Bruised, but not broken
New projects, light rail and corporate expansion boost Hampton Roads
- October 28, 2009
Rising 23 stories above the downtown Norfolk skyline, the Wells Fargo Center is the latest symbol of the city’s continuing revitalization. Although the $170 million mixed-use development won’t open until June 2010, 70 percent of the office space is leased — a sign, brokers and developers say, of Hampton Roads’ stability during economic malaise.
Other projects in the pipeline — a Westin Norfolk Hotel and Conference Center and the addition of light-rail — are other indicators of the market’s stamina. Plus, the news is good on the other side of the water. A multimillion dollar town center is going up in Hampton, and Newport News saw more corporate expansion last year than any other city in Virginia.
Still, Hampton Roads hasn’t gotten through the recession without some bruising. A not-too-subtle reminder of the tough market is a large hole in the ground surrounded by a black curtain in downtown Norfolk. That’s where the $180 million, Granby Tower luxury condominium project was supposed to be built. Construction stopped in fall 2007 after developer Buddy Gadams of Marathon Development Corp. was unable to secure financing. In recent public statements, Gadams says he still hopes to obtain financing; however, city officials have been pressuring him to clean up the empty site.
Hampton also felt the economy’s bite when NetCenter, a large high-tech business park — whose tenants include Northrop Grumman, AMSEC and Verizon — was foreclosed on recently. It’s being positioned for resale.
Another blow was the loss of one of the area’s oldest and best-known commercial real estate firms. In July, GVA Advantis closed all of its Virginia offices, including Newport News and Norfolk. Originally, Norfolk wasn’t on the close list. Yet, the lights went out there after brokers jumped ship for other firms following news of GVA’s other office closures.
Overall, though, Hampton Roads considers itself fortunate. Mark Warlick, senior vice president and partner with S.L. Nusbaum Realty, points out that Norfolk hasn’t seen major vacancies in downtown office buildings created by large office closings. “We’re fortunate because of the diverse types of tenants that make up Hampton Roads. The market has not been as adversely affected as in other areas.”
The shiny, new Wells Fargo tower certainly provides solace. As the city’s first, large office building to attain certification for green building standards under LEED (Leadership in Energy and Efficiency Design), the center is attracting interest from potential tenants. Formerly called the Wachovia Center, the building changed names when San Francisco-based Wells Fargo acquired the Charlotte-based bank last year. It includes 121 apartments, 50,000 square feet of retail and 255,000 square feet of office space.
Wells Fargo plans to open its regional headquarters here, moving from the nearby World Trade Center building, a few blocks away. Other tenants include accounting firm Goodman and Co. and S.L. Nusbaum Realty Co. Hotel developer LTD Management and law firm Willcox & Savage will occupy the center’s top two floors.
With the exception of LTD Management, which is moving from Chesapeake, all the major tenants so far are coming from other downtown locations. Brokers see the moves as a win-win situation, creating a domino effect as tenants move out and free up space for market newcomers. “Companies can upgrade their space and get better value for higher quality space,” says Deborah K. Stearns, senior vice president with Harvey Lindsay Commercial Real Estate. “In the long run, it allows for the market to grow.”
Other moves may come from companies already in Hampton Roads. As the economy withered, companies across the country scrapped plans to relocate to other regions. “We’ve seen much more consolidation and retrenching than we’ve seen relocation and expansion,” says Stearns. However, she notes that Hampton Roads companies often expand when they switch office buildings, with 85 percent of the market growth coming from existing firms.
Altogether, more than 750,000 square feet of office space was constructed last year, according to an annual report issued by Old Dominion University’s E.V. Williams Center for Real Estate and Economic Development. At the end of 2008, Hampton Roads recorded a total of 2.8 million square feet of vacant space. However, the region also saw absorption of 435,000 square feet.
By the end of this year’s third quarter, real estate research firm CoStar Group Inc. reported an overall office vacancy rate of 10.8 percent for Hampton Roads’ central business district. In downtown Norfolk, the rate was 8.7 percent for Class A buildings — far below the rate for other metropolitan cities.
Currently, more than a half a million of square feet of office is under construction in the region. Among the most expensive to lease is the Wells Fargo Center, which goes for $29.50 per square foot.
Jordan Slone, chairman and CEO of Harbor Group International in Norfolk, believes vacancies will be filled quickly. His company controls more than half of the Class A office space in downtown Norfolk, including Dominion Tower, the RBC Building, Town Point Center and the World Trade Center. According to Sloan, these buildings are between 88 and 91 percent leased. Harbor Group, which purchased the 366,100-square-foot-World Trade Center last year for $54.1 million, remains undaunted by the loss of big-name tenants such as Wells Fargo. “So far, it hasn’t affected us,” Slone says. “We have several high-profile tenants we’re talking to about taking Wells Fargo’s space in the World Trade Center.”
Slone counts the region’s military infrastructure and government and defense contractors as major buffers in the recent economic storm. “That keeps some stability to the Hampton Roads economy.”
Besides, vacancies aren’t always a bad thing. Real estate broker J.C. Wynkoop, who works in S.L. Nusbaum Realty’s retail brokerage and development department, says they create opportunities to attract newcomers, especially to downtown Norfolk. “I take clients to look at the Wells Fargo Center because of the synergy in downtown Norfolk,” he says. The light-rail system will have a stop at the center. And with the 2011 opening of the new Westin Hotel and Conference Center on Main and Granby Streets, “downtown Norfolk has made a turn for the best.”
It is wrestling with one project: the city-owned Waterside. The festival marketplace opened as a redevelopment vehicle in 1983. As more upscale restaurants and shops opened elsewhere downtown, traffic decreased, leading to steadily declining revenues. Last year, the city provided $325,000 to offset Waterside’s operating deficits. The Norfolk City Council continues to review the site’s future, with some members favoring plans to raze Waterside and redevelop the acreage as prime waterfront property.
Over on the Peninsula, the economy seems to be looking up, a welcome development for commercial real estate. Canon of Virginia just finished a $625 million expansion. In May, it opened a 700,000-square-foot toner cartridge plant in the Oyster Point area of Newport News. Also, a $325 million joint venture by Northrop Grumman and Areva will build a new major plant in the city to produce heavy components for nuclear power plants.
“The Peninsula is sort of an oasis in a sea of poor economic news in the last year,” says Karen R. Beale, a principal in the Peninsula office of Divaris Real Estate Inc. The activity, she adds, is creating good-paying jobs. “We’re starting to see a trickle down effect into the commercial real estate market.”
Hopes are especially high for the $200 million, mixed-use Peninsula Town Center. The largest private investment development in Hampton’s history transformed the fading Coliseum Mall into more than one million square feet of office, retail and residential space. “That’s the most exciting new project in the region,” says Beale. “We’re seeing good, steady interest in Peninsula Town Center and are getting ready to ink the first lease in office space.”
With the broader appeal that comes from a mixed-use project, Beale is confident the center’s 116,000 square feet of Class A office space will be leased despite high office vacancy rates on the Peninsula. According to CoStar Group Inc., 20.8 percent of downtown Hampton’s Class A office space sat empty in the third quarter of 2009, while more than 40 percent of office space in the Coliseum Central area was unoccupied. “As retail opens and these amenities become available to tenants, we anticipate the office space will go quickly,” Beale says.
Brokers are counting on the town center, along with Norfolk’s revitalized downtown and the region’s stable economic structure, to attract corporate tenants and retailers. “It’s a great market,” says Wynkoop. “We don’t experience the high highs and low lows.”