Officials see positives in commercial sector
What's the future of commercial real estate in Henrico County?
On Sept. 22, 120 members of the Greater Richmond Association for Commercial Real Estate (GRACRE) got a glimpse of it on what was billed as GRACRE's first real estate bus tour.
Beginning at North Shore Commons in Innsbrook, the three sold-out buses traveled to nine featured locations and made four stops, most of them in Henrico.
Among other western Henrico sites, riders viewed the vacant Deep Run I, which previously housed Circuit City offices but will soon serve as headquarters for travel insurance company Mondial Assistance US. Also located along the route were Glen Forest's Highland I – notable as the first project on the East Coast to use an innovative weight-saving structural system – and Towne Center West, the westernmost mixed-used development tied to Short Pump Town Center and the future Gayton Road flyover.
Riders disembarking at West Broad Street and Lauderdale Drive were treated to a peek at the buildings under construction at The Corner at Short Pump, where new retailers will include Toys 'R Us, Bassett Furniture and Olive Garden – all scheduled to open in spring of 2012.
The Corner is already something of a boom town, riders learned, thanks to the Kroger that opened in July 2010. In a typical week, the store attracts an average of 30,000 customers and grosses $1 million in sales.
Among the passengers on the bus was Kathleen Finderson, a director at management consulting firm Warren Whitney, who said she came on the tour so that she could better help clients with real estate needs.
"A lot of what's available, and the price points of what's available, are changing so fast," said Finderson. "I need some ideas of what's out there, what spaces are like, what access is like, and what amenities are like."
A resident of South Richmond, Finderson observed that the Short Pump bus stops were the real eye-openers on the trip.
"It amazed me," she said, "because [my husband and I] never come out here."
Optimism at West Broad Village
Bryan Kornblau, CEO of Eagle Construction, welcomed tour-goers at the stop at the West Broad Village clubhouse, and described an outlook that has swung from disastrous to decidedly optimistic in the course of the last two years.
"In the summer of 2009, this project was very close to foreclosure," said Kornblau, ticking off a list of woes that included multiple lawsuits and a builder in Chapter 11. "Twenty-three prospective townhouse residents were living in the Aloft Hotel, and couldn't close on their property – because where you are standing was red clay."
But on Christmas Eve of that year, said Kornblau, a group of investors formed what would become Markel|Eagle Asset Management LLC, and the turnaround began in earnest. By Memorial Day 2010, the clubhouse had opened and new residential units were well underway, and by June the Children's Museum of Richmond (CMOR) had moved into the Village.
"CMOR really jump-started the empty [retail] space," said Kornblau, who listed a string of soon-to-open retailers that includes the Atlantic Coast Athletic Club (ACAC), Bonefish Grill, and Halligan's West. That's in addition to the already-established anchors such as Aloft Hotel, REI, HomeGoods, Dave & Busters, the Wine Loft, and a Whole Foods store that ranks in the top 15 in the nation for sales.
Members of the Innsbrook community have seen a turnaround in the 30-year-old office park as well, as Paul Kreckman of Highwoods Properties told the bus riders. After a vacancy rate that slipped to 25 percent in 2009, Innsbrook is back up to closer-to-normal levels in the single digits.
But Kreckman has no intention of sitting back and waiting for improvement to continue. Innsbrook needs to change, he said.
"It's a nice suburban office park," said Kreckman. "But if we don't [face] the future, it's never going to be more than that."
At North Shore Commons, tour participants heard descriptions and browsed renderings of Innsbrook Next, a 188-acre project for urban mixed use that is still in the preliminary zoning application phase. The new zoning would allow for buildings as tall as 16 stories, which would be constructed on both parking lots and undeveloped land.
Most of the new buildings would top out at "eight to ten stories, max," said Kreckman. "I think we can be more 'up' without being really tall.
"We're going to try to keep that same green space we have," he added, "only at the same time going more upward in our parking lots."
The added density would enable Highwoods to develop 1,000 hotel rooms and 6,000 apartment and condo units, in addition to new office and retail space. Development will be completed in phases, with the first phase beginning as early as spring 2012. If all goes as planned, the changes would help bring a projected 14,688 new permanent jobs to Innsbrook in the next 20 years.
'Aren't we smart!'
A dozen or so miles down Broad Street, The Shops at Willow Lawn is also undergoing a transformation.
On Sept. 27, members of the Urban Land Institute (ULI) Young Leaders Group visited Willow Lawn for a look and a presentation entitled, "The New Normal: Repositioning and Rethinking or 'Refashioning' a Historic Richmond Mall."
Richmond's original suburban mall, Willow Lawn has evolved from its 1956 opening as an outdoor shopping center typical of the time, to its repositioning as an enclosed mall in 1986, to its reincarnation as an outdoor center.
As John Tschiderer of Federal Realty Investment Trust – the company that bought Willow Lawn in 1983 – told ULI members, "Here it is 28 years later; and here we are, still repositioning."
Using a collection of old photos to illustrate the center's history, Tschiderer pointed to a 1987 picture of the newly-enclosed mall that was placed prominently in the company's annual report. At the time, he said, company executives considered their makeover of the center quite an accomplishment.
"'We turned an open air community shopping center into a mall!'' Tschiderer drily quoted Federal's leaders as exclaiming. "'Aren't we smart!"
Everyone knows what happened next, Tschiderer continued. Retail – eventually including Willow Lawn anchor Dillard's – began marching westward, and the mall began to decline.
In 2006, Federal Realty began the "de-malling" process, removing enclosed sections and taking the center back to its roots as a walkable outdoor mall. Stores that include Old Navy, Lane Bryant, Victoria's Secret, GNC, and Chick-fil-A are relocating, and new restaurants, shops and cafes are being enticed to locate in the open areas. Although the center of the mall is still under construction, said Tschiderer, the exterior space is 100 percent leased.
In addition, the mall has been hosting regular family events such as Mommy and Me and Imagination Richmond, which have seen substantial increases in attendance, sponsorship, and merchant participation, said Sarah North of Federal Realty. Plans for a festival of arts, garden parties, jazz festivals, concerts and a farmer's market are also in the works.
While programs at other outdoor malls have declined due to the economy, Tschiderer pointed out, programs at Willow Lawn have expanded, and are drawing participants from as far away as Ashland and Chesterfield.
The reason for the success, he surmised, has to do with the center's reacquiring of that quality that malls have been missing for so long: a sense of place. Willow Lawn – once a destination for family activities from fashion shows to "Dino-land" exhibits – has become once again a community center and a place to take the kids or just "hang out."
Still far from stable
Despite the optimistic reports at the ULI breakfast and on the GRACRE tour, the commercial real estate industry in Henrico County – as in the rest of the region and the nation – is still a long way from achieving anything resembling stability. In recent weeks, as investors have backed off and financing has become more difficult, headlines have noted a faltering in the industry's slow recovery of the last year or two.
What's more, a Henrico County submarket – Parham South – bears the distinction of the highest vacancy rate in the region: 18.7 percent for the second quarter of 2011, according to real estate brokerage Thalhimer.
Birck Turnbull, a vice president for Thalhimer, attributes Parham South's decline not only to aging buildings, but a lack of access.
"Just like in the retail market, [office buildings] become a little tired and outdated after 20-plus years. People want newer buildings with better access to the highway and parking," said Turnbull, noting that Innsbrook and Deep Run offer quicker and easier access to Interstate 64 than the Parham Road corridor.
In general, however, the Henrico market from Glenside Drive west to Route 288 is a strong one, said Turnbull – thanks to the county's residential growth to the west and the tendency for commercial growth to follow rooftops.
"Suburban office parks aren't going to go out of fashion, but there will be a push for more density," he said, praising Innsbrook Next developers for their foresight in moving to high rises and mixed use.
"There's not going to be a new perimeter beyond 288," he predicted. "[Route] 288 is probably going to be it for awhile."
'Big driver' catalysts
Turnbull also noted that while the local market has weathered the massive vacancies left by the departure of Land America, Wachovia, and Circuit City, one company filled the gap almost singlehandedly: Capital One. What Henrico could use now, Turnbull said, is another "big driver" or intense office user to serve as a catalyst and kick-start a recovery.
And while he sees hopeful signs in the success of sites such as West Broad Village and The Corner at Short Pump, Turnbull pointed out that both of those projects were underway before the 2008 economic downturn, and required new owners to get them back on track. Although the "second-generation" owners have given the projects new life, projects have fallen short of original projections for pace of growth and level of rents.
To the east, Turnbull said, Henrico's biggest success stories have been Rocketts Landing (which recently added its first restaurant on the county side) and The Shops at White Oak Village.
"The success of White Oak has been surprising," said Turnbull, pointing out that a comparable mall on Route 288 in Midlothian is struggling. "People didn't think the population base was out there to support a big lifestyle marketplace.”
Willow Lawn's makeover is another surprise, said Turnbull. "I would have predicted Willow Lawn would have gone the way of Cloverleaf Mall."
Whatever improvements might be in store for Henrico's commercial real estate market, say experts, they won't be dramatic ones. The market has yet to settle out after the shocks and fluctuations of recent years, said Turnbull, and the county is "definitely overbuilt" in the retail sector.
"There's going to be a long period of time to [fully recover]," said Turnbull. "We need some time to absorb."
As John Tschiderer summed it up at the ULI presentation, "It's an evolving process . . . an evolving education, and evolving markets.
"It's going to be a slow burn."
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