Office space getting cheaper

mainstreetinsideRichmond office vacancies continue to rise, which means prices are likely to fall.

The vacancy rate in the central business district rose about 3.5% from the last quarter for a total rate of 13.5%, according to Thalhimer’s recently released third quarter reports.

The office vacancy rate for the whole metro area was 8.9% in the third quarter, up 1% from last quarter.

Blame all the subleases, or about a million square feet and rising, according to Grubb & Ellis’ third quarter report. As bottom lines continue to suffer, more and more tenants are looking for ways to turn unused cubicles into a little extra cash.

The good news for some tenants is that the surplus of available space is dropping prices; average rental rates for Class A space are down 5 % in the third quarter from the same time last year dropping from $20.68 per square foot to $19.54. In addition, landlords are making more concessions including a month of free rent or providing shorter term leases.

“I think landlords who can be aggressive with concessions and go after tenants are going to be more successful in the next 12-18 months,” said Andy Little, a principal at real estate investment firm John B. Levy & Company.

Other brokers have said that landlords will get increasingly antsy to lease space, which means rents could fall even more.

While Little says most tenants will try to stay put in the short term, some Richmond tenants will be forced to find new offices as their leases expire. That’s because the Commonwealth of Virginia recently bought Main Street Centre (600 E. Main St.) from Brandywine Realty Trust for $48.8 million. The state plans to fully occupy the building as existing leases expire.

The state also purchased One Capital Square at 830 E. Main St. to house offices for VCU Health Systems, whose employees occupy various leased spaces throughout the city. Current tenants of One Capital Square will also have to look for new space.

Most of the firms displaced by the state are expected to move a few blocks over to Cary and Canal streets where a large amount of space is available.

Office vacancies will probably continue to rise over the next few years. The law firm of Williams Mullen has plans to move into a $60 million tower to be built by Armada Hoffler by the end of next spring. That move would open a lot of space in Williams Mullen’s current location at the James Center.

Also, it is unclear this point how much Wells Fargo will downsize Wachovia offices in the city, but their plans could have a substantial impact on the office market if they cut Richmond-based jobs.

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