Commercial Real Estate: Market Overview
2006 is a landlord's market

by Paula C. Squires
Virginia Business
December 2006

Vacancy rates dropped and rents inched up throughout much of the Southeast in 2006, making for a strong commercial real estate market. There were a few bumps; namely increased mortgage interest rates, higher construction costs and volatile energy prices.

Yet, overall, Virginia brokers don't have much to grumble about. "Rents will continue to grow. It's a landlord's market," Maria Sicola, senior managing director and head of research for Cushman & Wakefield, told Virginia real estate professionals during a recent statewide conference.

One of the Southeast's strongest performers this year was Northern Virginia. By midyear, more than 8 million square feet of real estate had sold for more than $2.4 billion. The average sales price, according to a report from GVA Advantis, was about $300 per square foot - premium pricing usually seen only in such mega markets as Los Angeles and Washington, D.C.

In Northern Virginia, demand was fueled primarily by job growth. Greg Meyer, a vice president in the Washington office of Equity Office Properties Trust, says the expansion of existing businesses fueled much of the growth. "A lot of demand in 2006 came from law firms and technology firms. They're starting to grow again, reflecting the broadening economy; whereas in 2004 and 2005, the growth was based more on increased defense spending."

That spending seems to have hit a plateau, adds Meyer. He expects next year to play out much like 2006 with growing firms seeking more space. Equity's Reston Town Center is drawing tenants. The mixed-use project offers more than 1 million square feet of office and retail, and plenty of amenities, including a conference center, ice rink and movie theater.

For Northern Virginia, the biggest challenge for real estate development remains transportation. Real estate officials hope the extension of the Metrorail to Washington Dulles International Airport and Tysons Corner will provide relief from the area's notorious traffic congestion. The opening of the first span of the new Woodrow Wilson Bridge has eased traffic backups at one bottleneck, where the eight-lane Capital Beltway narrows into six lanes at the bridge. "That's been a good thing for the southern part of the region," says Meyer. "They're creating two bridges where there used to be only one."
Other parts of Virginia also saw strong commercial growth. In Hampton Roads, new speculative warehouses and distribution centers are coming online in response to expansion at the Port of Virginia.

Artist's conception for new MeadWestvaco headquarters in downtown Richmond to be completed in 2009.

While nationally the condo conversion market has slowed, Virginia continues to see new condo construction in some of its central business districts, including Norfolk and Richmond, especially along the James River. In the state's capital city, corporate relocations also are boosting the commercial market. One of the city's newest corporate tenants is MeadWestvaco, a global packaging company which relocated from Stamford, Conn. It will move from a temporary site in Henrico County into a new headquarters building on Richmond's downtown riverfront. Construction on the 250,000-square-foot, eight to 10-story building will begin in 2007, with completion expected by mid-2009. MeadWestvaco will lease the space from the landowner, NewMarket Corp.

Looking ahead to 2007, real estate experts in Virginia expect a market similar in behavior to 2006 - strong, but not as strong as 2005 when investors were seeing higher appreciation rates on commercial properties. One annual report, "Emerging Trends in Real Estate 2007" by the Urban Land Institute and PricewaterhouseCoopers LLP, says the industry should expect a slight pullback with returns on property closer to historical averages. Exceptions could be global gateways. The report ranks the metropolitan areas of New York, Washington, Los Angeles, Seattle and San Francisco as the top U.S. markets for real estate investment prospects next year, because of their locations close to major airports and harbors.