2021 Outlook: Multifamily, Industrial, and Suburban Office Markets in Virginia Remain Vibrant

Not since the Great Recession of 2008 has the National, Regional and Local Commercial Real Estate market faced current levels of uncertainty and in certain sectors devastation.  However, unlike 2008 there are sectors of the industry that remain vibrant like multifamily, industrial and suburban office. Occupancy levels and rental receipts for these sectors remain steady or in the case of industrial the market has expanded due during the current environment. Suburban office trends remain positive despite some level of uncertainty about future demand levels due to the currently imposed remote work environment, although this is likely to be just temporary as the pros and cons of such work environment are further evaluated.

One thing is for certain, decisions about the future are finally taking place. From March 2020 through year-end 2020, companies were in a wait and see approach. No one wanted to make a decision that would affect their long-term operations only to find out that the Virus was a short-term issue. It is clear that we will be dealing with the effects of COVID for at least the next 12 months so decision makers are finally acting. New Leases are getting executed and renewed, companies are in the market looking for alternative or employee-friendly space especially in the suburbs, where tenants have direct access with limited common area exposure and no need for mass transit.  

As for the future, we have seen three different paths with office users. Those that expect to downsize as the remote working has been successful, those that will keep their existing footprints as they expect all employees will want an alternate to working from home, and those that are expanding to accommodate social distancing and workplace safety. The fact that these paths are becoming more clear means that transactions are getting completed  at market terms and the market is healthier.

The larger the organization and the larger the footprint, the more likely a return to work is delayed.  Companies that are headquartered in New York, San Francisco, Chicago etc., that have seen a much greater impact from COVID 19, are forced to follow the big-city rules and the parent companies’ policies.  Whereas local or regional companies have more flexibility and are making decisions based on the environment here in Hampton Roads. Because we are a second tier market with a heavier concentration on locals and regionals, we are seeing more and more people returning to their place of work. Office buildings are becoming more occupied and things are feeling more and more like they did prior to March 2020.

In Virginia, we have seen office tenants remain flexible as they plan for the re-entry into workspace. Although not everyone is back in the office, most leases have remained in place as companies try and determine their next steps.  Dive into the rest of our 2021 predictions for commercial real estate below:

 Hampton Roads: 

• Industrial, Lang Williams
  • The Hampton Roads industrial market enters 2021 after a year with record activity and new construction. 2020 witnessed 5.8 million square feet of construction starts and over 2.1 million square feet of 2nd generation building leasing. Equus Capital Partners will deliver a new Class A speculative warehouse, 348,500 square feet, at 1401 Enterprise Drive in summer 2021. Equus will also deliver the 350,000-square-foot new build-to-suit distribution warehouse for Massimo Zanetti Beverage USA this summer. With vacancy below 2% and demand from e-commerce, retail, shipbuilding & repair, and other tenants expected to remain strong during the coming year, two to three other new developments may break ground in 2021 on a speculative basis. Another trend that may continue is value-added repositioning of 2nd generation properties such as 5457 Greenwich Road in Virginia Beach. Last November, Tempus Realty acquired this 107,000 square foot property located near the intersection of I-64 and I-264 in Virginia Beach and plans an extensive renovation to attract quality companies for the 67,000 square feet of vacancy.

• Multifamily, Hank Hankins
  • Interest rates are up slightly from 2020 and cap rates will likely stay at current levels due to high demand. We predict a slow first quarter similar to 2020 and the second half of the year sales to exceed the first half. Owners are cautiously looking at slow and delinquent accounts. Occupancy and rent growth will continue to hold strong and rental demand will outpace new deliveries keeping occupancy at historically high levels. The current risk among other product types continue to fuel apartment demand. Distressed assets in hotel and retail will lead to future multifamily conversions.

• Medical Office, Chris Kieran
  • Medical office continues to weather the pandemic. Unlike general office, the work-from-home option is not in play for medical tenants. Telemedicine has created a buzz in the medical space arena, but we have not seen a true impact on space demand in the local market related to this. While many general office tenants have requested shorter term leases due to uncertainty related to the pandemic, we have and expect to continue to see most medical tenants comfortable in committing to the traditional longer-term leases. With this said, new deal activity seems to have slowed down some as tenants are cautious with capital expenditures and find it is much more economical to renew than relocate.

• Retail, Chris Read 
  • There is continued pressure from the retail sector related to COVID-19 shutdowns and occupancy restrictions. The good news is that retail activity is on an upswing since the vaccine announcements.  While many concepts in the restaurant sector are still struggling,  many are expecting a significant comeback in the second half of 2021. Many restaurants have come out with new prototypes that emphasize drive through and pick up. We expect this trend to continue post pandemic. For many retail uses, we expect the trend of downsizing to continue as retailers try to understand the right balance between brick and mortar sales and online sales. The grocery sector has been experiencing very strong sales with pickup and delivery gaining in popularity. We are bullish about retail activity for the second half of 2021.

Richmond:

• Occupier Services, Zack Roski and Tom Vozenilek:
  • 2020 was a long hard, pause for office occupiers. 2021 will be a year of transition. Occupiers are still navigating the pros and cons of being out of the office and the impact of working from home.  Landlords have gotten more aggressive to attract larger tenants however the market for midsize tenants 10,000-20,000 has not softened like we thought it might.  We anticipate opportunities for occupiers later 2021. 

• Office, David Wilkins
  • 2020 presented unprecedented challenges for the national office market as companies attempted to navigate pervasive uncertainty created by the COVD-19 pandemic. The national office market struggled in many primary markets across the country with U.S. office absorption hitting a record low in 2020. The uncertainty for the future remains at the forefront with the market offering little clarity as to the long term impacts the pandemic will have on corporate America’s return to work strategy and longer-term workplace policy on real estate needs.  While there are bright spots, such as the emerging availability of vaccines, the office market is expected to remain challenged through 2021 and into 2022 with record increases in sublease space expected to expand.  Many employers will push off decisions regarding physical space needs into 2022 while they continue to debate what long term role “work from home” will play for their organization. Despite the headwinds to the national office using employment base presented by the COVID-19 pandemic, Richmond’s office market fundamentals remained relatively resilient throughout 2020 compared to many other markets.  Richmond’s office market did soften in 2020, but vacancy rates are still below the market’s long term historical average and as a result average asking rental rates experienced a modest increase.  Sublease space did also increase significantly, representing a record 1.3% of all inventory across the marketplace, however several large blocks have already been absorbed by tenants capitalizing on the flexibility a sublease can provide.

  As for the future, there are reasons for optimism visible through the mixed signals presented by this atypical downturn.  Richmond’s location, affordable office market and well-educated workforce have been a driving force in its recent growth and the emerging migration patterns of today’s workforce out of major urban markets, such as New York, Chicago and Washington DC to secondary markets could accelerate and ultimately benefit the region.  For the most part, business leaders want their employees back in the office and while remote work will remain prevalent, employees will also want to return to the office where culture, collaboration and teamwork foster in the physical work environment. Many companies will downsize, but many yet will maintain or increase their physical footprint to promote social distancing and safety in the workplace.

• Industrial, Matt Anderson
  • After 4.6 million SF of industrial leasing activity in 2020, Richmond is poised for another successful year due to limited vacancy (hovering just below 3%) and limited spec deliveries in the pipeline for 2021 due to various site constraints for new projects that will take time to address. Overall user demand and deal velocity remains strong at over 6 million SF. If these fundamentals remain in place, our market will likely see landlords continue to push rental rates higher as more users are competing for a limited amount of available space. The Port of Virginia has made tremendous investments in their Norfolk and Richmond terminals which continue to help fuel the momentum along I-95 as larger users are analyzing transportation costs. 

• Multifamily, Charles Wentworth
  • Multifamily continues to be the preferred segment for investors as the overall fundamentals have remained strong throughout the COVID19 period and into 2021.  We anticipate strong rent growth and high occupancy levels in the region for this year.  Increases in interest rates have not dramatically affected cap rates or investor sentiment, likely the result of limited product being openly marketed.  Significant pent up demand and an abundance of equity eager to be deployed have essentially compressed cap rates, a dynamic we envision continuing at least in the near term.. Absorption as well remains strong even with many markets at historically high levels for current and future apartment deliveries.

Charlottesville

• Office, Carolyn Shears and Cass Kawecki
  • Charlottesville’s office market is undergoing dynamic shifts – with a relative boom of top-tier Class A office buildings under development downtown - some recently delivered, some still under construction, and some proposed.  Charlottesville entered 2020 as a distinct landlord’s market, but since COVID’s impact has permeated the market, signs are indicating a shift towards a tenant’s market.  The market closed the year with average asking rents reaching a record $33.45 per square foot, continuing its upward trend as nearly 275,000 square feet of office space was delivered to the market, with over 170,000 of the space occupied. This resulted in the market accumulating approximately 130,000 square feet of positive net absorption throughout 2020. Although vacancy has reached an uncharacteristically high rate of 9.8%, demand remains present in the market, and this will begin to level out in coming quarters.  Moving forward Average asking rents in the market will continue to be buoyed by the relative premium associated with the newly constructed product being delivered downtown.  There is potential for increased sublet space as well as an increase in vacancy/shadow inventory in 2nd tier product as some tenants relocate to newly constructed buildings.

• Retail, Jay O'Donnell
  • The retail market in Charlottesville continues to evolve along with the rest of the country. Several tenants have vacated space through the pandemic, particularly restaurants. However, occupiers continue to target the area, given its strong retail demographics, growth and University presence. Starbucks is opening two new locations and Lidl enters the market this summer. We are seeing restaurant operators re-emerge with the vaccine rollout, but these are smaller concepts with drive-in or pick-up a priority. The Diary Market food hall recently opened and has been successful even with the current complications of COVID. Freestanding outparcel users have stayed active and are always searching for sites in what is a tight and expensive find. Investors and developers still view the region very favorably but this has always been a low-volume investment sale market with high barriers to entry.  

Fredericksburg, Rich McDaniel

The Fredericksburg market has enjoyed a robust housing market and increasing interest from logistics companies looking to serve the Northern Virginia Market. Look for several new logistics operations to open in the area in 2020 with more to follow. Office space will remain stable as the bulk of the markets office tenants are service in nature vs corporate space. The wildcard will be the uncertainty of government spending and how it impacts our market.

Capital Markets – Scott Adams & Will Bradley

With 2020 now behind us, investors are showing resilience to the COVID-19 pandemic and are becoming more aggressive to deploy capital. Equity and debt capital remain widely available, and interest rates remain near historic lows. Real estate opportunities offer stable, bond-type returns for certain asset classes and property types while also offering above-market, opportunistic returns for less favored asset classes or on certain property risks even within favored asset classes. The most favored asset classes for commercial investment remain multifamily and industrial, while the least favored classes remain retail and hospitality.  Office investors are primarily focused on core assets with predictable cash flow streams and with traditional value-add office opportunities are largely out of favor for the time being in the current environment.

While office vacancies in the central and eastern regions of Virginia remain relatively low, there are concerns about the long-term impact the COVID work solutions may have on office usage. With that said, we believe there will be a strong desire for businesses to return to their offices in mass at the earliest practical date and expect the health and vitality of the top regional submarkets to be the first to show their strength.

Property Management, Todd Willett

Despite the challenges that we faced in 2020, the REMS team experienced a substantial amount of growth. We ended the year with the addition of over 5.5 million square feet under management, with the largest acquisition being in office space at 3.4 million square feet added. We added an additional 6.7 million square feet under our Building Services line and now have employees in 15 states out of our Virginia and Raleigh offices. We predict a continuation in the shift from properties that have traditionally been self-managed to companies that can provide full service. We attribute this movement to the challenges of dealing with COVID-19. The growth we experienced in 2020 is due to our ability to quickly pivot and adapt throughout the pandemic. We anticipate exponential growth for Colliers maintenance services as we expand our employee footprint across the country. Our frontline team members have been consistently updated in CDC guidelines and trainings in health and safety has allowed this service line to stand out against competitors which we predict will continue through 2021.