In the second quarter of 2023, the Richmond office market posted more than 670,000 square feet of leasing volume, the highest total volume in more than four years. As transactions commence in future quarters, absorption will be impacted from occupancy shifts later in the year.
Despite increased leasing activity, however, the market softened slightly as absorption has started to plateau. The second quarter represented the fourth consecutive quarter of negative net absorption as Richmond’s office market observed occupancy losses dipping to 21,489 square feet. Vacancy rates rose and settled at 12.6 percent, an 8-basis-point increase quarter-over-quarter.
Pre-pandemic, overall asking rents saw stable upward rent growth. Since 2020, rental rates have continued to increase though at a leaner rate. Class A rents have flattened over the past 12 months, while Class B rents continued to rise.
The Manchester and Scott’s Addition submarkets remain the hot spots for office development. Though there are currently no major office buildings underway at this time, most major office projects under construction in the last five years have either been build-to-suits or conversions. The only notable exception to this was The Current, a 70,000-square-foot spec office building that delivered in Manchester at the end of 2021.
With the popular concept of live-work-play, thousands of multifamily units have been developed in these two areas with popular restaurants attached. The proposed Diamond District development just outside of Scott’s Addition further helps drive interest in these areas.
Office investment sale volume completed the quarter at $6.1 million, a 52 percent decrease over the previous quarter and a 97 percent decrease over second-quarter 2022 volume. The sale of 1602 Ownby Lane was the largest sale of the quarter at $3.5 million. With interest rates maintaining heightened levels over the quarters and the prolonging uncertainty of the overall office sector, the outlook of office capital markets activity will continue to remain at decreased levels.
To wrap up 2022, Lingerfelt sold an 11-building office portfolio totaling 723,000 square feet for approximately $119 million. The firm has been selling off its office portfolio and pivoting to industrial as the company feels bullish on that asset type. Lingerfelt has recently acquired an industrial portfolio and is actively developing industrial properties in the Richmond MSA.
In conclusion, the Richmond office market has stabilized, notwithstanding further footprint reductions in the future. With the increased leasing activity seen in the second quarter, it is possible there could be shift in fundamentals in future quarters, though pending economic headwinds and sustained employer hybrid/remote work strategies could stifle progress.
— By Komail Khaja, Director of Research, Colliers. This article was originally published in the August 2023 issue of Southeast Real Estate Business.