Office space outlook improves for Richmond area

2011 is shaping up as the year of big deals for leasing and buying office space in the Richmond area.

The amount of office space for lease was reduced by 1 million square feet.

"I don't think any of us could have dreamed that we could have absorbed as much space as we did," said Trib Sutton, a senior vice president at CB Richard Ellis.

A year or so ago, the Richmond area was waffling with nearly 1.5 million square feet of empty office space.

The big space takers are large employers Capital One Financial Corp., Mondial Assistance USA and Snagajob. However, an abundance of small to midsize space still is available for lease.

Big blocks of space became available when title insurer LandAmerica Financial Group Inc. and consumer-electronics retailer Circuit City Stores Inc. went belly up in 2009. A year earlier, Wachovia Securities, another large local employer and office user, left town for St. Louis.

The space is filling up faster than many brokers had predicted.

Capital One leased 135,000 square feet in Liberty Plaza II in the Innsbrook Corporate Center in western Henrico County. In late 2010, the financial-services company bought Innsbrook Center I and Innsbrook Center II on Wheat First Drive, formerly occupied by Wachovia Securities.

It recently signed a lease for 14,000 square feet in the new Williams Mullen Center in downtown Richmond to open its first commercial-banking division in the area.

"Capital One has the potential to have a profound impact on the community," said Charlie Polk, a broker with the Richmond office of Jones Lang LaSalle.

Travel insurer Mondial Assistance leased four of five floors, or 238,000 square feet, in Deep Run I, the former headquarters of Circuit City. Local developer Pruitt & Associates bought Deep Run 1 in a liquidation sale in 2010.

DRV LLC, a Richmond-based real estate investment firm, expects to close this month on Deep Run III, a 382,000-square-foot vacant building that was part of the Circuit City complex off Mayland Drive in western Henrico.

W. Spilman Short Jr., a principal with DRV, said the plan is to renovate and lease the six-story building. Dayton Thompson & Associates in Richmond is doing the design.

Short said he is talking with prospective large, local office users and plans to target marketing efforts outside the Richmond area.

Other big users include General Electric Co., which is taking space for a cybersecurity center in the now nearly full former LandAmerica complex. SunTrust Banks Inc. leased 90,000 square feet in the building early this year.

Online job-search company and software developer Snagajob is doubling its size with a move to a nearby 67,000-square-foot building in the Innsbrook Corporate Center.

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"The big story over the past 12 months is tenants are consolidating or upgrading," said Mac Wilson, associate broker at Cushman & Wakefield/Thalhimer.

"It felt like a lot of shuffling, a game of leap frog," Wilson said. "Big blocks of vacancies created opportunities for big companies that finally pounced on those deals.

"We don't see as many big fish in the pipeline, although a few are sniffing around," Wilson said, declining to be more specific.

While most big blocks of office space are taken, no shortage exists for companies looking for 1,000 to 5,000 square feet.

About 685 office suites in that size range are available for lease in metro Richmond, Sutton said. In a good market, there would be 150, maybe 200, he said.

Lease rates are favorable, but rates alone aren't enough to prompt much movement, brokers say.

"It (the abundance of space) shows the malaise in the economy," Sutton said. "There is not a lot of confidence in the mom 'n pops, bread-and-butter local tenants to expand or move."

Still, overall it's been a decent year, he said.

The vacancy rate in Innsbrook, once the highest in the area, dropped in one year to 16.4 percent in the third quarter from 22.1 percent in the year-earlier period, according to a Cushman & Wakefield/Thalhimer report.

"It's not a landlords' market, but it's becoming less of a tenants' market," Wilson said.

Despite Innsbrook's improvement, the Southwest quadrant — an area generally south of the James River and west of Interstate 95, with about 4.3 million square feet of office space — remains the most stagnant, with vacancy rates there stuck at 15.5 percent, according to a CB Richard Ellis report.

Office vacancy rates in the Richmond area are expected to continue to drop this year, though not as fast as they did in the first half of 2011.

"While this has been a good year for commercial real estate in the Richmond area and central Virginia, what is the future?" said Polk of Jones Lang LaSalle.

"I think Richmond and central Virginia will flourish compared to other markets," Polk said. "If you look at (hard-hit) Buffalo, Cleveland, Detroit and Richmond, who are you going to bet on?"

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The national office vacancy rate was 17.4 percent in the third quarter, according to Wells Fargo Securities, which tracks multitenant blocks of 15,000 square feet or more.

By comparison, the overall vacancy rate in the Richmond area was 10.7 percent in the third quarter, down from 11.4 percent in the same period a year ago, according to Thalhimer, which tracks all office space.

Class A space, or the newest and best space, in downtown Richmond proved to be recession-proof, according to a Thalhimer report. The vacancy rate for that space began the recession at 6.9 percent and is now 7.5 percent.

The figure for Class B, or older, office space downtown rose from 16.8 percent in December 2007, the beginning of the recession, to 23.9 percent at the end of 2011's third quarter, Thalhimer reports.

"BB&T moved from several Class B spaces and consolidated into a Class A location," said Evan Magrill, executive vice president at Cushman & Wakefield/Thalhimer.

Cigna, a health-services company, and tobacco-products maker Swedish Match relocated from the suburbs to downtown, Magrill said. "New-to-Richmond companies opened offices in the wake of the Wachovia Securities transition, including Janney Montgomery Scott and Cortview Capital. Other downtown companies such as The Martin Agency expanded."

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For the commercial real estate market to return to normal, more jobs are needed to fill more office space, brokers say. But that could be a stretch.

Economists expect job growth to remain sluggish, although the Richmond-area unemployment rate of 7.4 percent in August and the statewide rate of 6.5 percent remain below the national rate of 9.1 percent.

Still, it may take more than jobs for the office segment to fully recover.

Work is changing, and as people become more mobile — working from home or the local coffee shop — they spend less time at their desks.

"Before the recession, everybody was leasing space or building space," said Richmond native Janet Pogue, a principal of Gensler, a Washington-based architecture and consulting firm.

"Work was evolving before the recession, but it really became more apparent during the recession," she said. "We are not tethered to desks. We all have mobile devices."

Companies are rethinking the way they use office space. Some are creating more meeting spaces for collaborative work, for example, and fewer work pods.

"They are aligning their real estate, one of their top three expenses, to their work activities," Pogue said. In many cases, "they don't need all that space."