New Office Projects Taking Shape around Norfolk, Va.

The office market is tight. Vacancies are below 10 percent. In such a climate, big ideas quickly become blueprints. But will buildings follow?

The question is not if new office space will germinate over the next 12 to 24 months. The question is where and how much will the rents be and how will the deals be financed? With construction costs at an all-time high, developers may seek guarantees - a city-financed parking garage or other city incentives - from localities. For example, Norfolk's 150 West Main Street office tower rose out of a deal between the developers - Robinson Development Group and Bob Stanton - and the city. Government bonds, backed by parking revenue, paid for the parking garage below the offices.

"2006 was anything but robust, which has perpetuated a wait-and-see approach by most of the lending and development community, even while vacancies trough near historic lows," said Don Crigger, senior director of office properties for GVA Advantis.

Crigger said he has never seen low vacancies without a mutual response from developers, though he said he understands the hesitation on the part of developers.

"Choice land is scarce and expensive and construction costs remain at all-time highs," Crigger said. "At some point, pent-up demand will drive the next wave of speculative construction, and I expect to see evidence of that in 2007 if for no other reason than we have so few large, contiguous blocks of space available throughout the market."

"While leasing is slow, most of the occupancy growth is being driven by owner-occupants looking to expand existing facilities within the region," Crigger said. "If the cost of development and ownership becomes prohibitive, we may see some spillover of this demand into the multi-tenant market."

"There is going to be new construction," said Michael Divaris, president of Divaris Real Estate. Divaris said the real estate industry has a herd mentality: Once someone starts to build, the rest will follow.

Maureen Rooks agrees that development will take place.

"But can our area support it?" asked the broker with Thalhimer/Cushman & Wakefield Alliance. "The problem is that construction costs are astronomical."

Despite unprecedented rental rates, Rooks said, the interest rate climate is favorable for investment and the stock market is robust, factors that would indicate a building splurge.

"I think it's an office market," Rooks said. But "we have to have growth or we will come to a standstill."

If Hampton Roads doesn't have the space, companies will gravitate toward regions with higher vacancy rates, such as Raleigh, where landlords will offer a few months of free rent or other enticements to fill empty space. That makes life tough for Jones Hooks, president and CEO of the Hampton Roads Economic Development Alliance, because he can't sell a client on the region if there's no office space to offer.

Divaris said low-rise space will sprout first. Armada Hoffler, the Virginia Beach Town Center developer, has plans for a 60,000-square-foot, five-story low-rise building - offering four floors of office and the ground floor for retail - on Constitution Avenue at the Town Center.

Olympia Development has begun its third office building at the Convergence Center on Bendix Road in Virginia Beach, with the accounting firm of Goodman & Co. leasing a third of the space.

Liberty Property Trust opened the first privately financed and owned environmentally certified building in the region last month.

Recycled concrete, steel carpet and ceiling tiles went into construction of the 75,000-square-foot office building in Chesapeake. In the meantime, other deals may be gelling.

"Zim Shipping is looking to expand," Divaris said. "That might be the instigation for another building."

Divaris said high-rise space will pop up in 2008 or 2009. "We might be in another cycle by then," he said, with landlords charging from $30 to $35 per square foot.

Armada Hoffler has plans for another office tower at the Town Center, Divaris said, though a site hasn't been chosen yet.

Rooks and her sister, Teresa Gibbs, also with Thalhimer, have been hired by a partnership made up of Armada Hoffler and Richard Wright to market The Fairways @ Lake Wright, a 100,000-square-foot four-story office planned on Northampton Boulevard in Norfolk

Armada Hoffler won't break ground until some tenants commit to the project. Rooks is confident that she and her sister will nab some tenants over the next few months, prompting Armada Hoffler to break ground in 2007.

Though she would not go into great detail, Rooks said portions of Ghent may be redeveloped.

"There's a buzz in Ghent," Rooks said. "There will be more retail and office."

In the Ghent Economic and Market Study, published in September, consultant BPP Associates recommends that the city redevelop the senior center on 21st Street and portions of Monticello Avenue, 21st and 22nd streets for residential, office and retail. A final report is supposed to be published with input from the city, the Ghent Business Association and other stakeholders, though the city hasn't said when it will be ready.

"I feel sure that when I get back to my office Jan. 2, my phone will be ringing off the hook," Rooks said.

Divaris said the challenge is to build and stay within a reasonable rent range. With construction costs skyrocketing over the past few years, new rental space is more expensive, tending toward $30 per square foot in both suburban and downtown markets.

"I do think there is a bar of maximum rent," Divaris said, noting that firms with offices in cities outside the region are willing to pay at the upper end of the scale, from $25 to $30 per square foot, still a bargain compared to how much they pay in Washington, D.C., or Atlanta.

"I don't think there are many tenants willing to pay above $30 per square foot," Divaris said.

Rooks said that costs go up as soon as a parking garage is added and if the building goes up several stories. If developers have to pay $15,000 to $20,000 for each parking space, rents will top $30 per square foot.

Add parking fees and suddenly downtown space isn't so attractive, despite tenants being able to walk to a mall or buy a sandwich in their building.

But Norfolk has big plans - a new business park near Norfolk International Airport and another downtown icon, replete with offices, stores and maybe residences.

The city's economic development authority issued requests for proposals for the development of a business park at Lake Wright East, a 23-acre parcel on Northampton Boulevard owned by the authority. Proposals were due last August.

In addition, the city issued a request for proposals for a mixed use development on 65,200 square feet of city-owned property at the southwest corner of St. Paul's Boulevard and City Hall Avenue. Proposals were due last September. \uFFFC