Proceed with caution
Warehouse and retail markets see an uptick, but office glut remains
- July 29, 2011
If there was a road sign for the Hampton Roads commercial real estate market, it would say “proceed with caution.” Caution, mixed with optimism, is the prevailing sentiment as the market sees a reshuffling of office tenants, renewed demand for industrial properties and the construction of more city center retail projects (Click here for more.).
While real estate leaders don’t expect a full-throttle return to conditions of five or six years ago, they say businesses are gingerly testing the region’s financial waters after hunkering down during the recession. “In 2009 and 2010, a lot of business owners were very pessimistic,” says Mark Warlick, senior vice president of S.L. Nusbaum Realty Co. in Norfolk. “Now … business owners seem to be more optimistic. They’re not necessarily leasing a lot of new or growth space, but at least they’re out looking and have a good outlook for the future.”
As developer of the Wells Fargo Center, downtown Norfolk’s newest high-rise building, S.L. Nusbaum has filled about 75 percent of the mixed-use development, which opened in 2010. Construction begins this summer on the project’s second phase, which will include 121 luxury apartments and 35,000 square feet of retail space. Firms such as Willcox & Savage, Dixon Hughes Goodman and KPMG left their former downtown addresses to move into Wells Fargo, the first LEED gold-certified high-rise in Hampton Roads.
“Right now, everybody is trying to get full again,” Warlick says, adding that new downtown construction is not on the horizon. According to CoStar Group Inc., a market data and analytics company based in Washington, D.C., Hampton Roads ended the first quarter of 2011 with a 12.3 percent office vacancy rate. In downtown Norfolk, though, the rate was 16.7 percent.
The 43-year-old Bank of America Building was hit hardest by the exodus to the Wells Fargo Center. Nine floors currently lie vacant in the 21-story building. “It’s in a very challenging state,” acknowledges Deborah K. Stearns, senior vice president at Harvey Lindsay Commercial Real Estate in Norfolk. Gramercy Capital Corp., the building’s owner, recently missed the maturity repayment of more than $790 million in loans, which likely will lead lenders to foreclose on nearly 900 of its properties. “There are question marks about the ability of the ownership to participate and be effective,” Stearns adds.
The Bank of America Building lost tenants not only to the Wells Fargo Center, but also to the World Trade Center and 150 West Main. The World Trade Center, which saw Wachovia Bank relocate to Wells Fargo, has backfilled much of its empty space and is about 90 percent leased. As landlords seek to lease space, rental rates have declined on average by 2.9 percent. At the end of the first quarter, CoStar said the average rate for a Class A building was $20.91, down from $21.35 for the same time last year.
Despite vacancies and lower rental rates, optimism flourished in early 2011. “The first quarter continuing into the second quarter started out very robust,” Stearns says, but activity declined in late spring. “Continued uncertainty in the market is causing corporate executives to put their cautious hats back on.” However, the absorption rate is trending positive. According to CoStar, net absorption for Hampton Roads’ office market was positive 129,177 square feet during the first quarter compared with positive 104,132 square feet the previous quarter. As Stearns says, “Business is still alive and well in Hampton Roads.”
Big deals in the warehouse market
That seems to be more evident on the industrial side where logistics and warehousing remain big drivers. Although the market saw a 9.2 percent vacancy rate at the end of the first quarter, according to CoStar, Worth Remick says activity is picking up. He’s vice president for industrial services at CB Richard Ellis Hampton Roads, which closed on several big deals this spring. “We’re making big dents in our inventory.”
Lumber Liquidators Inc. leased 515,486 square feet in West Park, a 50-acre industrial campus in Hampton. “West Park is starting to gain traction,” Remick says. “It will be 95 to 100 percent filled in the next several months.” CB Richard Ellis also leased Total Distribution Inc. a 110,000-square-foot space in the Norfolk Industrial Park. The company will use the property for storage and distribution.
Ashton Williamson, CB Richard Ellis’ senior vice president for industrial and commercial sales and leasing, likes to point out that the first quarter of 2011 was the best in company history. CB Richard Ellis closed on 1.8 million square feet of leased and sale deals. “We’re feeling very good about what we’re seeing,” he adds. “We’re on a return to normalcy.”
Along with available space, tenants are also finding historically low rents — $3.50 to $4.50 per square foot — for industrial space. “You’re looking at rates where they were 20 years ago,” Williamson notes. With space to fill, landlords are cutting deals that include immediate space, utilities, month-to-month leases and even a year’s free rent.
The Virginia Renaissance Center, developed on the site of the former Ford Plant in Norfolk, also is attracting interest. Third-party logistics provider KTN recently purchased the plant’s former 662,000-square-foot body shop. The Belgian company operates warehouses in several port cities but is a newcomer to Hampton Roads. “KTN has made a good buy,” Remick says. “The site has rail service and is close to the port.”
As one of the region’s most vital economic engines, the port continues to attract companies. Caspari Inc., specializing in high-end paper products, opened a 60,762-square-foot warehouse and distribution center in Suffolk’s Virginia Regional Commerce Park in June, while California Cartage Co. leased 385,000 square feet in the city’s 101-acre Virginia Commerce Center. Cal Cartage, which provides third-party logistics services for Target Import Warehouse in Suffolk, will occupy the first of three buildings in the Suffolk center and will employ more than 200 workers. “This deal is an example of a prospect who considered the market for over five years,” Stearns notes. “The economics of locating in Hampton Roads became more attractive from a real estate, port and rail point of view.”
Thanks to port and military activity, Hampton Roads’ economy has not experienced as much variation as in other markets. However, John Lombard, director of Old Dominion University’s E.V. Williams Center for Real Estate and Economic Development, cautions that the region has not yet entered a growth market as investors keep a watchful eye on the U.S. economy. “Everybody’s holding their own,” he says. “Depending on how the national economy goes, we’ll do OK.”
In the meantime, brokers and landlords hope the region’s economy will pick up. Yet, as Stearns notes, concerns about a double-dip recession along with international financial crises and horrific weather events have curbed economic confidence. “People aren’t crying the blues, but they want to see evidence that we’re going to experience economic growth and job growth.”
Market snapshot: Hampton Roads
|Total inventory||46,115,671 sq. ft.||101,057,344 sq. ft.||103,815,031 sq. ft..|
|1st quarter net absorption||129,177 sq. ft.||263,396 sq. ft.||71,494 sq. ft.|
|Under construction||118,615 sq. ft..||18,796 sq. ft.||183,931 sq. ft.|
|Average rental rate||$17.34||$14.07||$5.52|