Slow growth expected to be the norm until 2014January 24, 2013 12:22 PM
by Robert Burke
Think back to a year ago when the commercial real estate industry was hoping for a rebound in an anemic economy and nervously waiting to see what cuts in federal spending might come. Not much has changed. A looming fiscal cliff of tax hikes and federal cuts at year’s end had people wringing their hands, particularly in Northern Virginia and Hampton Roads, where the federal presence is huge. So, tenants remain understandably skittish as they head into 2013.
On the upside, the economy overall is improving, and Virginia’s unemployment rate has been dropping, hitting 5.7 percent in October, a full percentage point lower than it was in October 2011.
The challenge is getting businesses to act amid continued uncertainty. “The election itself doesn’t clear the air of the uncertainty in the marketplace,” Ben Breslau, Jones Lang LaSalle’s Americas research managing director, said in a recent market report. “We have reasonable confidence that some, or all, of the fiscal cliff may be averted, but the Euro crisis may get worse before it gets better and will continue to drag on global confidence and the U.S. economy into 2013.”
JLL researchers say a recession is unlikely in 2013. “If we’re able to clear some of these hurdles without a big near-term fiscal drag, the release of some pent up demand could accelerate growth in the second half of 2013,” Breslau said.
Some regions in Virginia are faring well enough. There’s been a recent uptick in activity in some commercial real estate sectors, including multifamily and health care. And several major mixed-use projects are under construction around the state.
Office vacancy rates in Hampton Roads are down almost a half percentage point from a year ago to 12.1 percent ― the first decline in four years, according to data from Cushman & Wakefield | Thalhimer. As of the third quarter, year-to-date leasing activity was up 63 percent.
In Northern Virginia, though, office vacancy rose to 16 percent in September, up from 14 percent at the start of 2012. BRAC-related moves are partly the reason — more than 550,000 square feet of space was vacated by public- and private-sector firms in the third quarter, with tenants heading to outside-the-Beltway locations, according to real estate services firm Cassidy Turley.
A bumpy ride
Many firms are happy to have survived the bumpy ride of the past year. Bethesda-based First Potomac Realty had some recent successes — it bought the 181,400-square-foot Three Flint office property in Oakton three years ago and did $10 million in upgrades. Last fall it snagged three new tenants, filling 69 percent of the space. But its occupancy rate still is hovering in the mid-80s, short of the 90 percent the firm wants.
Tony Beck, the firm’s vice president for the southern Virginia region, says one challenge in filling the space is that prospective tenants are staying as lean as possible. “What we’ve found is that a company that has worked at becoming more lean and learned that they can do with less — that’s becoming the new norm,” Beck says. “So even if you win a contract … they’re a little bit more frugal.”
In general, Beck says, multifamily units are doing well, as they did for all of 2012. He thinks retail confidence is rising in the markets where First Potomac does business, which includes Hampton Roads to Richmond to Northern Virginia and the Washington suburbs. “But office and industrial still remains a little bit flat,” he says.
In a lot of regions, though, it looks like a good time to be a tenant, says Dean Stiles, senior vice president in the Tysons Corner office of Jones Lang LaSalle. Metrorail construction is under way, with the first phase of the Silver Line to be ready in late 2014. “There is a time before the Metro comes when rates are low and [concession] packages are high, and you can push the envelope a little bit,” he says.
Stiles has a client needing about 50,000 square feet, and there are about 20 locations in Tysons to choose from. “There’s just not a lot of demand in that size space right now.”
Beck agrees that tenants have the upper hand. He says his firm is going to “be more aggressive on some of the concessions we provide, because the biggest thing for us going forward is to try to fill up every vacancy. We’re trying to get to 90 percent, and we think 2013 is a good year to get there.”
In the greater Richmond region, the retail market is showing some energy. Retail sales last year were up 4.8 percent from the previous year, says Reed Goode Jr., regional director in Richmond for S.L. Nusbaum Realty Co. “It’s as if my phone got plugged back in in January of [last] year,” he says. Some late-year momentum showed up, with retail spending up 8.3 percent for the third quarter compared with the same period a year earlier.
Yet, the numbers overall aren’t great — vacancies increased to 6.9 percent in the third quarter, from 6.3 percent a year earlier. Leasing activity for retail stayed roughly the same in 2012 as the previous year, around 1 million square feet, according to data from Thalhimer.
But Goode says things are “loosening up.” Office and industrial vacancies are both down in the third quarter to 10.2 percent, and retailers are gaining confidence. He says financing seems somewhat easier to get. “If you’ve had a business that’s held on through this [recession], you’re very likely to be able to get financing,” he says.
If the demand for space is finally catching up to the supply, then the region’s commercial real estate market will benefit. “I’m frankly more excited about next year than I have been in the past five years. Real estate is just meat and potatoes, supply and demand,” he says.
While economic growth remains slow, some developers are moving forward with new projects ― a source of inspiration that things are getting better:
Richmond region — A new $25 million, 70,000-square-foot medical building for orthopedics and sports medicine and rehabilitation had its grand opening in October. The health-care sector has been very robust with a $168 million, 640,000-square-foot Children’s Pavilion outpatient center under way downtown and a $10 million cancer center being built in Petersburg. Downtown Richmond also has seen a burst of activity in multifamily with developers renovating many old buildings in Shockoe Bottom, Shockoe Slip and the city’s financial district.
Northern Virginia — Construction of the 22-story Tysons Tower project has begun with the 524,000-square-foot office building set to open in 2014 along with the new Metrorail extension. Luxembourg-based Intelsat S.A. has been named as an anchor tenant, and will lease 188,000 square feet in the building. It would move from its current headquarters location in Washington.
Hampton Roads — Armada Hoffler is moving forward with plans to build a second 14-story tower at Virginia Beach Town Center. The project includes 174,000 square feet of office space, 267 apartments, 18,000 square feet of retail and 875 garage parking spaces. The architecture and design firm Clark Nexsen has committed to lease 80,000 square feet. If approved, the project will break ground in February with completion in mid-2014.
Roanoke — Riverside Station, a 20-acre mixed-use project in downtown next to some of the city’s major employers, was set to break ground in the fourth quarter of 2012. The decade-long project, with a price tag of about $100 million, will include office, retail and residential space. It’s adjacent to the Riverside Center, Carilion and the city’s Virginia Tech campus.
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