The Richmond, Virginia, office market is gradually recovering from the effects of the recession and an unusual flurry of large-block office vacancy following several major corporate bankruptcies and relocations during 2008 and 2009. In 2011, overall vacancy declined slightly from 10.9 percent to 10.6 percent, year-over-year. Average asking rents increased slightly; however, tenants remain aggressive in seeking favorable terms.
Due to a continued abundance of available Class A office space, office development remains at a standstill, with the exception of pre-leased medical office buildings.
The metro Richmond office market saw a significant increase in leasing activity in 2011 with 2.5 million square feet leased compared to 1.83 million in 2010. Overall positive space absorption of 495,631 square feet was just under the 2010 total of 543,287 square feet, reverting back to close to normal absorption following the negative 1.3 million square feet of absorption reported in 2009.
The market leader during 2011 was suburban Innsbrook, or the northwest quadrant submarket, with more than 1 million square feet of leasing activity. The largest submarket in the region, it suffered major losses in occupancy when the bankruptcies of Circuit City stores and LandAmerica, as well as the relocations of Wells Fargo Securities and Meadwestvaco, emptied approximately 1.5 million square feet of prime office space.
Tenants Mondial, Capital One, Sun Trust and Snagajob were the primary contributors to the office space absorption, accounting for approximately half of the submarket’s activity. Leasing opportunities for tenants seeking more than 100,000 square feet, abundant during the last 3 years, are now limited to Deep Run III and WestMark Two, both in the Innsbrook submarket.
2011 also saw a significant increase in the purchase of existing office buildings, led by a $97 million, 919,000-square-foot, 14-building suburban portfolio sale to local developer/investor Lingerfelt Development and the purchase of the 263,000-square-foot downtown Riverside on the James office building by American Real Estate Partners Management for $63.8 million.
Other significant transactions included the 383,000-square-foot, $12.4 million sale of one of the former Circuit City headquarters buildings to DVR LLC & Markel/Eagle Partners and the purchase of the 286,000-square-foot 1400 Best Plaza Dr. by the County of Henrico for $6.2 million.
On the development side, two medical office buildings, the 70,000-square-foot Ortho Virginia Building and the 45,000-square-foot Bon Secours MOB I at Watkins Center, were completed during 2011 by Lingerfelt Development and Dasco Development, respectively. New construction continues on a 66,000-square-foot medical office building by Reynolds Development at the Reynolds Crossing project and the 55,000-square-foot Bon Secours MOB II, also at Watkins Center.
Richmond enjoys the presence of well-positioned developers, including Lingerfelt Development, Liberty Property Trust, Brandywine Realty Trust and Highwoods Properties, all of which are ready to respond to tenant demand for new development. In 2012, expect most new development activity to occur in the suburban northwest quadrant and look for the possibility of a major new office building in the CBD.
The outlook for the Richmond office market is cautiously optimistic as business confidence recovers and unemployment numbers improve. The unemployment rate for the Richmond area, currently at 6.5 percent, remains significantly below the national average. A continuation of this trend coupled with little or no speculative construction should lead to continued positive absorption and steady leasing activity throughout 2012.
— Jeffrey Cook, SIOR, is the senior vice president and Brian Berkey is a member of Cushman & Wakefield/Thalhimer’s Richmond office.