Lots of empty space
- August 27, 2009
For Richmond real estate, 2009 has been a year of shock waves. Veterans can’t recall another time when so many major offices in the capital city region have gone dark.
The closing of three major employers — Circuit City Stores, LandAmerica Financial Group and Qimonda — put 4,000 people out of work and dumped more than a million square feet of space on the market.
The closures followed another big hit: the relocation of Wachovia Securities to St. Louis, after its merger last year with A. G. Edwards. That move alone is emptying out 500,000 square feet of office space. All told, the huge blocks of mostly office space are a lot for a midsize market to absorb, especially during a recession.
Throw in a glut of new retail projects and it’s easy to understand why Steve Gentil — a broker with 29 years in the industry — longs for the good old days. “Our market was always never but so high and never but so low.” Blessed with major hospitals, colleges, the corporate headquarters of six Fortune 500 companies and state government, Richmond typically turned in a solid performance.
These days “we all sit around in our sales meetings and talk about what are going to be the job creators? What will be the growth engine this time around … and no one can point to it. That’s got people concerned,” says Gentil, chairman of Grubb & Ellis/Harrison and Bates.
This recession, he adds, is different from the one in the 1990s where oversupply wreaked havoc with commercial real estate. “This time around, it’s about under demand. Where’s the demand going to come from just to fill up the vacant space?”
With the departure of so many jobs, brokers are seeing ripple effects. “Those were high-paying jobs,” notes Evan Magrill, a senior vice president with Thalhimer.
“Those people aren’t out shopping and eating … The Qimonda thing caused some closing of local vendors. It’s like a wave going across the whole marketplace.”
Nationally, by the end of the second quarter, office-leasing activity was down 39 percent compared with year-before levels. Richmond saw the toll of the reduced volume firsthand when GVA Advantis, one of the state’s strongest commercial real estate brokerages, closed all of its 16 offices in July, including the Richmond brokerage.
Yet before the locks were on the doors, another major player, Jones Lang LaSalle, hired GVA’s top-producing broker so it could expand its Richmond presence. “Richmond is a capital city in a thriving state and will always be a market that is worthy of consideration,” says David McGarry, mid-Atlantic market director for Chicago-based LaSalle.
GVA’s closing offered an opportunity, he adds, for a company that does a good amount of work for local, state and federal governments.
LaSalle’s interest may hold a lesson in these difficult times. Yes, it’s tough out there, but opportunities remain. In fact, some brokers say the flip side of excess space is opportunity.
Paul Kreckman, vice president of the Richmond office of Highwoods Properties says, “You’ll see some people look in Richmond, because space is available.”
That seemed to be the case behind hhgregg’s recent decision to open its first locations in Virginia in some of the big boxes vacated by Circuit City. The Indianapolis-based electronics retailer is expected to take two or more of the six former Circuit City locations in Richmond.
Meanwhile, other companies are trading up to better space and lower rental rates as they renegotiate leases in a tenant’s market. “We’ve got a lot of new companies moving to Innsbrook,” says Kreckman. Among properties that Highwoods owns in the corporate office park in western Henrico County, the occupancy rate is 92 percent.
Kreckman concedes that the swath of commercial space along West Broad Street near Innsbrook has one of the highest vacancy rates in the region, ranging from 32 to 36 percent, according to local surveys. That’s because much of the space left by LandAmerica and other departing companies sits in this area.
Other tenants are taking advantage of depressed building values to purchase their own buildings. Surgical Associates of Richmond just bought the shell of a 10,000-square-foot office building near St. Francis Medical Center in Chesterfield County for $1.3 million. By the time it finishes construction, the medical practice expects to spend $2 million, says Eric Bell, administrator for Surgical Associates. The move makes sense, he explains, because it will triple the size of the practice’s leased space while creating a savings of about $10 per square foot.
The medical practice obtained a good interest rate and 100 percent financing from local First Market Bank. “We were able to do the deal based upon the longstanding relationship that Surgical Associates has with us,” says Thomas Winston, a First Market vice president.
Jason Guillot, a broker for Thalhimer who handled the sale for Surgical Associates, says he has other similar deals in the works. “They’re in an industry, health care, that’s being hit less than others. People still get sick and have to see the doctor in a recession.”
One sector not standing up so well is retail. S&K Famous Brands, a national menswear chain based in Richmond, is out of business, after filing for bankruptcy. Ukrop’s Super Markets Inc., the region’s locally owned grocery-store chain, reportedly has tested the waters for a possible sale after floating a prospectus to potential buyers. “It seems like Richmond is losing its strong foundation of homegrown retail,” observes Brian Glass, a senior vice president with Grubb & Ellis.
The problem is competition. “We have more retail, per capita, than basically any place in the country,” says Glass. He cites figures from the International Council of Shopping Centers, showing that Richmond has 57.2 square feet of retail space per person, compared with a U.S. average of 43.3 square feet, or about 24 percent more retail space. Glass isn’t surprised considering that from March 2008 to March 2009, 3.7 million square feet of new retail came online in the region.
Looking to the future, he expects more pruning in the retail landscape as Richmond tries to absorb new developments such as Westchester Commons in Powhatan County and West Broad Village in Henrico.
Brokers say the city is fortunate to have some corporate projects going up downtown. Packaging company MeadWestvaco will move into a new corporate headquarters this fall, while the law firm of Williams Mullen plans to be the lead tenant in a new namesake, 15-story tower being built by Armada Hoffler.
In the future, Gentil expects that some of Richmond’s big empty buildings will get redeveloped into other uses. One of them, the 300,000-square-foot Deep Run I corporate Circuit City building in Henrico, already has gone into foreclosure and has been turned over to its lender, Bank of America. In the meantime, brokers will keep searching for that next big driver of office space.