Local office vacancy rate is high and going higher

The commercial real estate market in the Richmond area continues to reel from the recession, with the office vacancy rate expected to climb to 21.4 percent in the next six months.

It's now at 16.5 percent, far from a healthy 10 percent level, said William E. Bradley, a research analyst at CB Richard Ellis, a commercial real estate firm in Richmond.

Yet, for all the bad news, real estate experts say the worst is likely over.

Meanwhile, the area in and around the Innsbrook Corporate Center in western Henrico County is expected to suffer the worst, with vacancies rising as high as 36 percent in the next six months. It now stands at 22.8 percent.

Vacancy rates in all but one of 11 areas in the Richmond region are projected to rise.

The area along Staples Mill Road from West Broad Street north to Parham Road likely will remain at 25.1 percent -- already the region's highest vacancy rate.

The next highest vacancy rate is the Innsbrook area, followed by the area near the Boulders office park in Chesterfield County at 20.3 percent, CB Richard Ellis reports.

The areas with the lowest rates are Stony Point in South Richmond at 5.3 percent, the Ashland area at 7.1 percent, and the section of Parham Road from Interstate 64 to I-95 at 8 percent.

Evan Magrill, a senior vice president at Thalhimer/Cushman & Wakefield brokerage in Richmond, said he has never seen this much empty office space in the Richmond region in his 16 years in the commercial real estate market.

"There is still lease activity. The market is not at a complete standstill," Magrill said.

But it's definitely a tenant's market. "The tenants have the upper hand and are negotiating attractive terms," he said.

The law office Sands Anderson Marks & Miller, for example, is upgrading at about the same cost to newer offices, moving three blocks next year to the top two floors of the Bank of America building at 1111 E. Main St., Magrill said.

"That's a trend we are likely to see as people move into nicer space and keep their costs about the same," he said.

"Landlords who do not concede at least several months of free rent on a five-year deal are likely to lose tenants," according to a recent Thalhimer report.

At Riverfront Plaza in downtown Richmond, lease rates have fallen from $20 a square foot to $15 a square foot because an abundance of sublease space has hit the market, Thalhimer reported.

Landlords can be described as "anxious," according to Jones Lang LaSalle, a Chicago-based real estate brokerage that recently opened a local office.

Landlords are offering concessions such as fixing up space for tenants and paying moving expenses in addition to free rent and lower rental rates.

"With vacancy [rates] climbing, existing tenants becoming more unstable and capital virtually frozen, landlords are salivating at the opportunity to lure a quality tenant to their assets," the Jones Lang report says.

The vacancy rate in the Innsbrook area will be pushed up in the next couple of months by leases coming due on buildings once occupied by the now-defunct LandAmerica Financial Group Inc. and a move next year by MeadWestvaco, a packaging company, to its new downtown headquarters.

That area's high vacancy rate has been driven by big blocks of space left by the bankruptcies of major employers, notably LandAmerica, a real estate services provider, and consumer electronics retailer Circuit City Stores Inc., Bradley said.

The three LandAmerica buildings could be retrofitted for multiple tenants, he said. "But the average tenant wouldn't even look at the Circuit City buildings."

The largest of two empty office buildings on the former Circuit City campus is six stories with each floor measuring 63,000 square feet -- or 1.4 acres, bigger than most home lots.

"The big question is whether there will be any more catastrophic events, such as the bankruptcy of Circuit City, to hit the market. We think the answer is 'no,'" the Jones Lang report states.

The lifeblood of the commercial real estate industry is an employed work force. As companies shed workers, they need less office space. The unemployment rate in the Richmond area was 7.7 percent in August, up from 4.6 percent a year ago.

Jane duFrane, leasing director for Highwoods Properties, said the market has been tough. "We think 2010 will be just as soft."

Highwoods owns 34 buildings in the Richmond area. Ten of its 24 buildings in Innsbrook area have space available for lease.

Small companies are looking for space, typically a sign that a recession is ending, duFrane said.

"Luckily for Richmond, there are not a bunch of cranes in the air," she said.

In other words, no one is constructing buildings on speculation, so when demand picks up, in theory prospective tenants would take available space.

Contact Carol Hazard at (804) 775-8023 or .