Tim Reamer – Cottonwood | Commercial – Harrisonburg Va Commercial Real Estate

January 1, 2015  |   No Comments Yet

One year ago, I wrote this same article (with a better opening) suggesting we would see retail, particularly restaurants and grocery stores, expand and bring new brands; the Southeast Connector would shift momentum for new development; and multifamily would stay hot and finally produce new units in the market. Nailed it. Seriously.

I’m tempted to use the next seven hundred words for a written victory lap. However, since I’ve used this same publication in the past to poke fun at pundits, suggest we all have horrible predictive powers, and discuss a series of other fallacies—I would prefer that you know the truth out of fear someone actually pays attention to what I write.

Here’s the secret. Commercial real estate is usually planned out six months, or more, in advance. In other words, when I wrote the 2014 Commercial Real Estate Preview, most of the prognostications were really just projects that were already underway, and in some cases, had been for a while. It was kind of like guessing Easter would be on a Sunday in 2019.

Now that the shine is off—here’s what 2015 likely holds for us all.

The Year of Retail Development

The upcoming year will officially kick-off more commercial development than we’ve seen in quite some time. Stone Port, Coffman’s Corner, and Preston Lake all represent new ground up projects while vacated and underutilized structures like Shoney’s and Kmart exemplify compelling redevelopment projects. Solid retail absorption rates have caused relative scarcity within the primary retail corridors (think the E. Market Street, Reservoir Street, University Boulevard triangle) and an overall retail vacancy rate of 5.2% with retail demand among national tenants rising. It’s not a terrific comparison for several reasons, but this level of vacancy is lower than Austin, Boston, and Miami and in line with markets like Los Angeles and Long Island.

 
The combination of low inventory levels, increased demand, and a shifting path of progress has the area primed for a retail surge not seen in more than a decade. Largely, this new development will occur along the Connector Road with Stone Port leading the way. Infill development of new strip centers like University Center and freestanding units should contribute to the equivalent of a 15% increase in total retail product over the next half-decade.

A Rebounding Office Market

As of December, the Harrisonburg metro area had approximately 147,000sf of office space available, which translates to an 8.9% vacancy rate (a one point drop since June).

Nationally, office space requirements have been shrinking in size for years. Standard office sizes were 225 square feet in 2010—they are 160 square feet now, and the goal is to make them as small as 100 square feet. All of this lessens the demand for large office space. The days of filling large office buildings with ease have largely come to an end. Unfortunately, the great majority of space within the Harrisonburg metro area, 71% to be exact, is above 2,000sf while the greatest demand is for product of less than 2,000sf. That’s a problem—especially when employment projections are considered.

Forecasts for the Commonwealth of Virginia over the next two-year period indicate a positive employment change of 95,000. Of this total, approximately half would be classified as office positions. Long-term projections through 2022 show employment change of 534,000 of which 57% are occupations traditionally using office space. Extrapolating this information to the Harrisonburg metro’s employment profile (again, not perfect) without considering population growth would suggest absorption of vacancy, potential for some new development, and the opportunity to repurpose older office product.

Offices around the nation have been reconfigured to meet this new demand and tenants have shown a willingness to pay; the same can be true locally, too. That’s a solution that I hope to see in 2015.

Appreciating Lease Rates & Commercial Values

The metro area has the potential to add tremendous amount of new inventory, especially within the retail sector, which traditionally puts downward pressure on lease rates. Most, however, will be built for a specific user, which wouldn’t create new supply. The balance, including multifamily, industrial, and office will maintain relatively tight supply. Competition for space will permit landlords and sellers to continue realizing price increases. This isn’t to suggest a bidder’s frenzy for all, or even most, properties; it’s simply reflective of normal lag in developing the supply on a speculative basis in a market realizing increased demand. Rates across all sectors increased in the metro area in 2014. Economists are projecting average increases ranging from 2.1%-3.5% nationally in 2015—Harrisonburg will likely hit similar levels.

For the first time in some time, the previous year left both consumers and real estate investors feeling confident about the upcoming year. In an Urban Land Institute poll of real estate investors, more of them rated their chances of profitability as being good, very good or excellent than at any point since before 2007. Economists believe 2015 will sustain the rebound in home prices increasing wealth for homeowners while the stock market continues to hover at near record levels, both of which should drive consumer demand and subsequently, commercial growth. Rational, sustainable, commercial growth—it’s been a while. Welcome back.

Tim Reamer provides commercial real estate brokerage and consulting services with Cottonwood Commercial and specializes in investment property (multifamily | commercial | NNN), retail/restaurant site selection, and commercial buyer/tenant representation. Learn more at www.timreamer.com.

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