By Lydia Wheeler
Hampton Roads is the turtle in the race to economic recovery - slow, but steady.
At the 2013 Hampton Roads Real Estate Market Review and Forecast, held at the Ted Constant Convocation Center in Norfolk on Wednesday afternoon, commercial real estate professionals from six markets presented overviews of 2012. While the local retail and multifamily markets boomed, the industrial sector stayed stagnant and the office sector showed glimmers of redemption as a few companies signed larger-than-normal leases and others made big purchases.
The annual event, now in its 18th year, is sponsored by Old Dominion University's E.V. Williams Center for Real Estate and Economic Development. About 600 people were in attendance.
"Hampton Roads is open for business," said David Machupa, vice president of Cushman & Wakefield | Thalhimer. "Whole Foods is one of the top retail tenants sought after in the nation. The fact that they opened up in Hampton Roads on the Southside back in October of last year is a good indicator for the market."
In his market review of 2011, which he presented this time last year, Machupa said slow and steady would win the race and the numbers of 2012 proved him right. Hampton Roads had a gradual recovery. Three years ago the area's overall vacancy rate was just about 10 percent for the retail market. Vacancy rates for small shops in Hampton Roads are now down to 7.85 percent.
And as vacancy rates decreased, average asking prices for rental rates increased in Southside submarkets. On the Peninsula, the average asking price for rental rates decreased $0.22 to $15.06 per square-foot and vacancy rates increased 0.22 percent, but interest in the market was strong in the first quarter of 2013. Whole Foods announced plans to open a second location in Newport News, another positive sign of growth.
Big movers in 2012 - 7-Eleven, historically focused on new construction, bought existing gas stations and rebranded them; Target opened on the backside of Pembroke Mall in October; Onelife Fitness purchased the Bally Total Fitness facilities on Virginia Beach Boulevard and in Greenbrier; and Cook-Out opened four locations in the market.
Hilltop had a strong performance in 2012 with vacancies decreasing from 8.85 percent in 2011 to 3.27 percent in 2012 and rents increasing from $20.83 to $21.14 per square foot, the highest of all Southside markets.
Though there was no mass exodus of retailers in 2012 like in years past, Machupa said e-commerce is taking its toll on Best Buy, Barnes & Noble and Blockbuster.
The bright side, he said, was grocery activity. There are four grocery stores under construction now, a Walmart Neighborhood Market in Virginia Beach and in Williamsburg; and a Kroger on Holland Road in Virginia Beach along with two other locations in Portsmouth.
The big question is, what will happen to Farm Fresh and Harris Teeter? SuperValu Inc., the parent company of Farm Fresh, has already sold some of its other concepts, and on Wednesday, Harris Teeter Supermarkets Inc. confirmed its retention of J.P. Morgan Securities LLC to assist in sale discussions. The company has been approached by two interested buyers.
The star pupil of CREED's market review last year, multifamily, had another good report card at the 2013 event.
There were 2,004 apartments under construction in the fourth quarter of 2012 throughout Norfolk, Virginia Beach and Newport News. Construction of an additional 3,501 units is expected to start in 2013.
"The demographics of our country are driving the multifamily world," said Dwight Dunton III, founder and president of Bonaventure Realty Group LLC. "There are 80 million folks between the ages of 16 and 29."
Known as the millennials, they are renting instead of buying and doing so for longer periods of time.
Unlike prior generations, Dunton said 80 percent of people under 25 are renters and a third of them are willing to pay more in rent to be able to walk to shops, work and entertainment, even for less square footage.
There is a new American Dream.
Student loan debt has ballooned since 1999 by 511 percent to $950 billion, and $85 billion is delinquent, Dunton said.
"While the affordability of houses on a payment basis has never been greater," he said, "the ability to put together the down payment has never been harder."
J. Van Rose Jr., president of Rose & Womble Realty, New Homes Division, called Dunton "Mr. Doomsday."
"Houses are becoming increasingly affordable," he said. "Seventy percent of Hampton Roads households can afford a house."
Inventory, which used to be Hampton Roads' biggest problem, decreased 12 percent. Existing home closings were up by almost 8 percent and new home closings were up by 16 percent, he said.
New home sale prices dipped as less expensive homes were built.
"In a market of 1.7 million people, only having 9,000 houses for sale is about right," he said. "It's about the right balance of what we should have."
Industrial and office
The good news of 2012 trickled down to office space, but failed to reach the industrial market.
Vacancy rates have been balanced the last three years, hovering between 12 and 12.5 percent, said William Throne, first vice president of Cushman & Wakefield | Thalhimer.
Of the total 107 million square feet of industrial space in Hampton Roads, Throne said 95 million square feet is occupied. The slight reduction of inventory from 2011, however, does not reflect an increase in demand.
Occupancy rates of commercial office space were on par with 2010 and losses that occurred during the Great Recession were recouped.
"The average rate for Class A space was $21.26 which is $0.11 per square foot less than Class A average in 2010," said Deborah Stearns, senior vice president of Jones Lang LaSalle. "The average rate for Class B property was $15.95, which is also 11 cents per square foot less than the average rate in 2010. So, we're back to the future and we're in better shape than many markets."
Amerigroup, recently acquired by WellPoint, signed the largest lease in 2012, occupying 315,000 square feet in the former USAA operations center in Norfolk. The second largest lease was signed by AMSEC, which took 65,000 square feet on Cleveland Street in Virginia Beach.
Large sale transactions of 2012 included Sentara's purchase of Fort Norfolk Plaza, a 200,000-square-foot office building, for $29 million. The 100,000-square-foot Patrick Henry Corporate Center in Newport News, which Stearns said is the most frequently sold building on the market, traded for the sixth time since 1993 in 2012 for $14.1 million.
In 2013, sequestration, defense and other federal spending cuts, likely will stifle external and internal investments, Stearns said.
"Defense contractors are a pretty cold segment of the market right now and they are actively requesting termination options, shorter lease terms, consolidation and frequent downsizing," she said.
Real estate investment
National sales volume was about $182 billion for all sectors, which was up 19 percent from the previous year, but Tony Beck, vice president of Southern Virginia First Potomac Realty Trust, said we're nowhere near the volume that occurred in 2006 and 2007.
"The major players were large equity funds, institutional investors whose focus truly is on the fundamentals of real estate," he said
They were buying Class A property in the primary markets - New York, Boston, L.A., Chicago, San Francisco, New Jersey, Atlanta and Houston, for the industrial side.
Leading the national market was multifamily, which was the frontrunner in both activity and pricing.
"Actually pricing in 2012 exceeded pricing of 2006 and 2007," Beck said.
Willing and active buyers drove the growth.
"I know people hate to hear this," he said, "but the market is truly flush with cash."nib