Nearly 1 million square feet of class A office space in the Innsbrook area could be vacated as locally-based corporations downsize, driving down rental rates in the area but potentially making the Richmond area more attractive to corporations considering moving here.
Almost every office building at Innsbrook has a “for lease” sign, and the situation is going to get worse before it gets better. After declaring Chapter 11 bankruptcy Nov. 10, Circuit City will probably consolidate from two buildings to one on Mayland Drive, giving back 250,000 square feet.
At Innsbrook proper, title-insurer LandAmerica may eventually give back up to 300,000 square feet. The company laid off 120 of 800 workers this month, and a possible sale of the company to a Jacksonville insurance company fell through last week. Analysts say the company might have to file for bankruptcy.
Meanwhile, paper manufacturer MeadWestvaco will be moving sometime next year to new headquarters downtown and letting go of 200,000 square feet in the 11000 block of West Broad Street.
The vacancy rate for space at Innsbrook, considered some of the best office real estate in the area, will likely almost double from the 12.6 percent posted at the end of the third quarter, according to Thalhimer’s quarterly reports.
John Gentry, a broker with Grubb & Ellis | Harrison & Bates, said the West Broad Street corridor could see at least 500,000 square feet available over the next year.
In the third quarter, the West End area saw a negative absorption of 113,000 square feet of space, Gentry said. Absorption has been about 150,000 square feet per quarter for the past decade, Gentry said.
Most economists are predicting that a recovery will not begin until the second half of next year, which means the fourth quarter of 2008 and the first few of 2009 could be even worse for the commercial real estate market.
“You are safe to say the vacancy factor, which includes lease and sublease space, is going to go over 20 percent,” Gentry said, “which is probably the high-water mark, at least that I can remember in my 21 years [in the industry].”
Gentry estimated that the vacancy rate is 18 percent for the Innsbrook area. The market might take 36 months to return to a more reasonable vacancy rate, about 10 percent, he said.
Any additional office space will hit the market at a time where there are already large blocks of space for sublease, according to brokers, and that will likely drive down rental rates. Wachovia already has 200,000 square feet for sublease at Innsbrook before the other local companies began making staffing cuts.
And Altria, the parent company of Philip Morris USA and a major local employer, will be downsizing next year. The company has offered buyout packages to 30 percent to 50 percent of its office workers, according to sources who have received buyout offers. Many are middle managers. The tobacco company leases 200,000 square feet at West Mark One near Innsbrook. Several brokers said they have not heard anything about the company giving up space, but, with fewer employees, the company might not need as much office space.
The rising vacancy rate will hit landlords and developers, but it might make class A space more attractive to businesses.
“When you have an environment in this 18 to 20 percent [vacancy] range, the tenants obviously have a lot of selection and can very much dictate the pricing and concessions,” Gentry said. Companies looking for space will have more leeway for lower rent and build-out allowances, Gentry said, meaning they can pass along the construction costs of outfitting the space to the landlord. The average rental rate for class A space for Richmond has been rising for the past several years, most recently at $19.32 per square foot/year in this year’s third quarter, according to Thalhimer’s report.
In the past, lower rents have made Richmond more attractive to outside companies. Altria relocated several hundred positions from New York this year. Gentry said he knows of at least one big tenant that might be looking for up to 100,000 square feet at Innsbrook, but he did not want to say which company that might be.
Mark Douglas, a broker with Thalhimer, said there is a silver lining: “We may now probably be on the radar for some out-of-town companies potentially looking to relocate.”
“The small block space could still be very competitive, 5,000 to 10,000 square feet,” Douglas said. “I’m not going to break up 88,000 square feet at Innsbrook for a small tenant.”