CITY HIGHLIGHT, NOVEMBER 2008

HAMPTON ROADS CITY HIGHLIGHTS
Patrick Mumey, Robert Phillips, W. Scott Wermers, Edward Kimple, Donald Krigger & Jay Sloan

Hampton Roads Industrial Market

With a current availability of some 4.3 million square feet of high-bay warehouse space and another 5.4 million square feet of planned warehouse distribution space, Hampton Roads is set to welcome more industrial space.

Officials have announced that two larger industrial land parcels have recently been acquired that would accommodate an additional 7.12 million square feet of modern high-bay warehouse space. CenterPoint Properties Trust, headquartered in Oak Brook, Ill., has purchased a 900-acre site in close proximity to the 1.8 million-square-foot Target import distribution center in Western Suffolk. CenterPoint is owned by Cal/East Global Logistics, a partnership between the California Public Employees Retirement System and LaSalle Investment Management. The partnership has accumulated approximately 10,000 acres of land across the nation for future industrial development. Its new CSX rail-served site in Suffolk can accommodate up to 5 million square feet of warehouse space. ProLogis, the world’s largest owner and developer of distribution facilities, is purchasing 132 acres in Northgate Commerce Park in Northeastern Suffolk. The new ProLogis Park Northgate will contain 2.1 million square feet of high-bay warehouse space. A 144,000-square-foot, 32 inch-clear building is scheduled to be delivered in the second quarter of 2009.

With the planned new ProLogis development, the City of Suffolk has approximately 8.92 million square feet of existing, under construction and planned warehouse/distribution space to offer within an easy drive to port terminals. Including the projected 5 million square feet from the CenterPoint development, approximately 14 million square feet of warehouse product is scheduled for Suffolk alone in the next 5 years.

Not including the port volume-focused expansions, the historic annual absorption rate for industrial space in Hampton Roads is in the modest 1 million-square-foot range. Phase I of the APM Terminals in Portsmouth  opened in July 2007. The increase of incoming container traffic at the new 300-acre terminal has taken more time than anticipated, as ship scheduling for containers must be adjusted. Thus, approximately 3 million square feet of warehouse space constructed in the past 2 years to accommodate this growth is available for new firms. However, with completion of the widening of the Panama Canal scheduled for 2016, the world’s largest container vessels will be able to more efficiently service East Coast ports. To meet future container traffic demands, Craney Island, which is immediately north of the new APM Terminals, is the site of a 600-acre Port of Virginia sea terminal. Projected for completion in 2017, this terminal is designed to accommodate the anticipated increase in container traffic driven  partly by the Panama Canal improvements. The second phase of the APM Terminals will add another 300 acres of shipping capacity for containers, but no date has been announced for this expansion.

A significant 2008 port-related transaction has just been announced. Safeco Products Company, a supplier of office products, is constructing a new 300,000-square-foot distribution center on a 31.8-acre site in the Shirley T. Holland Commerce Park in Windsor. It was anticipated that the requirement could absorb some of the current available warehousing product; however, the two existing new buildings available in the 300,000 square foot size range in Suffolk and Isle of Wight did not meet Safeco design needs.

Industrial growth in Hampton Roads has been nothing short of phenomenal during the last 3 years. The two  major land acquisitions by CenterPoint Properties Trust and ProLogis add credence for continuing long-term port and industrial growth in this region.

— Patrick J. Mumey and Robert L. Phillips are first vice presidents and W. Scott Wermers is an industrial specialist in Thalhimer’s Virginia Beach, Va., office.

Hampton Roads Retail Market

The old saying, “steady as she goes,” would be a good phrase for retail development in Hampton Roads. As a general rule, projects that were underway prior to the recent economic downturn are continuing to move forward. Projects that were in the path of progress or that were banking on residential growth have been shelved. Overall, the Hampton Roads retail market appears to be faring better than most with an impressive 5 percent vacancy rate.

The tide is gradually shifting in favor of the smaller pool of retailers that are still actively doing deals. Retailers are happy because landlords are willing to make concessions they would not have been forced to consider 1 year ago. However, given the low vacancy rates in the market, developers and landlords are still able to make reasonable deals without giving away the store. 

While new power centers may be taking a breather in Hampton Roads, the grocery market is still very active. Harris Teeter is making a significant expansion in the region.  The company has three stores currently under construction, which includes its first entry into the Williamsburg market. The Williamsburg store could be significant in that it’s the first time Harris Teeter will be going head to head with Richmond-based Ukrop’s, a grocery chain that has two stores in Williamsburg.

Another significant grocery development is Wal-Mart’s Neighborhood Market. The company’s first store is under construction in Norfolk, and Wal-Mart recently closed on the purchase of land for a store in Williamsburg. These stores will compete head to head with the traditional grocers in the market. The competition should shake things up on the grocery scene once Wal-Mart opens a few more stores.

Finally, the small store that packs a big punch in the grocery sales category, Trader Joe’s, has its second store set to open this fall in Williamsburg. The company has also recently signed a lease in Virginia Beach’s posh Hilltop section. Other retailers new to the market include Chipotle, America’s Best Optical, El Polo Loco and CVS/pharmacy.

There are four major retail projects under construction in Williamsburg, a retail submarket that was once underserved. Retail-wise the Northern Suffolk, Virginia Beach and Southern Chesapeake are hot, but the greater Williamsburg area remains extremely active with retail development.

— Edward A. Kimple is a senior vice president in Thalhimer’s Virginia Beach office.

Hampton Roads Office Market

At mid-year 2008, demand for office space remains moderate throughout Hampton Roads. The regional office market just completed a second consecutive quarter with slightly negative net absorption. While still outperforming the U.S. office at less than 10 percent vacancy versus more than 14 percent nationally, the approximately 100,000-square-foot regional negative absorption year to date is indicative of the slower economy and widespread caution being exercised by companies.

Vacancy promises to increase slightly into the double digits during the second half of the year. More than 600,000 square feet of new space is scheduled to deliver during the next 9 months, and approximately half of this new space remains available for lease. The good news is that these projects are spread throughout the region and no individual submarket should see an oversupply of space resulting from new deliveries. From an economic development standpoint, the regional office market is well positioned to meet the requirements of new and growing tenants.

Overall, the fundamentals of the office market remain relatively healthy in comparison with other areas in the country. Land scarcity in the primary submarkets combined with higher construction costs has resulted in a measured approach to new supply and has kept the market in balance. The largest and most visible new project under construction is the mixed-use Wachovia Center in Norfolk. This new development features a 250,000-square-foot office tower, 50,000 square feet of retail space and 162 luxury apartments. The office tower is approximately 70 percent preleased and will deliver in the summer of 2010.

The Virginia Beach Town Center is another expanding mixed-use development. A 106,000-square-foot mid-rise office building, Two Columbus Center, is due to deliver at the end of 2008. When complete, the Town Center will encompass more than 1.76 million square feet of office, retail and residential space. Less than 1 mile away, the Convergence Center is adding a fourth 85,000-square-foot building after quickly leasing Convergence Center III last year. 

In Chesapeake, the Battlefield submarket is also seeing continued expansion. Liberty Property Trust is adding Independence Place, a 75,000-square-foot, three-story building entirely available for lease. The Class A building is being built to LEED Gold specifications.

As for continued university growth, Old Dominion University is aggressively adding to its research capabilities with the expansion of the Innovation Research Park. A second 100,000-square-foot, five-story building is under construction. It will deliver in the summer of 2009. The first building is approximately 85 percent leased.

— Donald R. Crigger is senior director of office properties at GVA Advantis’ Norfolk office.

Hampton Roads Multifamily Market

While most other regions of the United States expect moderate job growth, the Southeast can expect significant expansion, which will translate into strong multifamily market fundamentals this year.

Despite an uptick in deliveries, healthy employment growth continues to support a strong outlook for Norfolk/Hampton Roads apartments. The presence of the port and military continue to drive steady job growth in the area, a trend that should continue during the extended term. Citing growing port traffic, CenterPoint Properties, for example, announced in August that it is considering 900-acre site for a 5 million-square-foot distribution center and rail yard in Suffolk near U.S. route 58. The project could eventually add 7,000 jobs to the metro area. In addition, military contracts continue to support growth within the construction industry. Last year, federal spending accounted for 15 percent of all contract dollars, up from 7 percent 3 years earlier. The metro’s distribution infrastructure and military presence are expected to support housing demand for the next several years. While construction of new units will result in a mild rise in vacancy through the rest of this year, absorption of new units is expected to be fairly healthy and concessions will remain minimal.

By the numbers, total employment will expand by 7,000 jobs in 2008, an increase of 0.9 percent. Last year, employers increased employment by 1 percent. Developers are expected to bring 1,500 rental units on line this year, representing a 1.7 percent increase in rental inventory. In 2007, new supply totaled 1,000 units. Vacancy in the metro area is expected to end 2008 at 4.3 percent, up 20 basis points from the current level and 40 basis points higher than the rate at the end of last year. In 2008, asking rents are expected to increase 3.6 percent to $862 per month, while effective rents advance 3.5 percent to $821 per month. Rent growth is slowing, as asking and effective rents gained 4.7 percent and 5 percent, respectively, last year.

Tight market conditions and forecasts for healthy revenue growth point to a strong investment outlook for Norfolk/Hampton Roads. Transaction velocity has remained subdued, the result of owners opting for current cash flow. There is healthy buyer demand for stabilized assets, and owners could capture premium values with the aggressive marketing. Cap rates have remained on the decline over the past 12 months, and now vary from the mid-7 to mid-8 percent range, down about 25 to 50 basis points during the past year. Ongoing economic growth resulting in increased traffic congestion will underpin steady tenant demand for properties closer to employment centers. As a result, investors can expect a strong long-term outlook for properties in the Norfolk and Portsmouth submarkets, where tight occupancy and healthy revenue growth will be tied to steady forecasts for military and port employment growth.

Despite the positive effects of some affordability challenges on renter demand for apartments, investor activity may wane in Southeast Virginia in the near-term, due to lower initial yields and more conservative underwriting. Buyers active in the market will likely remain focused on the stability offered by military employment in the Norfolk submarket.

— Jay Sloan an investment specialist in the Southern Virginia office of Marcus & Millichap Real Estate Investment Services.

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