Hampton Roads and Richmond, Virginia, have two dynamic real estate markets. To find out the latest commercial real estate news in these areas, Southeast Real Estate Business asked real estate leaders in both markets to tell us about recent activity.

Hampton Roads Retail

The Norfolk/Virginia Beach/Newport News metropolitan statistical area (MSA) covers parts of Virginia and North Carolina and is commonly known as Hampton Roads. The area is experiencing strong retail activity. In what has become the largest real estate deal in Hampton Roads history, Lynnhaven Mall in Virginia Beach was recently sold for approximately $256.6 million. General Growth Properties acquired the 1.3 million-square-foot mall, anchored by Dillard’s, Hecht’s and JC Penney, from the New York State Teachers Retirement System. The deal was not hampered by the announcement in July that anchor Lord & Taylor would close. An 18-screen AMC movie theater, a 28,000-square-foot Barnes & Noble and Dick’s Sporting Goods have been added to the mall, leaving 66,000 square feet of the former Montgomery Ward store vacant. Lynnhaven is the region’s largest mall.

Pembroke Mall in Virginia Beach is adding a freestanding Macaroni Grill and a Max & Erma’s Restaurant. Pembroke Mall, which is also receiving an interior facelift (see page 74 for more information on Pembroke Mall), is located across from The Town Center of Virginia Beach project currently being developed by Armada/Hoffler. The downtown project will include office, restaurant and 700,000 square feet of retail space. The city is also expecting the area east of the new convention center to be developed as an entertainment, dining and shopping complex.

In Norfolk, construction will begin this fall on The Market at Berkeley, which will anchor the Berkeley Shopping Center. Perrine & Wheeler and Fulco Development will co-develop a 25,000-square-foot grocery store and 18,000 square feet of retail space on 5 acres. The center, located in the south end of Norfolk, will be financed using a federal program that provides tax credits for investing in economically distressed areas. The city of Norfolk recently bought the strategically located Downtown Plaza for $5 million. The distressed 113,840-square-foot center will be redeveloped for commercial, residential and public uses.

Denbigh Village Center in Newport News was recently sold to Inland Retail Real Estate Trust for $20.8 million. S.L. Nusbaum Realty Company sold the center after owning it for 32 years. The 318,391-square-foot regional center is anchored by Kroger, Burlington Coat Factory and T.J. Maxx. The Patrick Henry corridor near Patrick Henry Mall is the hot retail corridor in Newport News. Gateway Country Store, located along that corridor, recently shut its doors after paying $1.3 million for the acre it occupied. The former Gateway building will reportedly be divided among several national retailers itching to gain space in this desirable location. Goodman Company plans to develop Jefferson Crossroads, a 500,000-square-foot retail center, on Jefferson Avenue. Construction on the 69-acre site is set to begin in early 2004, with Sears, Boscov’s and Kohl’s as possible anchor tenants. Kahn Development may also be trying to woo Kohl’s at its proposed 400,000-square-foot, 85-acre development nearby. Kohl’s currently has two new stores in Hampton Roads, one at Pembroke Mall in Virginia Beach and one in Chesapeake. Developers are also interested in the historic Endview Plantation area, the single largest parcel of vacant developable land in Newport News.

Two residential developments totaling nearly 400 homes are proposed for Chesapeake. Developers are capitalizing on this residential growth by proposing the development of a shopping center at the corner of Mount Pleasant Road and Centerville Turnpike. The grocery-anchored center will be called Mount Pleasant Crossing. Food Lion, Farm Fresh, Harris Teeter and Sav-a-Lot are dominant grocers within the MSA.

Williamsburg welcomes Stein Mart as a replacement tenant for Peebles Department Store when its lease expires at the Williamsburg Shopping Center. Stein Mart currently operates stores in Norfolk, Chesapeake and Richmond. In Hampton, Dillard’s at Coliseum Mall will close in January, but two new stores will open early next year in Richmond and Dillard’s will undergo a major expansion at Greenbrier Mall in Chesapeake.

— Lynn Leonard, vice president of marketing, NewBridge Retail Advisors

Hampton Roads Apartment Market

Owners of apartments in Hampton Roads have enjoyed low vacancy rates and above-average rent increases during the past decade. However, after years of demand for apartments outpacing the supply of new ones, the market is experiencing its most significant new construction since the mid- to late-1980s. According to the May 2003 issue of Real Data, 3,129 units are in lease-up or under construction with another 1,616 units in the planning stage. Several other large sites also are in the process of being rezoned to multifamily.

As expected, most of these new communities are positioned toward the higher end of the market, with several offering extensive amenity packages and pioneering rent levels. In fact, while most of the new complexes have market rents in the $1 to $1.10 per square foot range, some are actually achieving rents without concessions of $1.20 per square foot on certain types of units. Interestingly, these new projects are well distributed throughout the Southside and Peninsula markets, with no submarket in apparent danger of being oversupplied. Nevertheless, market-wide vacancy rates are projected to increase from about 4 percent to between 4.5 and 4.75 percent during the next 12 to 24 months.

While the availability of good sites, or the creation of new ones through creative rezonings and joint ventures, is primarily driving new development in the region, the economy has remained stable during the recession, which has further bolstered apartment acquisition and investment in Hampton Roads. Increases in civilian employment related to defense contractors and shipyards, as well as white-collar jobs in general, have negated the effects of the deployment of military personnel to Iraq. In fact, while the rest of the country was in a recession, Hampton Roads never really stopped growing. As a result, apartment development and acquisition interest continues to rise as land prices have almost doubled since the mid-1990s and cap rates for institutional grade communities are now in the 8 to 8.75 percent range, depending on location and condition.

Some interesting projects new to the region include South Beach Apartments and Salt Meadow Bay Apartments, both resort-style communities located within Virginia Beach’s resort district and developed by S.L. Nusbaum Realty Company and The Runnymede Corporation, respectively. Both Virginia Beach and Newport News have town centers under development, which will include high-end apartment components. Armada/Hoffler will begin construction soon on its 334-unit high-rise product at The Town Center of Virginia Beach and Kotarides Builders is constructing its 175-unit Park Place in Newport News’ Oyster Point Town Center. The city of Portsmouth will get its first new upscale apartment community in decades when the Whitmore Company breaks ground later this year on the 250-unit Myrtles at Olde Towne. Wood Partners also has been active developing apartments in Chesapeake and Virginia Beach while Drucker & Falk is providing the property management for a number of new communities in the region.

Looking into the next year, the new supply added to the Hampton Roads apartment market should result in a slightly higher, but still extremely healthy, overall vacancy rate. Overbuilding concerns are still minimal given the area’s coastal geography and limited available land to develop. While the economy will remain stable with its military and port operations, the region’s household income levels should be fairly flat and, combined with 4,500 new units, rent increases will become more moderate.

— Thomas Johnston, vice president, S.L. Nusbaum Realty Company

Hampton Roads Office Market

The Hampton Roads office market continues to be a two-edged sword, causing difficulties for landlords and opportunities for tenants. There are double-digit vacancy rates reported in all submarkets. The combination of new construction that began in 1998 coupled with a weak economy has reduced demand for office space. In turn, landlords are reducing rents and giving incentives, such as free rent, in order to attract tenants. Tenants have been moving to newer buildings, leaving the older ones vacant. The most recent example of this is SunTrust’s announcement to relocate from the former SunTrust Building to 150 Main St. in Norfolk, vacating approximately 70,000 square feet and leasing approximately 50,000 square feet.

Another issue that’s affecting the office market is the amount of available sublease space. Although it’s hard to measure, it appears to be growing. This space generally is offered well below the rental rates quoted by the landlord. In one recent case, the asking rents for the building were $17.50 per square foot and the sublease space leased for $13 per square foot. Landlords need to make every effort to retain their existing tenants. The cost associated with the loss of a tenant not only includes the loss of rent, but the cost to re-fit the space.

— R. I. “Rik” King II, vice president, Thalhimer/Cushman & Wakefield

Hampton Roads Industrial Market

The up and down sides of a major metropolitan area enjoying year after year stability and comforts of government and military occupation are a dichotomy. Those of us fortunate to live in such a vibrant “social and outdoor-related activity” area enjoy having water on two and a half of our four boundaries and positively experience these boundaries frequently.

However, one fact will remain for the foreseeable future: land on which our industrial real estate base may expand in the portion of our region known as the Southside, specifically its central area, is essentially non-existent. The Peninsula of Hampton Roads and the western portion of the Southside region, however, do have an abundant supply of reasonably priced industrial ground on which to build, and as a result, are the areas of focus for companies in need of new facilities. The effect on the old-line companies with roots in our central region may be a more intense evaluation of employee reaction should a decision be seriously contemplated to a relocation 30 to 45 minutes from existing operations. The demand is somewhat pent-up, although not near critical at this point. Potential increased income resulting from improved efficiencies in state-of-the-art facilities will ultimately be the driving force in relocations.

On the topic of vacancy, the same is true. Southside Hampton Roads (central) is experiencing near record-low vacancy rates. On the Peninsula and in western Southside Hampton Roads, the options are greater. Our shorelines are grand, but they have a price.

— R. L. “Abe” Ellis, vice president, Thalhimer/Cushman & Wakefield

Richmond Industrial

After suffering through almost 18 months of weak demand and high vacancy, Richmond is finally experiencing an upward trend. The economic recovery, albeit “jobless,” is benefiting the industrial sector due to modest inventory, machinery and equipment expansion along with the commensurate need for more space.

On the supply side, some owners of older, somewhat obsolete buildings are selling at deep discounts. Examples include Curtis Paper (131,000 square feet at $13.30 per square foot) and a Weyerhaeuser property (160,000 square feet at $8.28 per square foot). Most properties like these are being converted to storage or are now seeking low-end manufacturing. Despite more realistic expectations on the part of property owners, this sector is still experiencing stress.

In speculative construction, Devon USA continues to dominate Class A space with 1.2 million square feet built or under construction in Chesterfield County and plans to build more than 1 million square feet of warehouse space in Hanover County. Hollingsworth Companies has a 108,000-square-foot building currently available in Prince George County with plans to construct much more.

Flex development is slow with just a few projects underway. These projects are located primarily north of Richmond, including Crescent Business Center, with 109,000 square feet delivered in the past 12 months, and Hanover Business Center in Ashland, with 80,000 square feet underway.

Recent notable transactions include Graybar’s development of a 180,000-square-foot distribution center and Showbest Fixture’s purchase and expansion to 80,000 square feet of a vacant building for manufacturing, both in Henrico County near the airport. In northern Hanover County, Flexicell purchased a 65,000-square-foot building to expand its manufacturing operations. Other major transactions included Antioch Company’s 169,000-square-foot lease for distribution and assembly in Chesterfield County. The area’s economic development agencies also report increased activity from out of town companies. Some tangible results are evident with leases to newcomers Magellan Systems (25,000 square feet) and BWI (76,000 square feet).

Looking ahead, greater Richmond’s industrial market should see continued strengthening with better net absorption, fewer company closures and measured speculative construction, primarily in the distribution and flex markets.

— David Williams, senior vice president, Grubb & Ellis|Harrison & Bates

Richmond Office

The Richmond office market has been treading water over the past 12 months, awaiting evidence of positive job growth. Good news early in the year included Phillip Morris’ taking 240,000 square feet at the former Reynolds Metals Headquarters and the planned Richmond headquarters of a combined Wachovia Securities and Prudential Securities. This news was quickly offset, however, by bad news: Circuit City placed a 170,000-square-foot building on the market and Capital One is selling 450,000 square feet in two buildings at Short Pump.

Lease renewals, both downtown and suburban, are a serious game of chicken for landlord and tenant with rental rates under pressure and incentives increasing. The downtown market is waiting to see what happens at Riverfront Plaza where the two anchor tenants, Hunton Williams and Wachovia Securities, are at renewal time. The Class B markets downtown and in the suburbs are furiously competitive with not enough tenants to go around.

The pipeline of space coming back to the market for lease or sale over the next 24 months is substantial with major blocks coming back from Capital One, Carmax, Owens & Minor and Anthem. This will keep a damper on the speculative construction market with no turnaround seen in the near future.

The soon-to-be-completed Route 288 portion of the loop around Richmond will have a major positive impact on the office market. When things do turn around and job growth is positive, Richmond will offer a tremendous supply of well-located office park land with excellent highway access to the entire metro area for its existing tenant base, as well as for tenants relocating to the area.

— Steve Gentil, senior vice president, Grubb & Ellis|Harrison & Bates


©2003 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.