ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, February 11, 1996 TAG: 9602090021
SECTION: BUSINESS PAGE: G-1 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER|
OFFICIALLY, there isn't much office space available in downtown Roanoke. But plenty of space is available from tenants that are willing to sublease on an informal basis.
That is one of the conclusions in the 1996 forecasts for the commercial real estate market in the Roanoke Valley contained in the newly published survey of the Society of Industrial and Office Realtors.
Others are:
Office space in the Roanoke Valley, especially in the suburbs, is being absorbed rapidly.
When it comes to attracting new industries, however, the valley has a shortage of suitable industrial space.
The annual survey of office real estate was compiled in September by Edwin C. Hall and Stuart Meredith of Hall Associates Inc.
Dale Poe of Waldvogel, Poe and Cronk Real Estate Group Inc. conducted the survey of industrial properties.
Hall said the downtown office space picture improved somewhat last year compared to 1994, but at a much slower pace than in the suburbs.
The downtown market is depressed, he said, because a lot of space is on the market informally.
Hall said First Union National Bank in the First Union Tower and IBM in Franklin Plaza have both indicated that they would rearrange and reduce their use of existing space if occupants could be found for sublease.
Officially, he said, only the unoccupied 21st floor of First Union Tower is available for sublease by First Union.
Philip E. Witt, vice president for corporate real estate for First Union National Bank of Virginia, said the bank leased 102,300 square feet in the tower.
Of that amount, about 11,200 square feet is on the 21st floor. That space has been offered for sublease for about three years. It is a "shell" inside, he said, because the space has never been finished for occupancy.
"We have potential to compress ourselves and free up more space" on the floors just below, Witt said. On the other hand, he said, the bank might want to hold the space for future expansion because the operations center on Plantation Road is filled to overflowing. First Union is anticipating the possibility of growth, he said.
Witt said First Union hopes to find a new or expanding business that might be interested in the 21st floor. If more space were needed by a tenant, he said, the bank might be willing to compress on the lower floors. First Union is still exploring its options.
Fred McNeese, spokesman for IBM in Armonk, N.Y., confirmed that "we are interested in downsizing our space" in the Franklin Plaza Building.
McNeese said IBM has 34,000 square feet under lease. Studies have shown that IBM could compress its operations into just 10,000 square feet, leaving 24,000 square feet for sublease.
Hall's survey did not include the Heironimus building downtown, just vacated as a department store. He said the space is not suitable for offices and "there is no need for it" unless some quasi-government agency rented it for some use like a continuing education center.
No developer could get financing to turn the Heironimus building into offices, Hall said.
One space downtown has not remained on the market long. A lease reportedly is pending for the old Jefferson Club quarters on the 15th floor of the First Union Bank Building, although no papers have been signed.
Downtown office buildings had an overall 16 percent vacancy rate compared to 19 percent in 1994, Hall found, but this ranged from just 10 percent in prime quarters to 31 percent for lower-prestige buildings.
The society said in its survey that top-rated prime properties in downtowns nationwide had a vacancy rate of 12.8 percent in 1995 compared with 14.2 percent the prior year. The 12.8 percent is about equal to the vacancy rate of suburban properties nationwide.
"Absorption was 16.2 million square feet in this category, irrefutable evidence of the return of demand in the central cities," the society said. "There is an economic rationale for this. The rental differential [nationwide] between downtown and suburbs, only 7.5 percent a year ago, narrowed to 5.4 percent in 1995."
Rents in downtown Roanoke ranged from $7.50 a square foot at the long-vacant former Hop-In building at Campbell Avenue and First Street Southwest to $20 a square foot at First Union Tower.
Hall predicted that some of the middle-grade office space downtown will be converted into other uses such as apartments.
Hall said the vacancy rate at top-grade space along Virginia 419, the south suburban market, was only 9 percent, while the middle tier was 14 percent. Hall declined to give examples of the various grades of property, but the top tier would be the newest and most desirable space, while the lowest grade is older and less desirable without a renovation.
Occupancy is rising in both the north and south suburbs, he said, and new arrivals to the valley choose to rent office space in the suburbs.
He expects little or no office construction in 1996, he said, but office use may spread away from Virginia 419 in years to come as new office parks are constructed.
When it comes to industrial real estate, Poe predicted that "growth in manufacturing jobs is in the cards for 1996."
In addition to previously announced plant openings such as A.O. Smith Automotive Products, Poe said, other manufacturers are looking at the area through the Regional Partnership of the Roanoke Valley.
These jobs, he said, will pay $6.50 or $7 an hour because it is no longer possible to entice a sufficient work force for $5 an hour. People won't move here to take the lower pay, he said.
Roanoke won't lose its competitive advantage if its residents command the higher pay, he said, because the same situation is true for other markets as well.
Finding space for new manufacturing companies is difficult, he said, because the industrial vacancy rate is only 7.5 percent in downtown Roanoke and nearby streets and a mere 3.7 percent in the suburbs.
Poe said much of the existing available space is either obsolete or in the flood plain. The space is inexpensive, he said, but new industries seeking to expand are not interested in property that has flooded.
Small entrepreneurs would be willing to take the chance on such space in return for cheaper rents, Poe said, but the space is too large for them. Small new industries need small spaces, he said, but the older and larger buildings do not lend themselves to subdivision.
It's hard to find good small space, he said, and the only recent addition to that niche is the Airport Corporate Center where 14,000 square feet remains available for lease.
Airport Corporate Center is on Trapper Circle, just off Airport Road. A multitenant building constructed last year is fully leased. About a third of a second building, now under construction, also has been leased, leaving the 14,000 square feet still open for lease. The developer is Harmon Commonwealth Corp. of Richmond.
The president of the development firm could not be reached for comment.
The new space rents for $6 a square foot, Poe said, which is the rate an investor must make to build a small space. He predicted that the space will be absorbed, but it will take an indefinite period of time at that rental price.
The shortage of industrial and warehouse space makes it more difficult to attract new industries, but Poe said few developers are willing to do speculative building. The primary available sites are the shell buildings constructed by local governments, such as the Botetourt Industrial Park.
He described Roanoke as "a steady, build-as-you-grow market." He said the more modern and suburban facilities, not the central city, are more likely to pick up new industrial business arriving in the area.
"I wish I had more product" in terms of industrial space to lease, Poe said, but he said he's optimistic about new industries locating here.
Robert R. Copty of Copty & Co. has an upbeat view of downtown Roanoke, where he is active in real estate, although he did not contribute to the recent survey.
Roanoke's downtown section is much healthier than the downtowns in most communities, Copty said.
He believes that the trend toward downsizing in banking, insurance and other traditional office uses hit Roanoke in the late 1980s and early 1990s. Roanoke, he said, has "already sustained that phenomenon" just as some other cities are beginning to experience the trend.
While other communities are still caught in the downsizing and the switch from department stores to specialty shops, he said, Roanoke is on the upswing.
Demand for space on the Roanoke City Market is outstripping the available supply, he said. He predicted that the demand will soon spill over to other areas away from the market to Kirk Avenue and First Street. He noted that the old Roanoke Book & Stationery Co. store was recently leased by Copty to A&E, an architectural supply shop.
The demand, he said, will break out of the bounds of the market. The closing this month of the downtown Heironimus department store was a blow, but Copty said downtown has seen "more good news than bad."
"Roanoke is fortunate in downtown growth compared to other areas," Copty said.
Millie Moore, sales manager for the commercial division of Boone & Co., will compile her annual report on valley retail space until March, when the market has shaken out from the Christmas season. She expects to confirm her impression that a lot of retail space is available.
January and February always bring a lot of turnover at shopping centers, she said.
The seasonal shakeout has left about 20 vacancies at Valley View Mall, she estimated. One of the largest was caused by the closing of Morrison's Cafeteria.
Tanglewood Mall has also been affected, Moore said, but the vacancies there largely reflect the bankruptcies on the national level of some chain operations.
At the same time, she said, a lot of the smaller shopping centers are 100 percent leased. Old Country Plaza in South Roanoke County, for instance, was not affected by closings because the space was immediately rented. And when Harris Teeter closed at Brookside in North Roanoke County, Food Lion quickly moved in.
Retail space in downtown Roanoke is almost fully leased, she said. "You can't find anything at the market.
"We have a very healthy retail market," Moore said, but she predicted major changes by this time next year because of the opening of eight Wal-Mart superstores within an easy driving distance of Roanoke.
The stores are at Roanoke, Salem, Rocky Mount, Martinsville, Danville, Christiansburg, Lynchburg and (opening in 1997) Lexington, she said.
A Wal-Mart superstore, Moore said, will gross $750,000 to $1 million each week. You cannot have eight stores in the region doing that kind of business without causing significant changes in the local retail market, she said.
Taxable retail sales in the Roanoke metropolitan area in 1994, the last year for which figures are available, were $272 billion.
A year from now, Moore predicted, some of the smaller shopping centers and their current tenants will feel the impact of the superstores.
LENGTH: Long : 200 lines ILLUSTRATION: PHOTO: Stephanie Klein-Davis. 1. In their survey of office realby CNBestate, Edwin C. Hall (right) and Stuart Meredith look over space
left by the demise of the Jefferson Club. A lease is reportedly
pending for the old quarters on the 15th floor of the First Union
Bank Building. color. 2. Dale Poe found the Roanoke Valley lacking
in space to attract new industries. His survey showed that much of
the existing space is either obsolete or in the flood plain.
Graphic: Charts: Breakdown of Roanoke Office Space (3). Net
absorption (4). color.