Uncertainty surrounds the commercial real estate (CRE) industry heading into 2024. Geopolitical tensions, volatile capital markets and stubbornly high inflation will keep everyone guessing for the first half of next year, potentially stifling new investment. There are no certain answers to questions about interest rates and the future of office space. In turbulent economic times, consumers cut spending and are less likely to purchase homes, hard goods and businesses, leading to lower demand for commercial property. Lower demand and excess supply depress property values. The historic population exodus from major cities like DC, New York, Los Angeles, and San Francisco due to violent crime, sky-high housing costs and failing schools could be the catalyst for decline.
If property values fall, so will tax revenues and city services, prompting more urban flight. In a troubling sign, 730 construction companies went bankrupt nationally in the first quarter of 2023, an 8.6% year-over-year increase, according to national accounting and advisory firm, PB Mares.
Fortunately, Coastal Virginia has remained largely insulated from these phenomena. The state of our commercial real estate industry is relatively strong due to several factors:
Strategic Location: Coastal Virginia is central to the East Coast and offers world-class logistics and distribution infrastructure including ports, interstate highways and railroads, all facilitating the rapid movement of goods and services. High container volume at the Port of Virginia should continue. When a long-term channel dredging and widening project is complete in 2024, the Port will be the deepest container port on the East Coast, capable of handling super-size cargo vessels, and two-way shipping traffic.
Strong Economy: The region has a diverse and robust economy, driven by defense, tourism, healthcare, education, and manufacturing. Diversity attracts commercial real estate investments across multiple categories.
Military Presence: Coastal Virginia has more military installations than any other metropolitan area in the world. Seven of the ten largest defense contractors in the world have a presence in Coastal Virginia. Approximately 3,000 active-duty military retire here every month, providing a skilled and reliable talent pool highly attractive to new employers. Inevitable increases in defense spending in the face of alarming new geopolitical threats will further strengthen our economy, contributing to a steady demand for CRE, particularly for defense contracting, logistics, and support services.
Following is trailing twelve-month data on regional CRE performance in every major category with national data for context. Most data cited comes from CoStar, the worldwide leader in commercial real estate information, marketing, and data analytic services.
Multifamily demand in Coastal Virginia exceeded supply for the first time since the second quarter of 2021. Vacancy stands at 6.2% with rents growing by 3.2%, slightly higher than the respective national averages of 5.1% and 3.1% forecast for year-end by Fannie Mae. Strong market fundamentals make local multifamily highly attractive to institutional investors. In February, San Francisco-based FPA Multifamily purchased the 392-unit community known as ReNew Marina Shores in Virginia Beach for $101.9 million ($260,000/unit).
The US has a massive multifamily development pipeline, with CRE data analyst Yardi Matrix projecting deliveries of 506,574 units in 2024 alone. Coastal Virginia is no exception, with developer S.L. Nusbaum Realty Co. emphasizing high demand, high quality affordable housing. Recent deliveries include the 120-unit Aero Apartments in Hampton, the 218 unit River Bend Apartments in Gloucester, and the 118-unit Ashton Apartment Homes in Norfolk. Now under construction is 2 Rivers Apartment homes, a 119-unit affordable housing community in in Williamsburg.
While demand continues to be strong, there are more signs of a coming recession. Federal student loan repayments resumed on October 1st. Wells Fargo Bank estimates a $100 million diversion of household income among those borrowers, or an average of between $200 and $300 per month according to the Wall Street Journal. That combined with persistently high inflation and rising unemployment could limit rent growth.
Retail real estate has been highly resilient post-pandemic, with 2023 all about satisfying pent-up consumer demand. As of August, national retail vacancy stood at a record low of 4.2%, with Coastal Virginia only slightly higher at 4.8%. Florida based grocer Publix, with one store in Williamsburg, is aggressively expanding to Chesapeake, Isle of Wight, Norfolk, Suffolk and Virginia Beach. Neighborhood shopping centers are among the strongest performers due to their focus on internet resistant essential goods and services like dry cleaners, hair and nail salons, dentists, and casual dining. Enclosed malls are out of favor, especially those in city centers and secondary suburban locations. The City of Norfolk recently purchased the now unanchored MacArthur Mall and plans to redevelop the 23-acre property.
The explosive demand for industrial real estate that overheated the national market post-pandemic has begun to cool. As of July 1, net absorption was down 43% year over year and vacancy has settled at 4.7%. While occupancies have remained stable, industrial values declined by an estimated 15% compared with 2022, according to Green Street’s Commercial Property Pricing Index (May 2023). The recent bankruptcy of trucking giant Yellow Corp may foreshadow further market correction.
If so, this news has yet to reach the logistics industry in Coastal Virginia which is booming, with a new construction pipeline of 12,480,414 million square feet. That is more than six times the size of Tysons Corner Mall and almost twice the size of the Pentagon. The region has vacancy of only 2.6%, and record average rent (estimated) of $9.92/SF. However, Asian imports at East and West Coast ports are down 20%, and the Fed is signaling elevated interest rates well into next year, threatening a recession and a potential reckoning for industrial landlords and developers.
Major Northeastern cities are seeing record vacancies of 15% to over 20%, with declines in downtown foot traffic of 30% to 50% prompting retail flight, robbing city centers of their vitality. While uncertainty remains about the future of hybrid work, the historically low rate of new office construction in Coastal Virginia and the focus of landlords on tenant retention ahead of rent growth has kept average vacancy at a relatively low 8.0%. While investment activity declined as interest rates rose, it is now at par with pre-pandemic levels.
Investors show a preference for medical offices, one of the most resilient of all commercial real estate categories, as the US population of those over 65 is expected to double by 2050. The Camelot Medical Center at 1800 Camelot Drive in Virginia Beach sold for $13.8M ($344/SF). In Norfolk, 200 Corporate Blvd., a fully- leased medical office and surgery center delivered in 2022, closed last December at $21.1 million ($459/SF), a record price for 2022.
Coastal Virginia reached a full hotel performance recovery in 2023. Hospitality data firm STR Global Hospitality Inc., reported in the period January through May, pent-up demand post-pandemic saw Virginia Beach lead the region in revenue growth with 33.1% compared with 2019. Chesapeake/Suffolk saw 31.2%, followed by Norfolk/Portsmouth at 30.5%. Williamsburg had the slowest growth, with a 17.6% increase. Recently, a cold and rainy early Summer season and ongoing consumer concerns about inflation resulted in fewer rooms sold, but increased revenues due to higher rates in every submarket except Williamsburg. Among the most notable sales of the last 12 months was that of The Breakers Resort Inn at 1503 Atlantic Ave in Virginia Beach. It sold for $12.2 million ($221K/room) to Ronnie Sibony, founder of Virginia Beach resort retailer Sunsations Inc.
The Importance of Collaboration For Future Growth
Regional cooperation, often lacking in Coastal Virginia is the key to staying competitive and attracting new, large-scale commercial developments and the jobs they create. To that end, the Hampton Roads Alliance, the leading regional economic development organization for Coastal Virginia will soon announce a plan to facilitate that collaboration. The Eastern Virginia Regional Industrial Facility Authority (EVRIFA) will allow all Coastal Virginia municipalities to participate in the selection, acquisition, and site development of properties most likely to attract new employers. Participating municipalities will share in the revenues. The first such project will be Kings Creek Commerce Center, in York County. This could be a game changer. Jared Chalk, Chief Business Development Officer at the Hampton Roads Alliance offered this: “The only thing deeper than our history and our harbor is our potential.”