Industries Commercial Real Estate

Happy new year?  For developers of multifamily residential, perhaps; for office landlords, maybe not

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Print this page by Tim Loughran

Talk about a triple whammy. A still-sluggish economy, the threat of additional cutbacks in federal spending and growing uncertainty about how the next Congress might change U.S. corporate and capital gains tax rates have commercial real estate experts expecting little significant improvement in Virginia’s commercial real estate markets during 2012.

Still, there are a few bright spots in the fog.  Continued high unemployment and tighter restrictions on home mortgages are sparking increased sales and construction of multifamily residential properties. 

For instance, in Alexandria a joint venture is moving forward with the first phase of Braddock Gateway, a 15-story, 270-unit project that’s within walking distance of the Broddock Road Metro.

A continued revival in consumer spending also is boosting demand for higher-end retail in the state’s largest cities, brokers say, pushing top-end rents toward levels last seen in 2007. The same good news applies for industrial and warehouse space close to the Port of Hampton Roads and near highway interchanges near the state lines of West Virginia, Maryland, Tennessee and North Carolina.

To no one’s surprise, however, the laggard in almost every market continues to be office space.  While some new buildings continue to go up, especially in Northern Virginia, there’s plenty of vacancy among existing space. For instance, in the Northern Virginia suburbs of Washington, D.C. — a dynamic office market for most of the past decade because of annual rises in federal spending — the vacancy rate stood at about 14 percent at yearend.

“Everyone has adopted a very strong wait-and-see approach,” says Scott Homa, vice president of Mid-Atlantic Research at the Washington office of Jones Lang LaSalle. “With the confluence of all the different macroeconomic and political factors ... especially the lack of employment and job growth ... there’s been a very severe slowdown in philosophy.” Homa expects few meaningful decisions until at least 2013 after the presidential election. “So we’re looking at a situation that could continue well beyond 2012.”

Farther south, in metro Richmond, investors pounced last year on large blocks of long-vacant office space that were losing value by the month. Through September, 24 buildings with 2.5 million square feet of space were sold for $217 million, according to a report from Cushman & Wakefield/Thalhimer, up from four buildings with 640,000 square feet worth $30.3 million in 2010.

This year promises to be different, though. Since so much of Richmond’s Class A office space was taken off the market, Joe Marchetti, regional managing director of CBRE, (formerly known as CB Richard Ellis) makes this prediction:  “The market is generally flat . . . with no real appreciation in [leasing] rates,” he says. “The market is stable, but not unhealthy ... We’re in a slow growth mode … It’s pretty much the same story Richmond has seen for the last 20 years.”

In Hampton Roads, CBRE’s Scott Adams says the warehouse and industrial sector is the region’s top performer. It’s followed by retail in a handful of select locations, while the office market continues to suffer.  “Office users are in tough conditions and are being very cost sensitive,” he says. “On a net basis, we’re not seeing much growth. Underneath that data we are seeing a tremendous number of deals where companies are growing and expanding, but there are also a lot of companies going in the other direction ... and that’s not something we see changing significantly in 2012.”

Slow and steady

The consensus among nearly 1,000 commercial real estate professionals from across the state at Virginia Commonwealth University’s 21st Annual Real Estate Trends Conference last fall was equally negative. In an electronic survey measured via wireless, push-button devices, 84 percent of those responding said they expected the local industry to remain flat or “get worse” through 2012. Sixty-six percent said they thought available credit for commercial real estate projects would remain tight or become even more difficult to obtain.

Nationally, the forecast for 2012 among commercial real estate economists is about the same. Based on a survey of 950 industry professionals, the PwC LLP unit of the PricewaterhouseCoopers business consultancy and the Urban Land Institute (ULI) jointly predicted that until at least 2013 commercial real estate activity in most secondary markets (like Virginia, outside the D.C. suburbs) will suffer from a “slowing, grind-it-out economic recovery.”  Large cities like Chicago, New York, Los Angeles, Boston and our nation’s capital may see only marginally better growth.

More specifically, CBRE senior economist Arthur Jones predicts that the national office vacancy rate — which hit a peak of almost 17 percent in mid-2010 — will continue its slow improvement from 16.2 percent at the end of 2011 to 15.7 percent at the end of 2012 and 14.8 percent at the end of 2013. He writes in a recent report that “Healthy corporate balance sheets, record profitability and sustained consumer demand suggest that the economic recovery will strengthen by mid-2012 and, as a result, office market fundamentals will continue to improve slowly throughout the year.”

In November, the National Association of Realtors’ (NAR) chief economist, Lawrence Yun, echoed much of Jones’ optimism. “Vacancy rates are flat, leasing is soft and concessions continue to make it a tenant’s market,” he said. “However, with modest economic growth and job creation, the fundamentals for commercial real estate should gradually improve in the coming year.”

While the nation’s economy is still too weak to support the construction of many projects, Yun and NAR expect that during 2012 the slow, steady absorption of existing vacant space will push up apartment rents more than 3 percent, office and industrial rents about 2 percent and retail rents about 1 percent. 

Signs of growth

While the outlook may be dim, a handful of forward-thinking developers in different regions of the state have begun preparing for brighter days.  A few examples:

Henrico County — Highwoods Properties, a Raleigh, N.C.-based real estate investment trust, hopes to begin the first phase of an urban, mixed-use makeover of the Innsbrook Corporate Center.  The planned residential, commercial and office redevelopment would total an additional 3.5 million square on 188 acres — about a third of the size of the current business park. 

Northern Virginia — The Washington, D.C., region, with an apartment vacancy rate of less than 3 percent, will see 12 apartment buildings go up during the next 24 to 36 months, according to a report released by Charlottesville-based SNL Financial. Plus, developers plan to transform Tysons Corner into a more urban, pedestrian-friendly, mixed-use center with several new construction projects underway as the area prepares for the opening of four new Metro stations.

Newport News — By August, S.L. Nussbaum Realty Co. expects to deliver 144 new apartment units at Heritage Forest, now being built on the site of the former Whittaker Memorial Hospital; another 104 units are scheduled for completion in the first half of 2013. 

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