Positive outlook for commercial real estate market

Positive outlook for commercial real estate market

Predictions for the 2015 commercial real estate market are encouraging.  A recent report from Deloitte states, “In many ways, the commercial real estate (CRE) industry is on more solid footing than it has been for quite some time. The US economy continues to progress and investors are generally seeing robust performance across most property types and markets.”

Similarly, in his quarterly commercial real estate forecast, Lawrence Yun, Chief Economist for the National Association of Realtors, described a positive outlook for coming months stating that continued job growth would help sustain demand for commercial real estate activity.

Our local market reflects the national trend.  Agents report increased activity and decreasing vacancy rates, with some areas, such as downtown, being extremely tight.  They also hinted at deals in process, in some cases involving national companies, which, if all works as they expect, will soon be moving to our area.

The Charlottesville Commercial market

“The market is most definitely improving, “ said Bill Howard with Real Estate III Commercial Properties. He added that our area is attractive to new businesses coming in from elsewhere, such as a retail building materials company he is working with currently.

“The commercial market is steadily improving fueled by continuing low interest rates,” said Benton Downer with Downer and Associates.  He explained that in addition, investors who were holding on to their cash contributing to a stagnant market, are now much more willing to put their capital into commercial projects.

Downer described commercial activity during the recent down turn as a time when a lot of business owners were in contraction mode moving to smaller spaces.  However “now we are in more of a growth mode as people relocate, open second or better locations or add space at an existing location.  “This market feels better than it has for the last five to six years,” he said.

“The market has definitely picked up,” said Ed Brownfield with Brownfield Real Estate Advisors.  On a scale of one to ten, he puts the current market at 6.5.

“The commercial market has started to come back,” said Sara Schroeder with Real Estate III Commercial Properties, who appreciates that activity is picking up and her phone is ringing again.  She described Stonefield and Seminole Square on Route 29 as two active retail centers, and she echoed the view of many others when she said that “downtown is rocking!”

Where the Action Is

In our area, a big player in the commercial market recovery is the apartment market.  Brownfield said this is due in part to demand for student housing.  “This is attracting some big players from out of town,” he continued explaining that they like the apartment vacancy rates which can be as low as 5 percent and the continued availability of relatively inexpensive money.

Yun and others predict gradual declines in office vacancy rates this year, and we are seeing this trend also in our  area.“We saw robust activity in the downtown area in 2014,” said Bob Kahn with Bob Kahn Realty and Investment.  He added that ground zero for this growth was the downtown mall and radiated out from there.

Kahn described the suburban office market as “stabilizing,” adding that “sellers and buyers are sorting out the correct pricing post haste.”

Demand for office space in a particular area reflects in part the interests and needs of company owners and employees.  For example, Kahn said, “the younger demographic wants to be downtown to enjoy the experience of being in the central business district.”  Kahn described these people as being “allergic to the suburbs,” preferring camaraderie, ready access to restaurants and walking on the mall. On the other hand, suburban locations appeal to business owners who appreciate the easy access to parking and the lack of traffic to and from work.

Mason Graham with CBRE described the current commercial market as improving; definitely better in the last twelve months than in the previous year.  She described both downtown and Pantops as areas which are experiencing very low office vacancy rates, and added that while there is more vacancy on the 29N corridor there has been some progress there as well.

Retail business is also picking up. Kahn described it as “robust with lots of activity.”

Some of the more active areas are downtown, Barracks Road, Stonefield and Hollymead, Graham explained.  However, she and others expressed concern about the impact of the proposed  Rio Road, Route 29 overpass on both retail and office space activity in that area as buyers are nervous about how the construction will affect access to their business.

What’s New

With our active market there is a lot to look forward to as far as new businesses coming to or relocating within our area.

Construction has finally begun at 5th Street Station, which features Wegmans, the upscale, family-owned grocery store based in Rochester New York. Wegmans is known for treating its employees well, for its large selection of gluten free products and for generally providing high quality food at reasonable prices. Recently it was ranked number 1 out of 100 (unseating Amazon) when it was voted the firm with the best corporate reputation in an online Harris Poll that solicited opinions from over 27,000 respondents.

In the first phase of 5th Street Station, Wegmans will be joined by other major tenants that include Field and Stream, Dick’s Sporting Goods, which will be opening a second area location there, PetSmart and Panera Bread.  Not only will this center be a great asset to the south side’s growing population, but it may also help alleviate some of the traffic congestion on Route 29.  Look for a grand opening in the fall of 2016.

Another new project is a mixed use development at 10th and Market downtown.  Originally scheduled to be completed this year it was put on hold, but, according to Graham, is ready to start up again.  Plans call for a 7 story, 60,000 square foot building with 18,000 square feet devoted to Class A office space.

If you are facing outpatient surgery and want to know just how much your procedure will cost ahead of time, you might consider the new Monticello Community Surgery Center off of 29N on Seminole Lane. Prices for the different surgeries they perform are all posted on their website.

Located in what was once an antique mall, this 17,000 square foot facility has four operating suites (with the potential for expansion to as many as 11 more)  and a procedure room.  The plan is to have the entire Seminole Lane strip devoted to medical services, Howard explained. The remaining current tenants will be moving out as their leases were not renewed.

Another company, new to our immediate area, is Perrigo Nutritionals, a Dublin based company that makes infant formulas. After five years of doing business in Gordonsville, Perrigo recently moved from there to Peter Jefferson Place in Albemarle where company officials cited room for expansion and proximity to the Charlottesville Airport as some of the reasons for the relocation.

Government contractors continue to come to the Charlottesville area thanks to NGIC/DIA.  Downer described several transactions with these kinds of tenants in the last year who need a presence in the local market when they win a two to three year contract.

Research, biotechnology and IT are increasingly important in Charlottesville’s commercial market.  A good example is Hemoshear, which in 2014 moved into the former Cardwell Building on the site of the old Martha Jefferson Hospital.  Hemoshear describes itself as the “leading developer of human relevant systems for drug development and discovery.”  In January they announced a new multi-year collaboration with Pfizer to  “develop a predictive model for preclinical drug-induced vascular injury.”

Often technology and medical startups require light industrial space, as do many other types of businesses and these are somewhat limited, Downer explained.  He is working now with a retailer of exterior housing products such as siding, roofing and windows which requires 16,000 square feet and is looking at Avon extended.  Other active areas for this type of business include River Road and some near the airport.

Where Commercial Clients Come From

In the last several years we have seen a number of national companies open a new store or regional office in our area.  Some of these include Gander Mountain, Lane Bryant and Steinmart, while Wegmans and Costco are still under construction.

National companies like our area because of the convenient location and the natural beauty which makes it appealing to employees.  “It’s a great place to live and there is a lot going on,” Howard said.

Our area is also attractive to large employers because of the strong economy, thanks to the University and the many other large employers such as the hospitals, NGIC, GE and State Farm already located and operating here.

The positive outlook for the current market reflects continued interest from national companies as well as local concerns moving and expanding.  “I’m seeing an even mix of local companies and those coming from outside,” Downer said.  He added that while there is no demand at the moment for new construction in the suburban office market, he credits new companies moving into the area with putting a dent in the existing supply.

Graham is also working with a national franchise looking to come to Charlottesville, as well as with a local company that wants to relocate.

Commercial Finance

Money for commercial projects was very tight for some time during the recent financial crisis.  Also, economic uncertainty made investors wary about moving forward with new projects or expanding existing ones.

Today much of that has changed.  Money is more readily available, and interest rates continue at an all time low, but  the financial markets are different from what they were before the recession.  “The lenders got burned and so they made a course adjustment,” Downer said.  The attitude shifted from “how quickly can you do the deal to is it a good deal for the bank?”  He explained that in the old days he did not normally get involved with his clients’ financial background.  Now he does because part of protecting his clients is knowing up front if the deal will work.  “It’s not difficult, but it is different,” he continued.

“Today there is no problem with financing,” Howard said.  “There is lots of money and it is cheap.”  Clients deal with their banks, or if they are a smaller company they may get help from the Small Business Association, he explained.

Commercial real estate is one of the bigger drivers of our local economy. More businesses mean more opportunities for people to earn the income they need to support their lifestyle, their home and their schools. In other words, good news for investors in commercial real estate is good news for all of us.

Celeste Smucker is a writer, blogger and author who lives near Charlottesville.