Richmond’s Office Market Grows in Prominence as Corporate-Friendly Destination
Richmond is thriving and the office market is following suit. The office market, like the broader Richmond region, benefits from Richmond’s diverse economy, high-quality of life at a reasonable cost of living and the steadily growing, highly educated workforce. These attributes make Richmond an attractive option for large employers evaluating cities for operations.
Recent entrants to Richmond include CoStar Group, ICMA-RC and Owens & Minor. The CEO of CoStar pointed to Richmond’s educated workforce, affordability and excellent quality of life as the reasons Richmond recently beat out several other Southeast U.S. cities as the new home for the company’s global research headquarters.
Growth from within Richmond is also driving the market with new developments of over $1 billion in the pipeline or currently under construction from two of Richmond’s largest employers: Virginia Commonwealth University Health System and Dominion Energy. Their developments in downtown Richmond are accompanied by a wide array of creative office developments in the formerly industrial Scott’s Addition micro-market located near the convergence of Interstates 64 and 95.
The city of Richmond continues to be the recipient of most new office development with suburban development being limited and mainly healthcare centric, led by Bon Secours Health System and VCU Health System.
Office market vacancies continue to decline throughout the market with CBD vacancy rates largely declining as a result of new users to the market and a decline in inventory as Class B and C buildings are converted for alternative uses. Suburban office vacancy rates are below the market equilibrium in most submarkets, providing for a landlord-favorable environment with growing rents and minimal concessions.
The Glenside/I-64 and Innsbrook submarkets continue to be the most dynamic suburban office submarkets with average asking Class A rental rates near or above $21.00 per square foot. With new construction rents requiring a large premium to current Class A rents, there remains significant runway for rents to grow before potential new supply would relieve the upward pressure on rents.
The office investment sales market in Richmond has been steady in recent years as well. Investors like Richmond’s strong underlying economy, the office market fundamentals and the prospect of continued room to run. Asset pricing has risen with increased investor demand and growing rents, but cap rates in Richmond continue to remain higher than other Southeast cities.
With higher yields, Richmond has seen an influx of new capital that has been priced out of markets like Nashville, Charlotte and Raleigh, and it is expected to continue. Continued strength in the Richmond market and greater economy point to sustained investor demand for Richmond.
The Richmond office market is on a positive trajectory with strong user demand and increasing investor focus, all supported by a diversified and growing economy and an affordable quality of life. The ingredients are right for Richmond to become a leading Southeastern city like Raleigh and Nashville. Richmonders certainly feel that way.
— By Will Bradley, Senior Vice President of Investment Properties, CBRE|Richmond. This article originally appeared in the August 2018 issue of Southeast Real Estate Business.