New tenants?

With impending closure of JFCOM, market looks beyond military contractors

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Print this page by Elizabeth Cooper

After four decades ensconced in the Bank of America Building, the Norfolk law firm of Willcox & Savage migrated a few blocks, settling on the top two floors of the sparkling new 23-story Wells Fargo Center.

Willcox & Savage joins other companies leaving older downtown office buildings to claim a spot in the $170.9 million mixed-use development that opened in June. The Wells Fargo Center has leased about 75 percent of its 258,000 square feet, despite rates of $29.75 per square foot in a downtown where office space rents for an average of $21.71 per square foot. 

As the region’s first high-rise certified as a LEED-silver project (Leadership in Energy and Environmental Design), the center is attracting firms because of energy efficiencies and location, next door to the upscale MacArthur Center shopping mall. “It will be awhile before anything like this comes in the market,” says Mark Warlick, senior vice president of S.L. Nusbaum Realty, the center’s developer.

Indeed, the Wells Fargo Center is good news for a market that’s jittery about the possible closing of one of its major employers. Defense Secretary Robert Gates has called for the closure of the Joint Forces Command (JFCOM) — which employs about 6,000 people in Norfolk and Suffolk — as part of an initiative to cut $100 billion in defense spending over the next five years. Along with massive job cuts, shuttering JFCOM would lead to the loss of about $700 million in contracts and salaries.

“That issue potentially is of a lot of concern,” says Craig Cope, vice president and city manager with Liberty Property Trust. “No one really knows what effect it will have.”

Also looming is the possible loss of one of Hampton Roads’ aircraft carriers to Mayport, Fla. A carrier group represents about $750 million a year of gross regional product.

These developments drive home a point: South Hampton Roads needs to diversify its tenant base and not rely so heavily on the military and defense sectors. Take the trek to the Wells Fargo Center; it has left other downtown towers with empty offices.

The 43-year-old Bank of America Building is especially feeling the pinch. The building not only lost original tenant Willcox & Savage, but also S.L. Nusbaum Realty Co. and accounting firm Goodman & Co. LLP.  At summer’s end, more than 150,000 square feet of space and 10 floors sat empty in the 21-story Bank of America Building.

The downtown shuffle also hit Dominion Tower when KPMG LLP vacated its offices for new digs at Wells Fargo. Brokers are seeking new tenants to fill the empty spots but acknowledge that few new companies are moving into the area. According to Bethesda, Md.-based CoStar, a commercial real estate research firm, downtown Norfolk’s vacancy rate for prime, Class A office space stood at 19.1 percent at the end of the third quarter, virtually unchanged from the second quarter.  This was well above Hampton Road’s overall office vacancy rate of 12.8 percent.  “There are not a lot of new tenants downtown,” notes Perry Frazer, senior vice president and director of corporate services for CB Richard Ellis. “With the amount of square footage available, we will see five to seven years absorption before we’re back in single digits of vacancies.”

Despite the rates, Deborah K. Stearns, senior vice president of Harvey Lindsay Commercial Real Estate, believes that new construction creates opportunities for new and older properties. “We see a lot of tenants in the market seeking to find out their options — whether to stay put or relocate,” she says.  Companies that relocate often do so to change their office layout to comply with corporate standards regarding square footage and conference capabilities.

Region needs to change status quo
Other brokers, however, say that the region cannot be content with simply maintaining the status quo. “Downtown Norfolk — and it’s the real issue throughout Hampton Roads — really needs new blood,” says Gerald Divaris, chairman and CEO of Divaris Real Estate Inc. “You’re shifting from one building to another. You need to find tenants outside the market and create a new platform.”

There are some bright spots on the horizon. Norfolk’s light rail passenger trains will start running next May. Passenger rail to Richmond and Washington is expected two years later, an asset that can be used to draw new business. 

There’s a buyer for the old Ford Motor Co. plant site, which will take a large block of space off the market.  Plus, the Port of Hampton Roads, Old Dominion University with its modeling and simulation programs and the nearby resort city of Virginia Beach are other advantages for corporate clients.  The only missing link seems to be jobs. According to an economic forecast done recently by ODU, the Hampton Roads economy is expected to grow by 2.4 percent in 2010, but the expansion is not expected to produce many new jobs. That affects the market.

Companies looking to locate downtown last year saw tenants extracting previously unheard of deals as brokers sought to fill empty offices across the region. “Things are certainly more positive than they were 12 months ago,” says Frazer. “A year ago, we were seeing tenants controlling the market. They wanted to do rent reductions, short-term leases, extreme flexibility with terms and less square footage.”

Now, as the economy slowly shows improvement, companies are renewing leases for longer periods at higher rates and adding square footage to their space.

Lots of people are watching to see what shape the Virginia Renaissance Center at the old Ford Motor Co. site will take.  Atlanta developer Jim Jacoby wants to transform the 109-acre site into a mixed-use industrial park. It would focus on alternative forms of energy such as electric vehicles and wind- and solar-power equipment manufacturing. “We’re excited about being here,” Jacoby told members of the Hampton Roads Association of Commercial Real Estate during a recent luncheon.  “We’re excited about the location and the community.”

Jacoby, who plans to finalize the purchase on part of the property before the end of the year, says the development eventually would employ up to 2,000 workers and create other jobs throughout Hampton Roads.  “We’re looking at 10,000 jobs for a total build-out. We’re trying to bring in as many high-tech, green jobs. It’s all about jobs.”

That prospect numbs, somewhat, the pain of the impending loss of JFCOM. It operates out of four buildings in northern Suffolk. Contractors affiliated with the command work out of nearby facilities, totaling more than 650,000 square feet of space. Despite the potential job losses, Liberty Property, which owns two warehouses in northern Suffolk, is preparing to build another multi-tenant warehouse. “We’re bullish enough to think we may start construction on a third building in northern Suffolk,” says Cope, explaining that there is a growing demand for new warehouses related to other industries, especially the region’s ports.

As the fastest-growing city in Hampton Roads, Suffolk has become a major pipeline for office and technology firms. If JFCOM-related firms move out of Suffolk, they would leave behind high-tech facilities that would be relatively easy to market. “Not all of our business is tied to JFCOM,” says Kevin Hughes, the city’s economic development director. “We’ve heard from a number of businesses that this is the place they want to go and do business whether the Joint Forces are here or not.”

Stearns thinks the region is well positioned to market itself as a leader in modeling and simulation. “JFCOM gave us a huge catalyst for focusing on modeling and simulation,” she says. Harvey Lindsay is a partner in the MAST Center, a 32-acre research, technology and education campus near JFCOM, which Stearns says is about 50 percent occupied. “We have a great opportunity to capitalize on modeling and simulation industries such as health-care and economics.”

JFCOM’s closure also would affect Chesapeake’s Western Branch section, which borders Suffolk. An assortment of hotels and restaurants have cropped up in response to JFCOM and its related industries, and Chesapeake officials worry that the command’s demise would undermine those businesses. On the positive side, the General Services Administration plans to break ground next spring on a 131,000-square-foot office building in the Oakbrooke Business and Technology Center, a 120-acre site in Greenbrier. “Things are still slower than they used to be,” acknowledges Tom Elder, Chesapeake’s assistant director of economic development. “But we think we are well poised to attract businesses.” 

And, reminds Divaris, industries without ties to the military and government should be aggressively pursued to fill vacancies. “We have relied too much on the military and the government to fuel our growth. We need to look for fresh blood in different areas.” 

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