Office Space in Richmond
Offers a Mixed Picture

While Virginia's capital city has been on the winning side of several recent corporate relocations, the area's commercial real-estate market remains mixed, as new construction has absorbed some of the demand in the office-leasing market.

Last week packaging group MeadWestvaco Corp. said it would move its headquarters into a permanent site in Richmond from Stamford, Conn., by the summer of 2008. That addition will give the Richmond region bragging rights to seven Fortune 500 company headquarters. It also gives Richmond the second-highest concentration of such corporate giants per million residents among the 54 major metro areas surveyed by Property & Portfolio Research Inc., a Boston-based real-estate research firm. Richmond has six Fortune 500 companies per million residents, behind San Jose, Calif., which has just over seven per million people, PPR said.

"Richmond is now hitting its stride," said David H. Downs, a professor of real estate at Virginia Commonwealth University in Richmond, noting that the area's still comparatively inexpensive real estate has put it on the radar screen of investors priced out of larger markets. Other relocations have included cigarette maker Philip Morris USA, a unit of Altria Group Inc., which completed its move from New York City in 2004, and is building a $300 million research facility downtown.

Richmond's commercial real-estate market, though generally on the upswing, is more nuanced than the local economy might suggest. Fourth-quarter retail, warehouse and apartment-rental rates were all below the national averages, while vacancy rates were above average, PPR said. And some companies are pulling employees out of older buildings and putting them into new corporate campuses. That has offset demand in the office-leasing market, the only sector to post tighter-than-average vacancy rates, and kept average rents flat.

Capital One Financial Corp., a credit-card and financial-services company, opened a campus in suburban Goochland County in 2002, complete with walking trails and a treehouse for outdoor meetings. About 4,300 of the company's Richmond area employees, who previously were spread out in more than two dozen buildings throughout the Richmond area, are located on the 1.16 million-square-foot campus, according to Capital One spokeswoman Pam Girardo.

Office and retail properties saw an upswing in investor interest last year, with the dollar volume of office transactions rising more than fourfold in 2005 to $645.3 million from 2004. Average prices fetched for office buildings rose to $166 a square foot in 2005 from $88 a year earlier, but were still well below the national level for 2005 of $190 and the mid-Atlantic region's average of $237, according to Real Capital Analytics in New York.

Propelling the average price was the sale of the three-building James Center office complex in Richmond's downtown financial district, one of the biggest transactions in 2005. JEMB Realty Corp. of New York City paid about $185 million for the buildings, or about $188 a square foot. Joseph Jerome, a principal in JEMB, said he was attracted by the building's location near the Federal Reserve bank and downtown residential development.

Prices fetched by retail properties compared more favorably to other areas, bringing in $172 a square foot, above the national average of $150 and the mid-Atlantic region's level of $144. Richmond's above-average median income and job growth have kept the retail market stable despite the recent addition of two large malls to the area, PPR said.

The area's economy is driven by a range of large corporations, as well as strong government, education and health services sectors; that helped push employment growth to 2.7% in December, outpacing the national rate of 1.5%, according to the Bureau of Labor Statistics. It's unclear how long Richmond can keep up its current pace, however. Job growth is expected to downshift over the next four years to an annual growth rate of 1.1%, below the forecast U.S. average, according to Moody's Economy.com, a unit of Moody's Corp.

About 500 scientists, engineers and support staff will work at Philip Morris USA's new facility in downtown Richmond, which is set to be completed in 2007.

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