Tourist and military hub growing steadily.

The Hampton Roads metropolitan area of southeastern Virginia, named for both the Norfolk-Virginia Beach metro area it encompasses and the body of water that surrounds it, is unlike most other U.S. markets. Its huge military presence, which includes the Air Force, Army, Coast Guard, Marines and the largest Naval base in the world, helps keep this market on an even keel, as do the estimated 6 million people who visit its tourism haven, Virginia Beach, each year.

Consequently, this growing market has not been hit nearly as hard by the retail downturn as others. The seven cities that chiefly comprise the Hampton Roads trade area—Virginia Beach, Norfolk, Hampton, Chesapeake, Newport News, Portsmouth and Suffolk—are expected to show a combined population well in excess of 2 million when the 2010 census is tallied, up from 1.6 million at last count.
There has been some softening in retail demand. Like elsewhere, landlords have had to re-adjust expectations. Those willing to be aggressive and creative are getting deals done, though certainly not at the same numbers as just 3 years ago. While small businesses seem more willing to look at new opportunities, one overriding issue continues to be tenants’ inability to obtain financing. Some franchisees and other merchants who already own multiple successful stores still aren’t able to qualify for new ventures.

A number of heavily capitalized national tenants have identified Hampton Roads as their crossroads of opportunity and are actively opening new stores in the area. CVS/pharmacy has finally entered the market with multiple stores and will duke it out with Walgreens and Rite Aid for market share. hhgregg made its market debut in March with stores in Virginia Beach (it took over a Linens ‘n Things box) and Newport News. The retailer is also building its third regional store in Chesapeake. Trader Joe’s is expanding again after its initial market entry in late 2008; it recently opened a shop in the upscale Hilltop section of Virginia Beach, following openings in Williamsburg and Newport News. U.S. Coast Guard Retail Exchange has signed a 15-year lease on the 42,697-square-foot former Circuit City building in the Crossways Shopping Center in Chesapeake.

At the end of 2009, the Hampton Roads market had a retail vacancy rate of only 9.9 percent, according to the E.V. Williams Center for Real Estate and Economic Development at Old Dominion University. Rents per square foot in older, mature shopping centers range from $12 per square foot to $15 per square foot; these bump up to the lower $20s per square foot to the mid-$20s per square foot for new construction. Since the key to a center’s survival in the eyes of lenders these days is full tenant spaces, low vacancy rates make this market a standout among others still struggling to keep tenants.

There’s very little new retail product coming out of the ground. Developers, like retailers, are having a tough time getting financing even for top-tier projects. One large exception is the Peninsula Town Center in Hampton. Taking over the site of the former Coliseum Mall, this 850,000-square-foot mixed-use development anchored by Macy’s, JC Penney, Target and Barnes & Noble had its grand opening in March. Another exception is the 23-story Wells Fargo Center in downtown Norfolk. When finished, the project will add 50,000 square feet of retail to the downtown area, along with 255,000 square feet of office and 121 luxury apartments. The first phase opened in June.

Like other markets, we’ve seen the closures of national retailers Circuit City and Linens ‘n Things. We’ve also seen more isolated closures. Through a move to consolidate, Dillard’s recently shuttered its Chesapeake Square store, but has no plans to close any of its four other Hampton Roads stores. Similarly, Old Navy closed in Williamsburg, but the balance of its area locations are expected to remain open. Value City department stores liquidated in Newport News and Virginia Beach following the national chain’s Chapter 11 bankruptcy filing. Restaurant Depot took one of the spaces, purchasing the 90,000-square-foot former Value City building in Virginia Beach with intent to open in the third quarter of this year.

Harris Teeter supermarkets is shoring up its market position and has added three new Hampton Roads locations in the past year with plans for additional expansion, including a location in the Churchland section of Portsmouth in 2012. Petco, which already has four stores in the market, is slowly expanding. Firestone has laid track to store openings in Virginia Beach and Chesapeake. Last year, Fresh Market took over an old CompUSA building in the Jefferson Plaza shopping center in Newport News. Chesapeake-based Dollar Tree is growing quickly, both nationally and locally. After purchasing the “Deals” chain in 2006, Dollar Tree plans to open its first Dollar Tree Deals store in Hampton Roads by the end of 2010. The chain is also expanding two other concepts locally, including Dollar Tree Market, which is roughly twice the size of the typical Dollar Tree and carries fresh produce, meats and other groceries. The first of these debuted this spring in Chesapeake. The company’s second new concept, $1 Stop, opened last fall in Chesapeake and will expand to multiple locations. The small-format dollar store is sized to take advantage of more limited spaces in high-traffic areas.

Meanwhile, several upscale mixed-use projects in Virginia Beach are generating attention, including Virginia Beach Town Center in the city’s central business district. During the last few years, it has attracted such restaurant tenants as Ruth’s Chris Steakhouse, Cheesecake Factory and PF Chang’s. Surrounding blocks are primed for growth in several directions. For example, developer Michael Sifen has begun redevelopment of an existing retail complex, offering new retail shops anchored by Office Max. Plans also include 50,000 square feet of office space. Ongoing roadwork near the Virginia Beach oceanfront is slowly paving the way for the Laskin Road Gateway project, part of the local Resort Area Strategic Action Plan; it's expected to help transform the area surrounding 31st Street near the water into a pedestrian-friendly mix of shops, restaurants, hotels and residences.

Because of the market dynamics, this strong tourist and military hub has held steady during the downturn and is recovering far faster than many other markets. Recent expansion and leasing activity, plus a host of high profile, long-term mixed-use redevelopment projects on the drawing boards, bode well for both the near-term and long-term health of the region.

— Mike Gurley and John Wessling are X Team International partners. Mike is senior vice president and John is in commercial brokerage and development at S.L. Nusbaum Realty Co. in Norfolk.

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