THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, August 21, 1995 TAG: 9508180671
SECTION: BUSINESS WEEKLY PAGE: 04 EDITION: FINAL
TYPE: Column
SOURCE: Ted Evanoff
LENGTH: Medium: 85 lines
Gerald S. Divaris remembered the call that came the other day. A telecommunications firm wanted to locate in South Hampton Roads. It needed an immediate lease on a sizeable block of empty office space.
What the telecommunications firm learned was what everyone in the market for office space has learned. From Williamsburg on the Peninsula to Chesapeake's Greenbrier district, blocks of vacant office space in excess of 50,000 square feet are rare.
``Right now I'm saying, `Can you wait?' Or, `Can we convert a warehouse or a large empty retail building for you?' They're not very happy to hear that,'' said Divaris, president of Divaris Real Estate Inc. of Virginia Beach.
Hampton Roads' office market, glutted only five years ago, has tightened. Vacancy rates in many office districts have ebbed to the lowest point since the early '80s.
Construction of a few big buildings could temper the shortage, and help boost the economy by attracting businesses that immediately need to expand.
Searching for large blocks of office space, Divaris said, are four separate prospects, including the telecommunications firm and a travel company. The four need so much room that their space needs could almost fill the 26-story Dominion Tower in downtown Norfolk.
Tidewater's office shortage, Divaris said, means they might leave the market and search for empty offices in Richmond or North Carolina.
``We are faced with a large dilemma,'' Divaris said. ``We need to build new buildings or the whole region will suffer.''
Hampton Roads real estate experts say the construction upturn may await '96 or '97.
Rental rates, averaging about $14 a square foot for fancy southside space, must rise high enough to convince bankers and developers that building on speculation, on the chance a tenant will soon appear, is a worthy risk.
Speculative risks will ease when the cost of leasing existing Class A office space rises to match the cost of new office construction, currently as much as $17 a square foot. Lease rates, depressed by the glut, are just now perking up.
``Landlords have begun standing firm on rates,'' said Deborah K. Stearns, senior vice president of the real estate firm Goodman Segar Hogan Hoffler Inc. in Norfolk. ``The power has switched from the tenant to the landlord. Over the next six to 18 months, we're going to see rents increase by 10 percent to 20 percent.''
When Stearns joined the Norfolk real estate firm in the late '70s, Tidewater's 3-percent office vacancy rate was about to soar. A speculative building boom pushed the '80s vacancy rate to 17 percent. Then came the crash.
Pressured by regulators in the wake of the S&L debacle, banks shunned loans on speculative building projects. Construction of office buildings all but stalled.
Throughout the '90s, though, Tidewater steadily added jobs, filling the empty offices. Between '90 and '94, service businesses produced 55,000 new jobs in Hampton Roads, chiefly in the fields of health and business services.
In June, Hampton Roads' office market comprised some 15.2 million square feet with a vacancy rate of 13 percent on the southside and 11 percent on the Peninsula. Vacancy rates fell under 10 percent in the classy buildings in the Pembroke and Lynnhaven districts of Virginia Beach and the Oyster Point district of Newport News.
With office space running short, James City County constructed its own speculative building, and quickly found a tenant.
Most expanding companies, though, have made do or built small offices exclusively for themselves. They've converted buildings, such as the UPS endeavor to turn an old store in Newport News into a package tracking station. Or they've found space in downtown Norfolk.
Downtown, parts of which were substantially rebuilt during the '80s construction boom, harbors 3.1 million square feet of office space, the largest concentration of offices in Hampton Roads, as well as the most empty office space in the region.
The central city's 22-percent vacancy rate will decline, though only gradually, in part because the lease expenses are the region's highest. Rents downtown averaged $14.68 a square foot last winter, compared to $12.17 in the Pembroke district.
``Downtown is an outlet now. When it fills up, (lease) rates will start going up,'' Stearns said. ``When we see tenants pay rents in existing buildings comparable to the cost of new construction, we'll see more building begin.'' by CNB