The Delta variant has taken some wind out of the sails of Virginia’s economic recovery in the third quarter. Consumers are reacting to rising inflation and increases in COVID cases by pulling back on some kinds of spending. Elevated uncertainty has caused businesses to reevaluate their workforce issues and space needs. Despite these headwinds, the commercial real estate market across Virginia continues to make progress. The state’s large population centers—Northern Virginia, Richmond, and Hampton Roads—are generally proving to be more resilient than most smaller markets across Virginia.   

Virginia REALTORS^® Q3 2021 Commercial Market Report  tracks trends in office, retail, and industrial real estate across nine markets in Virginia. The following are some key takeaways from this quarter’s report: 

Office Market 

• Earlier this year, many workers expected to be returning to the office this fall. However, the expected surge of workers going back to the office has been delayed by the uptick in COVID cases in many parts of the state. In addition, after a year and a half of remote working, there is a growing sense that many workers will not want to return to the office full time and that many employers will not make them. The long-term changes to work arrangements still need to play out in the office market. 
• Even though there continues to be some weakness in the office market generally, there has been surprising strength in the Class A market, particularly in Northern Virginia and Hampton Roads. One explanation is that companies looking to bring workers back to the office post-COVID or planning expansions are looking for buildings with a wide range of amenities and flexible spaces to accommodate enhanced technologies and hybrid work. In addition, the businesses currently shopping for office space could be the ones with the best balance sheets and the most resources to commit to leased space. 

Retail Market 

• Earlier this summer, the opening of the economy fueled a fast rise in retail and restaurant spending, which was a positive sign for the retail market. However, the rise of the Delta variant has created uncertainty for consumers who may be more hesitant now to shop in brick-and-mortar stores and to dine out. The biggest hurdle retailers and restaurant owners face currently—perhaps even greater than the Delta variant—is the challenge finding workers. Even as retail sales have surged, so have the number of retail job openings nationwide. Businesses have been raising wages and offering bonuses to attract workers, but several factors continue to stall the return to work for many retail and restaurant workers. 
• The performance of the retail sector is bifurcated by geography, with larger metros performing better than smaller metros. However, the sector is also divided by retail type. Across the state, neighborhood retail is performing much better than “big box” retail. The uptick in rents and the decline in vacancy rates is a promising sign for the resiliency of Virginia’s neighborhood retail and restaurant industries.  

Industrial/Warehousing Market 

• The industrial market remains the hottest segment of the commercial real estate market in Virginia.  While large warehouse space (e.g., fulfillment centers) continues to be in demand, there are growing challenges for businesses looking for small warehouse and flex space. 

• Construction of new industrial and warehouse space has not kept up with the fast-paced demand. Challenges to new construction include the rising costs of materials and the lack of construction labor. But the development of new industrial space in Virginia also runs into additional roadblocks at the local level, where zoning and land use regulations limit the locations and types of industrial development allowed in the community. In addition, new types of space use (e.g., flex space, retail warehousing) do not always fit neatly into a locality’s existing use categories, making proposals for new industrial and warehousing development relatively more complex. 

Check out our Q3 2021 Commercial Market Report for more trends in Virginia’s commercial real estate market, including detailed market statistics for nine metropolitan areas across the state. 

Click here to send any comments or questions about this piece to Virginia REALTORS^® Chief Economist Lisa Sturtevant, PhD.