the private sector for two 100,000-square-foot office buildings adjacent to its Norfolk campus and joined the cities of Suffolk and Portsmouth and developer HRC One, LLC for the MAST Center at Hampton Roads Crossing, a 32-acre research, education and technology park.

Medical development: The three major health care systems in the area, Riverside Health Systems, Sentara Healthcare and the Hampton Roads division of Bon Secours, all have plans to build or expand facilities across the region, including in fast-growing areas such as Williamsburg, the Princess Anne area of Virginia Beach and northern Suffolk’s Harbour View. These facilities, along with changing demographics, will create significant opportunities for developers who know the local market and have experience with the specific requirements of medical providers.

Rental rate increases: The newest developments offer the most attractive combinations of location and building quality on the market, and asking rents for these properties reflect this. Asking rents for two proposed projects, downtown Norfolk’s Wachovia Center and Pavilion II at the Virginia Beach Oceanfront, are around $30 per square foot, full service – and both report substantial pre-lease commitments..

Hampton Roads remains a good bet. A strong local economy that shows no signs of decline, a low vacancy rate and a public sector willing to partner with the private sector add up to an office market that has much to offer developers and investors who can respond appropriately to market trends.

— Teresa K. Gibbs, CCIM, is an office & medical specialist  in the Virginia Beach, Virginia, office of Thalhimer, a Cushman & Wakefield Alliance.

©2007 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.