No more dark holes?
Large commercial properties are selling in Richmond
- October 27, 2011
2011 has been a good year to buy commercial real estate in Richmond. The market saw buyers scoop up iconic properties — including the former headquarters of Circuit City and A.H. Robins — as well as large, vacant buildings.
With the big holes filled in, developers are again thinking about the future. There’s a new urban plan proposed for Innsbrook Corporate Center, an area that has drawn much of this year’s activity.
Stoking the momentum behind large property transactions are prices below replacement value and organic job growth.
Unlike some U.S. markets that have suffered increasing unemployment rates, Richmond’s rate of 7.1 percent is two percentage points below the national average of 9.1 percent. Several employers, such as SnagAjob.com, Capital One Financial Corp. and Mondial Assistance USA, continue to expand, feeding the demand for office and retail space.
The Richmond region also pulled in a new employer. General Electric is developing a cyber-security center at Innsbrook in western Henrico County. The IT center, which will create 200 jobs, is going into the building that served as the headquarters of LandAmerica Financial Group Inc. before the company went bankrupt in 2009.
“Jobs equal healthy occupancy levels,” says Brian Witthoefft, a principal with Richmond-based Lingerfelt Development LLC. His company was behind one of the biggest property transfers in the region in years when it bought a portfolio of 14 suburban office buildings from Liberty Property Trust for $98 million. The 918,000-square-foot portfolio in the Innsbrook corridor was 98 percent occupied at the time of the sale in May and sold for about $110 a square foot. In September, Lingerfelt added to its local portfolio, picking up an 81,000-square-foot building in the Glen Forest Office Park in Henrico for $9.3 million.
“It’s a great time to buy,” says Witthoefft. “We continue to look for strong fundamentals and prices that are far below replacement costs.” The two buys in Richmond, for instance, were at prices “10 to 20 percent lower then their potential value over the next three to five years.”
The buying hasn’t just been local. American Real Estate Partners, a private real estate company in Herndon, purchased Riverside on the James, a 263,000-square-foot Class A office tower on the James River in downtown Richmond, for $63 million, or about $242 per square foot. Formerly owned by Prudential, the building was about 91 percent leased.
“People are interested in buying properties that are well positioned,” says Michael G. Pruitt. He’s a principal for DRCC Properties LLC in Richmond, which bought Deep Run I, a 300,000-square-foot office that used to serve as one of the headquarters buildings for the now-defunct Circuit City Stores Inc. In what was a liquidation sale, DRCC got the building for $3 million, or about $10 per square foot, and 59 adjoining acres for $2.7 million.
Buying a vacant building with no tenants is a gamble. Yet Pruitt’s group believed Deep Run’s location off West Broad Street near interstates, hotels and restaurants would attract a new corporate tenant. Their instincts proved correct when travel insurance firm Mondial Assistance USA decided to lease four of the building’s five floors for a new corporate headquarters location. Already located in Henrico, Mondial is expanding and needs more space. Circuit City’s second building, Deep Run III, is under contract by DRV LLC in Richmond and is expected to close by the end of the year.
Today, about the only large block of space left in the region is the WestMark buildings on West Broad Street. For years they were leased by Capital One. Now the financial services company has its own campus in Goochland County. Already one of the region’s largest employers, Capital One is growing. It’s building another building on its campus, and it recently bought two empty buildings in Innsbrook — formerly occupied by Wachovia — that will house an expanded call center and other operations. Plus, it’s leasing 14,000 square feet in the Williams Mullen Center downtown for its first commercial banking branch in the area.
Falling vacancy rates
While there’s still plenty of small- to medium-size spaces available, brokers report falling vacancy rates, increased absorption and more activity than two years ago when several of Richmond’s major employers went dark. In its third quarter market report, Cushman & Wakefield | Thalhimer said the area’s overall office vacancy rate fell to 10.7 percent, down from 11.4 percent for the third quarter in 2010.
The Innsbrook submarket experienced one of the most dramatic turnarounds. Overall vacancy fell from 23.7 percent in the third quarter of 2009, to 22.1 percent in 2010 and 16.4 percent for the same period this year, according to Thalhimer. With 22,000 employees, Innsbrook Corporate Center is the region’s second largest employment hub.
Known for its nature-friendly setting of lakes, trees, and walking trails, Innsbrook is poised for a major makeover. One of its primary landowners, Highwoods Properties Inc., has applied for a rezoning under a newly created urban mixed-use designation that would transform the nearly 30-year-old suburban office park into a pedestrian-oriented community where people could live, work and play.
“What Richmond doesn’t have is an urban product in a suburban setting,” says Paul W. Kreckman, a vice president for Highwoods in Richmond. To remain competitive as a business location, he’s convinced that the region needs a vibrant, 24-hour community with an urban edge, yet in a green setting, that meets the needs of today’s mobile work force. “We don’t have the ability to compete with other metro areas that have this product.”
Think Atlanta’s Buckhead area or Reston Town Center in Northern Virginia, he continues. “They’re not downtown; they’re not the suburbs. They’re something in between.”
Highwoods, which owns 1.7 million of the center’s 5.4 million square feet of office space, wants to have 188 acres (about a third of the park) rezoned to allow for an additional 3.5 million square feet of office, 415,223 square feet of retail and commercial space, 800 additional hotel rooms (the center now has 1,000 rooms) and 6.2 million square feet of apartments and condos. Highwoods plans to go vertical, building midrise buildings of eight to 12 stories on existing surface parking lots.
To naysayers who question whether the Innsbrook/Short Pump area could absorb so much development, Kreckman responds that the $2.4 billion project would be phased in over 20 to 25 years. “The big issue is transportation — the impact of this much development on the road network.” A public hearing before Henrico County’s Planning Commission — the first step in the rezoning process — could be held this month. If all goes well, the Raleigh, N.C.-based real estate investment trust hopes to begin its first phase of redevelopment by spring 2012.
West Broad Village filling up
Continuing development in the Innsbrook corridor has drawn new retail. West Broad Village, a mixed-use project on the brink of default until local investors injected new financing, has done well, leasing nearly all its 339 apartments and drawing new restaurants such as Bone Fish Grill. Meanwhile, The Corner at Short Pump, across from Short Pump Town Center, already is home to one of the area’s largest Kroger grocery stores and soon will have Babies R Us/Toys R Us stores, along with an Olive Garden restaurant and a Bassett furniture store.
“We’re getting good rents at The Corner at Short Pump,” says Kevin McFadden a partner with the Rebkee Co. in Midlothian, the developer of the 41-acre project. “The going rate for the Short Pump area is in the mid- to high- $30s per square foot.”
While Rebkee’s work primarily has been in retail development, the company moved out of its box this year and purchased the former headquarters of the A.H. Robins Co., located in North Richmond off Interstate 95. “Because of the downturn, we’ve jumped out of our niche a bit, and we’re doing some historic rehabs,” says McFadden. One of the big incentives for the purchase of the building, most recently occupied by the Wyeth Co., was traffic. “Fifty-five million cars drive by that site a year,” says McFadden.
While this year has proved to be more robust than the preceding two years, the continuing uncertainty of the country’s economy has put a chill on some projects. In Shockoe Bottom, the developers of Rocketts Landing want to move forward with a new five-story office building but don’t have commitments from tenants. It’s also been slow going for the continued expansion of the Canal Walk area downtown, which would bring more retail and apartments.
A bright spot in downtown redevelopment has been the $70 million restoration of the Hotel John Marshall. Its historic ballrooms, barbershop and 238 apartments are scheduled to open in November.
Like other areas, Richmond has seen some foreclosures. About a dozen commercial properties have been foreclosed on in the last couple of years, brokers say. One of them was a 300-acre site off Interstate 95 in Hanover County, which was supposed to have been developed into the East Ashland town center.
“There’s still a lot of negative news out there,” says Pruitt. But in Richmond, “I’ve heard about more deals in the pipeline, actual deals closing. Things seem to be fairly positive for now.”
Richmond office market snapshot
Overall vacancy rate…...............10.4 percent
Year-to-date leasing activity…....2,006,407 *
Year-to-date direct absorption…..440,104*
Average (all classes) rent rate…...$16.53**
Average (Class A) rent rate….......$19.19**
Source: Cushman & Wakefield | Thalhimer, third quarter, 2011.
* Square feet ** Per square foot