Return to Virginia Business - December 2002

Commercial real estate in Virginia had been riding the crest of a robust statewide economy for several years. Then came the dot-com and telecom crashes two years ago. Ever since then, the commercial real estate market has been struggling with too little demand and too much inventory.

How long will the slump last? Is this downturn different from previous ones? Are there any bright spots out there amidst the gloom? To find out, we tracked down a true expert in the field — Jim Theobald, a partner at the law firm of Hirschler Fleischer in Richmond. He has specialized in commercial real estate law for more than 25 years, making him a veteran market observer who has seen two other recessions and many ups and downs. We’ll also take you on a tour of the state to see how Virginia’s major regions are faring.

As recessions go, Jim says, this one is different from others. Commercial real estate tends to lag behind the rest of the economy, and consequently is the last to feel the effects of a recession. It is also the last segment of the economy to rebound. This recession doesn’t feel like the other two, especially the recession of the early ’90s, where development simply stopped. The Federal Reserve Board’s careful tweaking of interest rates has spared us the sharp peaks and valleys of prior recessions. This period seems more cyclical, since there is some activity and the whole industry is hunkering down waiting for a recovery. Cheap money has kept financing, and part of the market, moving. “Right now, our strategy at Hirschler Fleischer is to manage for the recovery, which will probably come sometime in the middle of 2003,” Jim says.

With hopes now pinned on a turnaround sometime next year, Virginia Business set out to learn how four main regions in the state are faring and what major projects are underway that may signal a rebound for the market. Here are our results:

Northern Virginia: Although hard hit by a downturn in the high-tech industry, Northern Virginia’s commercial market remains fairly strong inside the beltway. Markets in the City of Alexandria and Arlington County remain active due to a diverse base of tenants, including associations, the federal government, law firms and major corporations – all looking for easy access to major roads and the metro, as well as the convenient proximity to our nation’s capital.

Outside the beltway is a different story as a number of technology and telecommunications firms have either gone out of business or retrenched considerably due to market forces. The area has also seen a substantial bout of new construction over the past three years in anticipation of many new-economy tenants flocking to the area. Yet that hoped for scenario isn’t likely to materialize for some time, if it materializes at all. One bright side is that both landlords and tenants are in a deal-making mood since market prices have eased and both parties want to match space with credit-worthy inhabitants. One event that has had a positive impact in the market has been the government’s war on terrorism, as many defense contractors continue to expand operations and require commercial space in the area.

One example of a thriving project is the Carlyle Project, covering more than 80 acres, at the east end of the Eisenhower Corridor in the heart of Alexandria. The Carlyle Project represents an urban renewal success story, as a former Norfolk Southern rail yard is being transformed into a dynamic urban center. The first phase included a new ten-story, 400,000-square foot Federal Courthouse that was completed in 1996. Time Life Inc. built a five-story, 156,000-square-foot headquarters building on the Duke Street site and the U.S. Patent and Trademark Office is constructing a new campus that will house 7,000+ employees and represent 2 million square feet of leased office space. Initial occupancy will begin in late 2003, with the entire office moving over by 2004.

Hampton Roads: Unlike Northern Virginia, the Hampton Roads real estate market has benefited from a well-balanced supply of office inventory and a steady demand for space. Developers have also shown remarkable discipline through the past economic boom and a conservative lending community has kept excessive growth to a minimum. The result has been a balanced commercial market that hasn’t seen the remarkable highs and lows that have plagued other regions. In fact, Hampton Roads can be best categorized as “slow and steady,” since it hasn’t seen the influx of high-tech that other regions experienced.

One significant project recently completed is 150 West Main Street in Norfolk. This 21-story office complex began construction at the height of a roaring economy and was recently completed for a total cost of $40 million. It has been one of many recent efforts to revitalize downtown Norfolk. Major tenants who have signed leases include Kaufman and Canoles (65,000 sq. ft.), CB Richard Ellis (15,000 sq. ft.), Witt, Mares & Co. PLC (10,000 sq. ft.) and Marsh Inc. and Wachovia Securities (8,000 sq. ft. each).

Another project in the Hampton Roads area is Port Warwick in Newport News. This mixed-use urban village currently under development has a design reminiscent of charming American cities of yesterday. Offering a friendly pedestrian-oriented community, the layout of Port Warwick has a mixture of homes, office space, shops and restaurants, where residents can easily walk from home to work to shopping. Recently, Sentara completed construction on the Port Warwick Medical Arts building, a 75,000-square-foot two-story facility housing a number of specialty medical practices and an emergency medical facility serving the Port Warwick residents. In addition, Sentara is in the planning stages of a second building on the campus.

Down the road from Port Warwick on the Peninsula is Town Center at Oyster Point. Currently under construction by HL Development, this high density, mixed-use project will consist of one million square feet of mid-rise office space, 225,000 square feet of retail space, a hotel and conference center. The $300 million project will also include 360 upscale residential units and will occupy a 48-acre site. The entire project was made possible by a special public/private partnership between HL Development and the City of Newport News, allowing the timely construction of the road infrastructure and the parking necessary for a development of Oyster Point’s density.

Other major projects include the Harbour Breeze Professional Center, a 60,000-square-foot office complex under construction in northern Suffolk. The office complex consists of five 12,000-square-foot buildings set in a campus environment and is conveniently adjacent to a residential apartment complex and the new City of Suffolk Public Safety Facility.

In the summer of 2002, Ferguson Enterprises broke ground on a 150,000-square-foot office building in Newport News on Jefferson Avenue. The five-story facility will offer state-of-the-art communications and will be convenient to the airport, shopping, dining and lodging. Ferguson will occupy the bottom two and a half floors, with the remaining space being occupied by other Class A tenants.

Richmond Region: Higher unemployment in the Richmond area has contributed to vacancy rates that are above average for Virginia. Even previously “solid” areas like Innsbrook are feeling the effects of a lagging economy. The area has also felt the effects of several large corporate facilities that have been placed on the markets, such as Helig-Myers furniture, Reynolds Metals and Dominion Resources, adding more than 1 million square feet of inventory.

One project that has proceeded in spite of the economy has been the Capital One campus, part of the West Creek Office Complex in Goochland County. When Capital One announced the Goochland facility, it was part of the largest corporate expansion plan in Virginia’s history, which included the development of three distinct campuses in the greater Richmond area — one of which is a major new location and two locations that represent consolidations of existing properties. The 318-acre West Creek campus will initially consist of 1.5 million square feet of space in eight buildings with capacity for 2.2 million square feet in a total of 13 buildings.

Another significant project in Richmond is the recent opening of the DuPont warehouse complex on Bellwood Road. Officially known as the James River Logistics Center, the massive 800,000-square-foot facility serves as a regional distribution center for DuPont products like Tyvek and Kevlar as they await distribution to points around the world. By consolidating seven separate facilities into one, and investing a reported $30 million in the new facility, DuPont will realize tremendous cost savings through an improvement in distribution efficiency. Commercial real estate developer Devon, USA owns the 75-site on which the facility stands and leased it to DuPont. A North Carolina-based CCW Group manages the center, employing about 115 people on-site.

Roanoke Valley: Like Hampton Roads, the Roanoke and New River Valley areas did not realize a tremendous benefit from the dot-com boom of the late ’90s, and thus have not suffered the dramatic aftershock of the crash. However, there are signs that emerging fields like biomedical and bioinformatics are driving new commercial space projects in the valley, as the region tries to attract more high-tech and light manufacturing.

One of the major efforts underway is the project dubbed “e-Town” in downtown Roanoke. Formally known as Warehouse Row, this historic district is comprised of more than 100,000 square feet of renovated space. Along with advanced fully wired fiber optic access, e-Town is serving as an anchor for the downtown business community. Interconnected pedestrian bridges link the commercial facility to new urban loft apartments and the Roanoke Higher Education Center, where busy executives continue their education at accredited programs from a variety of universities, like Virginia Tech and the University of Virginia – without leaving Roanoke.

To the south, in the New River Valley area, they are putting the finishing touches on the new Branwick Center in Radford Commerce Park at Exit 105 off Interstate 81. Phase One of this two-phase project is a massive 54,000-square-foot mixed-use building, comprised of office space and warehouse/manufacturing space on a 13-acre commercial site. Branwick also has plans to develop a 50,000-square-foot facility in Floyd County in the newly created Floyd Industrial Park on Christianburg Pike, and a 30,000-square-foot facility in Giles County along Route 460 at the new Pembroke Industrial Park.

"This is the type of company that we want to bring to the Valley, which will work with us to meet the goals of the region," says Phillip Chino, CEO of the New River Economic Development Alliance.

Return to Virginia Business - December 2002