We are now half way through 2010 and many economists say that we are now experiencing the beginnings of a slow and long economic recovery—emphasis on the “slow” and “long,” especially in the commercial real estate markets.
Nationally, many challenges from 2009 persist today, including declining rents and equity challenges that are requiring owners to dig into their pockets to cover their loans.
In addition, as 2010 rolls on, we will likely see a growing number of defaults on loans. With that being said, someone stands to benefit from every cycle of the commercial real estate market, and these trends will create new opportunities for buyers and tenants even here in Hampton Roads.
Employment levels are a primary indicator of the health of office and industrial buildings markets — the lower the unemployment rate, the lower the amount of available office and industrial space.
Hampton Roads office and industrial availability has tracked with unemployment very closely over the last three years. Though the unemployment rate declined slightly late in 2009 and has continued to level off, the office and industrial markets have not.
There tends to be a lag between a declining unemployment rate and office and industrial market recovery in part because there often is a time delay of several months between announced layoffs and closures of facilities and the lease expirations or vacating of facilities affected by such decisions.
Another reason for the lag is the reluctance by companies to hire new staff until the economic recovery is stronger and more sustained.
It is possible that in Hampton Roads, the industrial market will recover sooner than the office market. International trade through the Port of Virginia is another barometer of the health of the Hampton Roads Industrial Market.
Container volume peaked during the Fourth Quarter of 2007 at the Port of Virginia, when industrial availability was 6.7 percent, close to the 3 year low of 6.5 percent attained as of the end of the Fourth Quarter 2006.
Given expectations for modest GDP growth throughout the rest of 2010, international trade should continue the quarterly increases at the Port of Virginia.
However, with nearly 11 million square feet of available industrial space in Hampton Roads, we anticipate continued rent compression during 2010 as landlords offer more rent concessions to those companies willing and able to commit to reasonable lease terms.
The office market in Hampton Roads will require significant expansion in employment in order to absorb the plethora of available space, nearly 18 percent of the total market. Office rents also will likely stay flat or slightly decrease in the second half 2010.
With a year of economic expansion, we anticipate office and industrial rents leveling off late in 2010.
The recovery in the commercial real estate market in Hampton Roads and nationally will lag behind the overall economic recovery and create opportunities for buyers and tenants.
Though there are signs that Hampton Roads is close to finding the “floor” in lease rates, we anticipate the remainder of 2010 being a tenant’s market as landlords compete more aggressively to renew tenants or convince tenants to relocate to their properties.
Blake Dozier is a commercial real estate agent in the Norfolk, Virginia office of CB Richard Ellis. He can be reached at (757) 217-1878 or by e-mail at blake (dot) dozier (at) cbre (dot) com.
