Commercial real estate market should improve in 2011
Accounting firm Cherry, Bekaert & Holland recently moved from Henrico into 21,000 square feet in the Williams Mullen Center downtown.
Published: February 06, 2011
The commercial real estate market, in the tank for a couple of years, is beginning to turn as companies resurface from the bad economy to lease or buy vacant space.
Companies aren't exactly gobbling up office, retail and industrial space, but they are making a dent and deals are in the pipeline, brokers say.
"We're seeing some good activity right now," mostly from companies that need more space, not relocations, Douglas said.
"People feel the recession is easing its grip."
Sales rose in all three commercial real estate categories last year, fueled in part by price declines of more than 30 percent, according to a report by Grubb & Ellis/Harrison & Bates.
Also last year, subleased office space shrunk, opening the way for new leases and sales.
"For a solid 18 months, subleases were crushing us," Douglas said. "There is still some subleased space out there, but much was absorbed by mid 2010."
Subleased space came on the market as businesses folded or cut back operations.
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Mondial Assistance USA, a worldwide travel and event insurance company based in Henrico, has been sniffing out a large block of office space, brokers say.
But it isn't the only growing company looking for new space.
"We're seeing more large prospects than we have seen in several years," Douglas said.
The buzz is that Mondial is considering the former headquarters building for Circuit City Stores Inc., a consumer electronics retailer that went under two years ago.
The new owner of that property is mum.
"We've talked to a bunch of different folks who have looked at the building," said Michael Pruitt with Pruitt & Associates, a development firm in Henrico that bought the 300,000-square-foot Deep Run I building off Mayland Drive in Henrico in September.
"We don't have a lease, so we won't comment (on any possible tenant), but we have been pleased with the interest."
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"The real story is we are seeing a lot of activity that just hasn't gotten booked yet," said Scott F. Durham, a senior vice president at CB Richard Ellis. "We should see three consecutive quarters of good absorption."
It's still a tenants' market, brokers say.
But as the market improves, landlords will be less likely to offer free months of rent and they will be less inclined to agree to one- or two-year leases, looking instead for longer leases.
"I wouldn't say the market has turned 100 percent, but we are heading in the right direction," Durham said. "A lot of brokers are glad to get 2010 behind them. It was a rough year, probably rougher than 2009."
Financial services company Capital One Financial Corp.'s leased 200,000 square feet in two buildings in the Innsbrook Corporate Center business park in western Henrico last year. SunTrust Banks Inc. took 90,000 square feet in the former headquarters of defunct LandAmerica Financial Inc., also in Innsbrook.
"If we could get one or two more deals like that, we would see pretty dramatic absorption," said John Gentry, a senior vice president at Grubb & Ellis/Harrison & Bates.
Despite some lease activity in the Innsbrook area, the vacancy rate there remains the highest in the region — at 21.8 percent at the end of 2010, down from 27.1 percent in the same period a year earlier, according to Thalhimer.
The West Creek office park area in eastern Goochland County had the Richmond region's lowest vacancy rate — zero.
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The number of foreclosed commercial properties in the Richmond area rose from four in 2009 to 10 last year, but it was fewer than most analysts expected, according to the Grubb & Ellis report.
Many companies are sitting on cash and waiting for the right time to invest in real estate, Douglas said.
Small Business Administration lending has opened the way for companies with excellent credit and padded cash levels to buy and occupy commercial properties, he said.
What's more, the commercial mortgage-backed securities market, an investment vehicle that pools real estate loans, is perking again.
Those commercial mortgage-backed security offerings are nowhere near where they were in 2007, when $237 billion worth of commercial real estate loans were issued and packaged nationwide. Even if this year's pools reach $35 billion, they would be twice the value of last year — a sign to investors that money is available again.
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The commercial real estate market hit bottom six to eight months ago, said Gentry with Grubb & Ellis. "Everybody agrees the vacancy rates will fall."
The overall office vacancy rate in the Richmond area was 10.9 percent at the end of 2010, down from 11.2 percent in the year-earlier period but up from 9.1 percent at the end of 2008, according to Thalhimer.
However, with 4.48 million square feet of vacant space still available in the office market, it will be three to five years before the market fully recovers, Bradley said.
In a weak market, speculative building won't happen anytime soon, brokers say, but expect to see some build-to-suit projects this year, particularly in the medical field.
Also, mid-size space for company needing more than 5,000 square feet but less than 40,000 is beginning to tighten up — a sign that the market is in recovery, Bradley said.
Notable new leases include accounting firm Cherry, Bekaert & Holland, which moved last weekend from Forest Avenue in Henrico into 21,000 square feet in the Williams Mullen Center in downtown Richmond.
Tobacco company Swedish Match will relocate soon from The Boulders in Chesterfield County into 25,264 square feet in the James Center downtown.
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The industrial sector is picking up, as companies look to store or park more inventory.
"The fourth quarter was positive for the first time in a long time," said Evan M. Magrill, a senior vice president at Thalhimer.
Better than expected holiday retail sales helped boost the industrial sector. Also, new tenants are looking for space, he said.
The sector is still stabilizing, as rents are flat to drifting lower, Magrill said.
"We will have to see more demand before we can say we turned the corner."
The industrial vacancy rate here was 11.2 percent in the fourth quarter, up from 10.9 percent from the previous year and 7.2 percent in 2008, but in line with the national rate of 10.8 percent.
Mark Williams, Broker, ABR, Realtor