Monday, September 21, 2009
Understanding the valley's commercial real estate market
“Unlike stocks or bonds, real estate is not a national or international commodity, it is a local commodity.”
Understanding that statement is necessary if one is going to understand the commercial real estate business in the Roanoke Valley, as opposed to the market in Northern Virginia, Greensboro or Charlotte. Commercial real estate is impacted by broader national and regional events such as the availability of capital and the economic health of national firms but is also impacted by many local factors, including the supply of downtown office space, the local unemployment rate and the local cost of development. That is how it is possible to have an approximately 6 percent vacancy rate in downtown Roanoke Class A office space, at the same time Washington DC is experiencing a vacancy rate of over 12 percent in the core area.
Specifically, over the past decade, the Roanoke Valley has not produced the kind of growth in commercial space that would create the glut of vacant buildings seen in other, more urban and faster growing markets. At times, this means that our economy seems sluggish, compared to fast paced markets like Charlotte. According to Stuart Meredith, Hall Associates’ executive vice president of Brokerage, this market was overbuilt in the late 1980’s and early 1990’s and, as a result, suffered more when the economy struggled. This time, despite the national economy, Roanoke office market has continued to have activity and vacancies have not increased significantly, if at all.
The recession’s impact on commercial leasing in the Roanoke Valley has been to slow down the process. Calls by prospects for new space were slowest in the first quarter of 2009 but now have begun to pick up again. Our phones have begun to get busier and more prospects, both local and regional, have begun to look at space.
Yet there appears to be an uncertainty about the current market rates for lease space. Based on the national media, tenants expect rents to be reduced by at least 20 percent. However, in the Roanoke Valley, rents have dropped little, if at all. Again, without a lot of excess space, demand is still very balanced with supply.
The recession has not been as kind to the industrial market, particularly the larger properties. Typically, users of large industrial buildings are either national corporations or local corporations that produce goods for a national market. The recession has, both locally and nationally, reduced demand for these buildings. However, this has not led to the large number of “fire sales,” with only one of the more than thirty industrial properties on the market being marketed as “Price Reduced.” In many cases, Roanoke Valley properties are locally owned by investors who are more prepared to weather the current economic climate than highly leveraged regional and national development firms.
Many claim that the recession was based on the availability of easy credit and the housing bubble it created. To some extent, that occurred in the national commercial market also. Commercial Mortgage Back Securities had a significant role in the rapid development of many urban markets and, when rental rates in these markets dropped and vacancies increased, theses securities lost much of their value. This did not occur in Roanoke or probably any market our size. Lenders have been much more conservative, commercial appraisers have not supported values based on rapid increases in rents and buyers are traditionally much less adventurous. The local industrial market has never become greatly overheated or overleveraged. Without a growth in industrial demand nationally, it will take some time to become robust again but it will.
The retail property market is a mix of local and regional/national tenants and property owners. In many cases, retail is a national market, influenced by local factors such as household incomes and unemployment rate. For a big box retailer like Circuit City, the recession was felt throughout the company and, despite good local sales, Roanoke lost its store when the company folded earlier this year. There have been fewer store openings and more vacancies in shopping centers. This is likely to continue until retail sales (an employment and consumer confidence) begin to grow. The “experts” say early 2010 but that can be very hard to predict.
Roanoke has experienced growing unemployment but not at the same rate as urban markets such as Charlotte. Charlotte’s current rate is 12.5 percent, significantly higher that Roanoke’s 7.8 percent. Both are too high and contribute greatly to lost retail sales but Roanoke is in a much better position to make a recovery. Downtown Roanoke has held it’s own through the recession and, with a revitalized Market Building, is likely to see renewed retail and restaurant activity. All retailers must adjust to a new, more conservative consumer and those that do are likely to succeed.
Roanoke also is well positioned to take part in a national trend to “buy local.” More consumers are looking to by locally produced produce, eat at locally owned restaurants and furnish their homes with unique items not available in big box stores. With small retail centers like Grandin Village, Crystal Spring, Salem and even Downtown Roanoke, there opportunities for the next generation of entrepreneurial retailers.
(Edwin C. Hall is CEO of Hall Associates, Inc., a Roanoke based commercial real estate services company. A longtime Roanoke resident, Hall is chairman of the Jefferson Center Foundation’s Board of Directors.)
Understanding that statement is necessary if one is going to understand the commercial real estate business in the Roanoke Valley, as opposed to the market in Northern Virginia, Greensboro or Charlotte. Commercial real estate is impacted by broader national and regional events such as the availability of capital and the economic health of national firms but is also impacted by many local factors, including the supply of downtown office space, the local unemployment rate and the local cost of development. That is how it is possible to have an approximately 6 percent vacancy rate in downtown Roanoke Class A office space, at the same time Washington DC is experiencing a vacancy rate of over 12 percent in the core area.
Specifically, over the past decade, the Roanoke Valley has not produced the kind of growth in commercial space that would create the glut of vacant buildings seen in other, more urban and faster growing markets. At times, this means that our economy seems sluggish, compared to fast paced markets like Charlotte. According to Stuart Meredith, Hall Associates’ executive vice president of Brokerage, this market was overbuilt in the late 1980’s and early 1990’s and, as a result, suffered more when the economy struggled. This time, despite the national economy, Roanoke office market has continued to have activity and vacancies have not increased significantly, if at all.
The recession’s impact on commercial leasing in the Roanoke Valley has been to slow down the process. Calls by prospects for new space were slowest in the first quarter of 2009 but now have begun to pick up again. Our phones have begun to get busier and more prospects, both local and regional, have begun to look at space.
Yet there appears to be an uncertainty about the current market rates for lease space. Based on the national media, tenants expect rents to be reduced by at least 20 percent. However, in the Roanoke Valley, rents have dropped little, if at all. Again, without a lot of excess space, demand is still very balanced with supply.
The recession has not been as kind to the industrial market, particularly the larger properties. Typically, users of large industrial buildings are either national corporations or local corporations that produce goods for a national market. The recession has, both locally and nationally, reduced demand for these buildings. However, this has not led to the large number of “fire sales,” with only one of the more than thirty industrial properties on the market being marketed as “Price Reduced.” In many cases, Roanoke Valley properties are locally owned by investors who are more prepared to weather the current economic climate than highly leveraged regional and national development firms.
Many claim that the recession was based on the availability of easy credit and the housing bubble it created. To some extent, that occurred in the national commercial market also. Commercial Mortgage Back Securities had a significant role in the rapid development of many urban markets and, when rental rates in these markets dropped and vacancies increased, theses securities lost much of their value. This did not occur in Roanoke or probably any market our size. Lenders have been much more conservative, commercial appraisers have not supported values based on rapid increases in rents and buyers are traditionally much less adventurous. The local industrial market has never become greatly overheated or overleveraged. Without a growth in industrial demand nationally, it will take some time to become robust again but it will.
The retail property market is a mix of local and regional/national tenants and property owners. In many cases, retail is a national market, influenced by local factors such as household incomes and unemployment rate. For a big box retailer like Circuit City, the recession was felt throughout the company and, despite good local sales, Roanoke lost its store when the company folded earlier this year. There have been fewer store openings and more vacancies in shopping centers. This is likely to continue until retail sales (an employment and consumer confidence) begin to grow. The “experts” say early 2010 but that can be very hard to predict.
Roanoke has experienced growing unemployment but not at the same rate as urban markets such as Charlotte. Charlotte’s current rate is 12.5 percent, significantly higher that Roanoke’s 7.8 percent. Both are too high and contribute greatly to lost retail sales but Roanoke is in a much better position to make a recovery. Downtown Roanoke has held it’s own through the recession and, with a revitalized Market Building, is likely to see renewed retail and restaurant activity. All retailers must adjust to a new, more conservative consumer and those that do are likely to succeed.
Roanoke also is well positioned to take part in a national trend to “buy local.” More consumers are looking to by locally produced produce, eat at locally owned restaurants and furnish their homes with unique items not available in big box stores. With small retail centers like Grandin Village, Crystal Spring, Salem and even Downtown Roanoke, there opportunities for the next generation of entrepreneurial retailers.
(Edwin C. Hall is CEO of Hall Associates, Inc., a Roanoke based commercial real estate services company. A longtime Roanoke resident, Hall is chairman of the Jefferson Center Foundation’s Board of Directors.)
