Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, April 24, 1994 TAG: 9404220163
SECTION: BUSINESS PAGE: F-1 EDITION: METRO
SOURCE: By MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
Commercial real estate in many communities has yet to recover from recession. Having suffered the excesses of the '80s, real estate developers and brokers are playing it safe now.
Edwin Hall, president of both the Virginia Association of Realtors and Hall Associates Inc. in Roanoke, said he sees virtually no speculative commercial building in the valley any time soon.
Hall based the forecast on his company's annual survey of occupancy by paying tenants of office space in the Roanoke Valley, which was completed Feb. 15.
Though new tenants are taking up some slack, Hall said, there is enough vacant space in the Roanoke area to prevent profitable construction for the next year or two.
The only ways a developer might build sooner than that, Hall said, would be construction for an owner-occupied structure or a prearranged tenant willing to sign a 10-year lease.
Right now, Hall said, the Roanoke Valley has what developers and brokers call a tenants' market. So much space is available, compared to those willing to lease, that tenants can virtually dictate rental terms.
Despite the situation, Hall said, owners are making relatively few concessions to lessees. He said what concessions exist come in the form of extra improvements to the property and, in some cases, minimal periods of occupancy when no rent is collected.
But the occupancy rate is improving so steadily that the valley is moving into an owners' market, where owners set rental terms. Hall estimated the valley might reach this point by mid-1996 or 1997.
Hall said housing sales and construction lead an economic recovery, as it is now, but commercial building generally is a lagging economic indicator. The credit economy of the 1980s led to more overbuilding than usual, Hall said, so there is more space to absorb than there has been in most business cycles.
Bruce Hobart, a developer who works in both Roanoke and Richmond, said he has experienced a lot of leasing activity in the last 12 months, although "we're not out of the woods yet."
Hobart said his Colonnade Corporate Center II is 75 percent leased, while Northpark Business Center has reached 94 percent.
He said Century Business Center has gone from bankruptcy to fully rented. Townside Festival shopping center is 95 percent leased now compared with 70 percent a few years ago, while Penn Forest Corporate Center has moved from 40 percent to 65 percent.
Concessions have all but disappeared, Hobart said.
"It has been a long, slow, painful but ultimately rewarding process," Hobart said. He, too, predicted there will be little or no new construction for another 18 to 24 months. "At that time," he said, "I expect to be right in the midst of it."
Richard Whitley, president of Fralin & Waldron of Roanoke, said the market holds plenty of risks because vacancies are high in southwest Roanoke County and downtown.
His firm is still preparing plans for upgrading of the old First Federal (later CorEast) building, the first floor of which will be rented to the proposed Valley Bank. When that work is done, he said, the downtown building will be heavily marketed.
Today, he said, some desirable buildings are full, but there is a tenants' market for secondary space.
He estimated it will be two to three years before the excess space is absorbed. Even then, he said, there may be little new construction because of rising building costs. He said new construction might require higher rents than the market could bear.
Hall's annual survey covered all office buildings with at least some speculative rental space. It eliminated structures which are totally occupied by their owners, such as Norfolk Southern Corp's. building in downtown Roanoke, because buildings that do not compete for tenants are not considered valid indicators of market demand for space and rental rates.
Hall said the information was obtained from the owners of the buildings, so he believes the survey is reliable. He also compares the information on rentals with the preceding five years, showing the vacancy and absorption of space over time.
The survey shows that so-called Class A space is in good demand, especially downtown. Class A space in any market is defined as "the newest and the latest" in office buildings with a prime location, Hall said. First Union Tower is Roanoke's prime example of Class A office space.
Class B buildings are a little less modern and perhaps not so well located. But they are well maintained and offer some advantages, such as lower rents. Their mechanical systems - heating and air conditioning, plumbing, lighting - may not be as efficient, but they create value for tenants.
Class C is cheap space in an older building located in a less desirable area.
In downtown Roanoke, for instance, while the overall vacancy rate is 19 percent, Class A offices are 10 percent vacant. Class B offices are one-third empty, while Class C space is 53 percent vacant, according to the February survey.
In the suburban office markets, Class A space was 19 percent empty in the south district and just 2 percent unoccupied on the northern side of the valley.
In the central business district, Hall said, a sharp improvement in the last year was caused by the expansion of Blue Cross and Blue Shield into space in the Franklin Plaza, First Union and Signet Bank buildings.
The federal government, having outgrown the Poff Federal Building, moved some of its offices into other downtown space, notably the former Woods, Rogers & Hazlegrove building on Franklin Road. That building is being remodeled for the U.S. attorney's offices.
In all, more than 53,000 square feet of downtown space was absorbed by renters during 1993.
Despite that, about 250,000 square feet remain available, including 58,000 square feet in the Colonial Arms building at Jefferson Street and Campbell Avenue - a prime location. That building became mostly vacant when Norfolk Southern Corp. completed its new regional headquarters building at Franklin and Williamson roads and moved many of its offices out of the Colonial Arms.
Hall believes the absorption rate downtown will be "really flat" this year because the government and Blue Cross-Blue Shield have slowed their expansion. Also, traditional downtown tenants - accountants, law firms, realty brokers and banks - are not growing.
He expects First Union National Bank of Virginia to expand in downtown Roanoke over time, but not in the next year.
He pointed out that First Union has room to add more workers in the First Union Tower, where the 21st floor remains available. In addition, the bank might get the 12th floor of the First Union Building back from Blue Cross-Blue Shield.
The future of Blue Cross, Hall said, is "anybody's guess." One question is the impact of pending health care changes on insurance companies. Another is whether Blue Cross will be tempted to leave downtown in order to consolidate its scattered operations when its current leases expire in the next two to five years.
Hall said his personal opinion is that Blue Cross is committed to doing business downtown and will remain if at all possible.
Retail business downtown has been flat for years with the exception of the City Market, Hall said. He foresees no change in this pattern until the reopening of Hotel Roanoke brings more tourists and convention delegates into the area.
On the south side of the city, where most buildings hug the Virginia 419 corridor, the vacancy rate changed little from 1992 to 1993, Hall said. About 26,300 square feet were absorbed there last year, about half of the 50,000 square feet added to the market.
Hall believes that continued increased activity in the Southwest County market will show a noticeable improvement by the end of 1994, provided that no other large vacancies occur.
Tenants in the Southwest County have tended to move laterally from one building in the area to another, Hall said.
Since January, he said, there has been a lot of activity in the south suburbs. The new Fralin & Waldron Building has been successful, he said, and the Colonnade Corporate Center has started to fill up. Those are Class A properties, but older buildings are beginning to pick up as well.
After gains in 1991 and 1992, the northern suburbs took a loss in 1993 when nearly 20,000 square feet of space was vacated. The overall vacancy rate in the north, which generally follows the Peters Creek Road corridor, rose from 7 to 12 percent.
Hall said the north suburban market should strengthen through 1994 and vacancies should be lower by year-end because there are no new construction plans for that area.
The north market is much smaller than the south side, Hall pointed out, and it consists of a lot of service offices and warehouses.
He predicted that 20,000 to 30,000 square feet will be absorbed on the north side this year compared to 40,000 to 60,000 on the south side. But, he said, those figures are "like Russian roulette. It's an educated guess."
by CNB