THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Monday, April 8, 1996 TAG: 9604060199
SECTION: BUSINESS WEEKLY PAGE: 12 EDITION: FINAL
TYPE: Cover Story
SOURCE: BUSINESS WEEKLY
LENGTH: Long : 138 lines
Hampton Roads is becoming a landlord's market again.
Sharp negotiators looking for office space can win discounts from landlords, but property agents say concessions are fewer and lease rates appear headed higher.
``I think the balance of power is going to tip in favor of the landlord,'' said Robert T. Fine, commercial leasing representative at Runnymede Corp., a real estate company in Virginia Beach.
What's happening on the Peninsula and in South Hampton Roads represents a turning point in Tidewater's commercial real estate industry.
Remember all the construction sites in the '80s? Well, Tidewater has caught up with its building boom. The office glut almost has ended.
Owners and managers of major office buildings on the Peninsula and the southside reported a total vacancy rate of 12.1 percent in September compared to 16 percent a year earlier, according to the Old Dominion University Real Estate Center survey.
The survey, published in February, already appears outpaced by the expanding economy. Outdated or not, the survey is the only comprehensive look at the region's commercial real estate market. It includes 15.07 million square feet of office space in about 300 major buildings located in 20 areas of Hampton Roads.
As a benchmark, the survey seems a percentage point or two behind today's numbers. Since October, for example, office building managers in downtown Norfolk have leased space equal to the 111,600-square-foot First Virginia Bank Building. That's according to a February '96 downtown survey conducted by Harvey Lindsay Commercial Real Estate of Norfolk.
Despite the downtown activity, the center city still has the equivalent of one or two vacant skyscrapers. ODU counted 1.82 million square feet of empty floor space in Hampton Roads, with about one-third of it in downtown Norfolk, which has Tidewater's largest office district.
In downtown's 31 major office buildings, the vacancy rate was 17.9 percent in February (according to Harvey Lindsay) compared to 21.4 percent in October. If downtown, particularly the financial district, weren't in the picture, Hampton Road's vacancy rate would have been 9.6 percent in October (according to ODU).
Downtown's half-million square feet of empty offices may seem like a big surplus, but landlords appear heartened.
``I think lease rates are much more stable downtown,'' said Deborah K. Stearns, senior vice president of the Norfolk-based real estate firm Goodman Segar Hogan Hoffler. ``They are in the range of $14 to $16 per square foot. They have not decreased below that.''
One reason: Suburban offices are filling up. So tenants who need big chunks of space look downtown.
In Virginia Beach's Pembroke section, for instance, contiguous empty office space in excess of 7,000 square feet appears rare (except for Corporate Center II, a 51,000-square-foot building recently vacated by a struggling company).
``Whatever demand you have in downtown Norfolk is at least double in Chesapeake and Virginia Beach,'' said Gerald S. Divaris, president of Divaris Real Estate Inc. of Virginia Beach.
Rule out downtown Norfolk, and the combined vacancy rate of the next five biggest office districts (Greenbrier, Lynnhaven, Newtown, Oyster Point, Pembroke) has dipped to 8.3 percent (in ODU's survey), a rate considered nearly ideal for landlords.
``This is the first time since 1982 that such a low level of vacancy has been achieved in the suburban areas as a whole,'' Stearns said.
Suburban vacancy rates have steadily fallen. Suburban rates as high as 19 percent regionwide were common during the building boom. Some districts were even higher. As recently as 1991, Pembroke was 29-percent vacant. In October, Pembroke measured 13.6 percent, and would have been lower if Corporate Center II were filled.
What pushed down the rates? Lenders stalled new construction. New companies such as Avis car rental's operations headquarters trickled into Tidewater. Established businesses expanded. And government expanded.
The U.S. General Services Administration has leased more than 150,000 square feet of office space for federal agencies in the region since 1994, Stearns said. Most of that space involved the nearly 100,000-square-feet taken by the Coast Guard. It moved a regional headquarters into Main Street Tower in downtown Norfolk.
More federal leasing is expected. The Navy is a prime candidate. Navy units moving to Tidewater in the next few years as part of a national consolidation will require about 1 million square feet of administrative space beyond what's currently available at Norfolk Naval Base.
The base will take some of those incoming units. Perhaps many of them. Stearns said it depends on how much office space on base opens as units presently stationed in Norfolk relocate elsewhere in the nation.
Property agents expect incoming Navy units will occupy some commercial office buildings. If the 200,000-square-foot Main Street Tower is a guide, even the rental of big blocks of space won't depress lease rates.
By taking a large chunk of space, the Coast Guard lease goes for $12.50 a square foot per month, considerably lower than the $14-rate prevailing last fall in Main Street Tower (according to ODU).
By February (according to Harvey Lindsay) Main Street Tower was leasing for $15 a square foot. No one clamored for rates like the Coast Guard's. ``People look at that as a very unique deal,'' Stearns said.
With the falling rates have come firmer rents throughout the region. All landlords aren't charging more today, but most are poised to make more money. They feel less compelled to offer concessions, such as paying redecorating or relocation costs. ``We are seeing landlords who are less willing to accept those provisions,'' Stearns said. ``We have seen net rates change considerably.''
Ten years ago, firmer lease rates and the prospect of rising rates would have foreshadowed a new wave of office construction. Developers would put up buildings assuming tenants would come calling. And the new buildings would temper lease rates in established office buildings.
That's not happening today and probably won't happen on a large scale for the next few years. Developers are going forward only when they know tenants are in hand for 75 percent or so of the space that will be built.
The conservative streak hasn't halted construction. If companies can't find enough room in office buildings, they're renovating abandoned department stores or constructing new buildings for themselves.
Divaris took the latter route at Pembroke for 360 Degree Communications, formerly Sprint Cellular. Construction began this winter on Five Columbus Center, a 52,000-square-foot building of which the telecommunications company will take 20,000 square feet. Restaurants are slated for the remainder.
``We have a lot of new economic vitality here as a result of the recognition by the business community that you can't rely exclusively on the military,'' Divaris said.
Developers may be optimistic, but few will put up buildings unless tenants are immediately available.
``It's not purely from the developer's standpoint that you want to be safe,'' Divaris said. ``You have to satisfy the lenders.'' MEMO: Commercial Real Estate Issue ILLUSTRATION: Graphic by Robert D. Voros, The Virginian-Pilot
Commercial space available in business districts of area
Source: ODU Real Estate Center (Oct. '95)
Harvey Lindsay Commercial Real Estate (Feb. '96)
For complete information see microfilm.
Chart
Hampton Roads Vacancy Rates
Source: Old Dominion University Real Estate Center
For complete information see microfilm.
KEYWORDS: OFFICE SPACE COMMERCIAL REAL ESTATE by CNB