New Office Projects Taking Shape around Norfolk, Va.

Low-rise projects in works to head off lack of available space

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.

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