A so-so year?
Experts say 2014 will look like 2013: tempered activity but at least no bust
- December 27, 2013
If no news is good news, the forecast for commercial real estate in Virginia in 2014 would make banner headlines. Vacancy rates across the state and in all sectors — office, industrial, and retail — are expected to stay the same or endure a minor, corrective dip. Rental rates are expected to show little change, increasing or decreasing by a matter of pennies. Meanwhile, there is some new construction, including speculative projects in Northern Virginia located close to metro stations.
In assessing their industry, commercial real estate executives produced a thesaurus’s worth of synonyms to describe what’s expected to be a so-so year. Words like “tepid,” “unremarkable,” and “tempered,” all came up. Still, no one is complaining. People are relieved that a relatively stable if somewhat ho-hum market has replaced the downturn of a few years ago.
Job creation, experts agree, is the engine of commercial real estate growth, but, in 2014, it will be the brakes, too. According to the Thomas Jefferson Institute for Public Policy in Springfield, employment growth in Virginia will accelerate from 0.8 percent in 2013 to 1.1 percent in 2014, but nationally, a rise of 1.4 percent is predicted.
The reason for the commonwealth’s less-than-average job growth outlook is that government and government-related businesses — so central to the economies of Hampton Roads and Northern Virginia — are braced for further contraction in the face of continuing federal cutbacks.
Gridlock in Washington is giving consumers the jitters, too. While congressional leaders reached a bipartisan budget deal in December, another crisis could be coming when the debt ceiling deadline arrives on Feb. 7.
“I can’t underline enough how much uncertainty with the federal government is important,” says Jeff Kottmeier, director of research and analysis for the commercial real estate services firm CBRE. “What happens in Washington will set the tone for 2014.”
“Tenants remain apprehensive,” concurs Scott Homa, vice president of mid-Atlantic research at the real estate services firm Jones Lang LaSalle. “Contractors and agencies are coming to grips with likely budget cuts, but they are not sure about how deep the cuts will be or about their timing.”
Not surprisingly “Demand remains restrained,” Homa says. Tenants are opting for shorter leases and renewals and are demanding — and receiving — termination rights. Many are downsizing, and landlords often must offer upgrades or add amenities to remain competitive.
The sectors in which job growth is anticipated — education, finance, cyber security, and health care — will mitigate the woes caused by government rollbacks only so much, Kottmeier explains, because they tend to be non-space related.
Here’s a brief look at what’s expected in Virginia’s major commercial real estate markets.
Chris Rouzie, senior vice president of brokerage with the commercial real estate services firm of Cushman & Wakefield/Thalhimer, expects little change in either the vacancy rates or the average rental rates for office space in the region, which stood at 12.1 percent and $21.45 per square foot for Class A space, respectively, in the third quarter of 2013, the latest period figures were available. The biggest project currently under construction, he says, is a 14-story, mixed-use building in Virginia Beach Town Center designed by Clark Nexsen. The architectural firm will occupy 44 percent of the space when the building completes this summer.
Several other projects are in the works thanks to public-private partnerships. A group headed by Bruce Thompson, CEO of Gold Key/PHR Hotels & Resorts, is renovating the historic Cavalier Hotel property in Virginia Beach. Work is expected to begin this month on another Thompson project: a $126 million luxury hotel and conference center in downtown Norfolk. The new year also should bring the renovation of the city’s Waterside project into an entertainment/restaurant venue.
On the industrial side, business will be “pretty flat,” Rouzie predicts — with a focus on filling existing space.
It’s a different story for retail. Rob Wright of the commercial real estate company Katsias says grocers and casual restaurants will continue to drive development. Kroger will open a store in Portsmouth in the first quarter; Wal-Mart is going into Virginia Beach and Williamsburg; Harris Teeter is opening a store at Ward’s Corner in Norfolk and another at Sandbridge Commons in Virginia Beach; and a Fresh Market is arriving in Norfolk.
Government downsizing has suppressed the office market, with the commercial real estate services firm of Cassidy Turley reporting an average vacancy rate of 17 percent in Q3 2013. Costar, another commercial real estate information company, reports that rental rates also were on a slight downward trend, averaging $38.23 for Class A space during the same quarter. No one expects those stats to change much in 2014.
Even in Springfield, where some speculative construction has been going on, “tenant demand has been slower and more inconsistent than builders expected,” Homa says. Cassidy Turley’s report confirms that: Springfield had a painful 22.2 percent vacancy rate in Q3 2013.
Cassidy Turley also reports that the once-golden Rossyln-Ballston corridor had a 17.5 percent vacancy rate in Q3 2013. The impending addition of 1812 North Moore onto the market at the Metro station in Rosslyn won’t help that situation. The 35-story, 580,000-square-foot Class A building will be “a massive vacancy that will have to be worked through,” Homa says. So far, it hasn’t attracted a single tenant.
NoVa office submarkets outside the Beltway, such as Tysons and Reston, are expected to make the region’s best showing this year, thanks in part to expansion of Metrorail. Projects slated to be under construction or deliver at Tysons in 2014 include a 22-story office and retail center called Tysons Tower developed by Macerich; an 11-story 300,000-square-foot complex from MRP Realty called Tysons Overlook; and two office buildings from Lerner Enterprises, a 23-story, 600,000-square-feet building at 1725 Tysons Boulevard and an 18-story, 476,000-square-foot building at 1775 Tysons Boulevard.
Homa looks for growth in nontraditional areas of the economy, such as health care IT, to help pull other parts of NoVa out of their government-induced doldrums. “The demand for everything health-care related remains strong,” he says.
Data centers — more than 40 of them located in Ashburn — are the bright spot in NoVa’s industrial market. Matthew Gallagher, a vice president at Jones Lang LaSalle who specializes in this niche area, says that in terms of absorption and level of construction, the data center market “is night and day compared to the office market.” Although the vacancy rate for data centers stood at about 13 percent late last year, Gallagher anticipates that demand for the latest facilities will be strong and that delivery of about 825,000 square feet of space this year should be absorbed quickly.
Meanwhile, a 17-floor, 300-room Hyatt Regency will open at Tysons. And the retail market expects to see the first phase of Vornado Realty Trust’s $200 million redo of the Springfield Mall open by midyear. Plus, a Wegman’s is scheduled to open this spring near Ft. Belvoir.
Office space in the state capital has been slow to recover from the recession, says Eric Robison, a senior vice president with Thalhimer. As of the third quarter of last year,
Thalhimer had seen 482,792 square feet of leasing activity, he says — more than all of the previous year, but only about a 65 percent recovery from the recession.
Thalhimer predicts that the Q3 2013 office vacancy rate of 9.6 percent should drop a bit in 2014, although the average rental rate of $20.79 for Class A space probably will remain static.
In terms of new construction, the city is partnering with Chicago-based Clayco to build a $110 million, 18-story office tower downtown. The project already has an anchor tenant. Gateway Plaza will be the new home for the law firm of McGuireWoods and its consulting arm when its completed in 2015.
In the industrial sector, Richmond saw a lot of build-to-suit activity in 2013, Robison said, along with a large absorption of space, which dropped the vacancy rate to 9.9 percent in Q3 2013, down from 10.2 percent in Q3 2012. In November, construction began on a 260,000-square-foot distribution center for Republic National Distributing Co. in Ashland. Republic is the country’s second largest distributor of wine and spirits.
In the retail market, grocers remain in the forefront. Kroger plans a spring opening for a store at Staples Mill Marketplace in Henrico County; a Martin’s will debut midyear at Midlothian Turnpike and Charter Colony Parkway; and Southern Season will begin operations at Libbie Mill in Henrico County.
John Nielsen, first vice president at Thalhimer’s Roanoke brokerage, expects older office inventory to continue to shrink as landlords refresh their properties to make them more marketable. The Q3 2013 vacancy rate of 8.6 percent and Class A rental rate of $21.78 should see little change. Construction is underway on The Bridges, a mixed-use development downtown that in its first phase will include 157 apartments and 60,000 square feet office, along with retail.
On the industrial side, Ardagh plans to open a metal can manufacturing plant in the third quarter. When it bought the 525,000-square-foot former Hanover Direct distribution center last year, Ardagh’s promised $93.5 million investment made it the single largest manufacturer’s commitment ever in Roanoke County.
The biggest projects in retail are The Pinnacle, a one million-square-foot-plus shopping and entertainment complex that straddles the Virginia-Tennessee border, and The Falls, another one-million-square-foot shopping center in Bristol. Both plan to open stores this year as the inaugural part of phased development.