Norfolk is a Navy town with a heavily blue-collar economic base. Thus a major office market with trophy Class A properties and a major corporate tenant base has not been developed. By Reis’ count, total existing inventory per the date of this report was only 17.6 million square feet. Not surprisingly, moreover, demand for office space has a large defense-related component. Also significant in the tenant base, however, is health care. “Activity continues to increase specifically in defense and medical related industries, and Class A and B properties,” states Cushman & Wakefield/Thalhimer in its second quarter report on the Hampton Roads market. A case in point, this observer reports, is a 315,000-square-foot lease in the Class A USAA building in Norfolk on the part of health insurance provider Amerigroup Corporation. The firm expects to fill its new space with as many as 1,000 employees in two to three years. In addition, as the market gradually strengthens leasing dynamics are changing. “During the height of the recession,” states this source, “most tenants did not want to commit for more than one or two years. Three to five year terms are once again becoming more common.” The likely subtext here is a desire on the part of users to lock in current rates for a longer period in anticipation of future increases.
According to Reis’ research, recovery moves forward slowly. Negative net absorption totals in three of the previous four years were followed by 23,000 square feet on the positive side in the first half of 2012 alongside no new supply. Indeed, no competitive general purpose, multi-tenant office projects have been delivered to the Hampton Roads office market since the second quarter of 2010. July, also with no new supply, followed with net absorption at 16,000 square feet. An additional modest total is projected all told for the remainder of the year. Vacancy closed the second quarter at 15.1%, down 10 basis points for the period and year-over-year in what has been a generally flat performance for more than two years. July shaved 10 additional points from the rate. Rent growth has been uneven but generally weak through the recent period. At $19.00 psf and $15.59 psf, second quarter asking and effective averages were up 0.1% (a penny) and unchanged from the quarter before and were up 0.3% and 0.2% since year-end following losses of 0.2% all told in 2011. No changes followed in July. Reis reports only one competitive project under construction metrowide as of mid-September. The 74,000-square-foot Sidney Kellam Building, “the only Class A office space at the Virginia Beach Oceanfront,” according to the 31Ocean website (see the Retail Space section below), was underway per report date in Virginia Beach. Inside Business expects completion in January 2013.
“As long as new jobs continue to be on the horizon,” states Cushman & Wakefield/Thalhimer, new office leases can be expected. Reis anticipates modest positive net absorption over the remainder of the year along with a modest decline in the vacancy rate to 14.8% and rent growth at about 1.0%. Development will proceed slowly.