2014 Preview: Should Old Times Be Forgotten?

’13 Leaves Behind Solid Base For Commercial Development

Posted: January 2, 2014

Pop the cork, drop a ball, sing Auld Lang Syne, and watch the endless shows reviewing the year that was — it’s nearly 2014. Some of you will stay up to welcome the New Year, others to make sure it goes away.

While not perfect, 2013 leaves behind a solid base for the commercial market to build on in 2014.  The economy remains complicated, but there are signs that growth is coming back and the Harrisonburg metro area is poised to realize gains in many areas including retail, multifamily, and commercial development.

Restaurants Continue To Drive Retail

The ongoing strength of fast casual restaurants — like Chipotle and Five Guys — has been repeated so often that it almost isn’t news anymore, but 2014 should bring more growth for the sector. According to industry research team Technomic, fast casual restaurants are expected to grow at a rate 33 percent faster in 2014 than in 2013.

The Harrisonburg metro area will participate in this growth with several new restaurant brands making their way into the market in 2014. In addition there will be several existing restaurants locating to new spaces and a couple of national chains opening additional stores.

The strength of retail, however, isn’t limited to fast food restaurants. Across the board, retailers are finding opportunity. 7-Eleven is starting on a plan to double the number of U.S. locations, small store formats of your favorite retailers are rolling out, and grocers like Aldi and The Fresh Market are also expanding.

While grocers have been seeking out sites around Virginia over the last year, the Shenandoah Valley did not attract much attention. It is expected that will not be the case in 2014 with at least one (and potentially more) new grocery announcement coming this year.

If you are looking for new clothing or electronics options, you’ll likely have to wait until 2015 or beyond.

The increased demand for retail spaces caused occupancy and rents to grow in 2013, but the available stock of properties did not increase commensurately.

The Harrisonburg metro area will likely continue to realize rent appreciation, especially in prime locations (think East Market St, Port Republic Road), but for the first time in many years, the area will also see an increase in the available stock of pad ready sites and new commercial construction.

Not Just Development, It Could Be A Shift

Retail, industrial and multifamily properties all posted strong gains in both occupancy and rent in 2013. Even the office sector, which remains weak due to the relatively tepid pace of job growth and shrinking office sizes, is achieving some positive absorption and rent growth.

Despite this good news, construction pipelines have largely failed to pick back up. Given that optimism is increasing and financing is becoming more available, it’s likely that 2014 will see a return to new commercial construction nationally and locally.

If the consumer confidence and financing as described above are the vitamins that aid in the growth of commercial construction, the Southeast Connector will serve as a super steroid for the region. The new six-mile road running from U.S. 33 to Va. 42 will connect every primary commercial corridor in the metro area, permit quicker drive times for commuters (read high traffic counts), and will be in close proximity to dense neighborhoods.

This is an excellent combination for retailers and developers have responded with more than 145 acres of new mixed-use space already planned for the corridor beginning in 2014.

In fact, the completion of the Southeast Connector is likely to represent more than just an excellent opportunity for local and national businesses — it may signify a major shift in the path of progress for commercial development in the region for three primary reasons:

1. Commercial development follows residential development and the east side of Harrisonburg has been the primary source of residential development for a decade.

2. Space on traditional retail corridors (East Market, Reservoir) is limited and prices reflect this fact.

3. Much of the development on the Southeast Connector will meet or exceed retailer’s standards previously only found in the East Market Street area, but land is at a lower price point (for now). As larger retailers recognize this opportunity, others are likely to follow.

Demand Results In New Construction

One of the standouts through both the downturn and the recovery has been the multifamily sector. Fueled by a lack of mortgage financing for many buyers and demographic shifts that are increasing the proportion of the population that is likely to rent, apartment properties are poised to continue performing in 2014.

Construction has picked up from a 2011 national low of under 50,000 units. The Urban Land Institute predicts that 2014 will bring over 150,000 new units to the national market, but that the national vacancy rate will still remain well below 5 percent.

While certain cities might see some delays in absorbing new construction in the luxury sector, overall 2014 looks to bring higher rents and lower occupancy across the board.

After several years of limited multifamily construction (nonstudent) in the Harrisonburg Rockingham market, 2014 is expected to be a breakout year. Several hundred permits have been pulled or are planned for market rate apartments (again, nonstudent) throughout the city and county in 2014.

The new construction is expected to range from small developments of 24 to 30 units to large luxury apartments of up to 396 units. Of course, in addition to new construction, downtown properties are expected to continue being snapped up for rehabilitation and conversion to mixed-use buildings with lower level retail and upper floor apartments.

We’re Back Baby? We’re Back?

For the first time in some time, both consumers and real estate investors feel 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 2010.

Economists feel that 2014 could bring a rebound in home prices, creating new wealth for homeowners, the stock market is at record levels, both of which should drive consumer demand and subsequently, commercial growth. All of this has resulted in, well, cautious optimism, which may have previously been known as prudent and pragmatic decision-making.

Given that it’s been more than a decade since we last saw this sentiment on a large scale — it’s easy to forget what it looked like, but nice to see what it produces.

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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