Economy: Hii Contract Adwards
The Navy continues to award new contracts to HII and Newport News Shipbuilding promising long-term job stability for the Hampton Roads region. The largest announcement is the $76.6 billion contract to support the construction of five Columbia-class and Virginia-class submarines and shipyard infrastructure maintenance. Also recently announced was the award of a $5.1 billion contract for the refueling and complex overhaul (RCOH) of nuclear-powered aircraft carrier USS Harry S. Truman (CVN 75). Small relative to the Gerald R. Ford-class aircraft carrier contracts underway in Newport News with preliminary acceptance of the future USS John F. Kennedy (CVN 79) by the Navy last week coinciding with the latest RCOH announcement, there are ripple impacts across all Hampton Roads real estate sectors. The Navy also announced a $1.7 billion contract to renovate military housing across the region with $450 million going to two new 17-story residential towers in Downtown Newport News.
Market Review: Will Negative Absorption End
Although the HII contract awards are positive for the local GDP and an increase in jobs for Newport News Shipbuilding, the civilian workforce in Hampton Roads dropped by nearly 17,000 workers over the last year. The office sector, unlike the industrial sector, has not seen any increased demand related to these contracts outside of a longer-term Southside consolidation requirement.
Several major stabilized office sale transactions surfaced over the last quarter in three distinct product types. The sellers of 150 West Main Street, the healthiest premier tower in Downtown Norfolk, had tested the market over the last couple of cycles and finally transacted last month at $115 per square foot (psf) after acquiring the asset in 2007 for nearly $250 psf. Bridgeway Tech Center, a three-building portfolio in Suffolk originally built for defense contractors but stabilized in recent years by medical and service-oriented tenants traded for $122 psf after WM Jordan had been long-term holders. Woodside Health entered the market acquiring Nansemond River Medical Center for $166 psf from former principals of the anchor tenant, Sports Medicine and Orthopedic Center. Although these sales are not high-water marks, they do announce a return of stabilized office transactions with buyers and sellers getting closer to finding the mid-point of the new norm.
Forecast: Operating Expense & Transaction Cost Increases
Office landlords continue to deal with increased operating expenses because of increased labor costs, utility cost increases, insurance cost growth, and overall inflationary pressures. The cost of tenant buildouts continue to be at record highs, both because of the inflationary construction cost increases but also because of the nature and scope of post-pandemic office environments. Rents will continue to rise as a result, despite sluggish negative absorption across Hampton Roads.
