Virginia Beach Strategic Growth Areas: Development Potential UPDATE. City of Virginia Beach Strategic Growth Area Office February 3, 2012

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1 Virginia Beach Strategic Growth Areas: Development Potential UPDATE City of Virginia Beach Strategic Growth Area Office February 3, 2012

2 OUTLINE Economic Outlook and Commercial Market Update Demographic Trends and Residential Market Update SGAs in Context Considerations 1

3 NOTES ON REVISED ECONOMIC FORECASTING Moody s economic forecasts for the nation and the Virginia Beach-Norfolk-Newport News MSA have been revised substantially between our initial analysis in January 2011 and this update in January 2012 due in part to: Slower than forecasted national growth Unpredicted global macroeconomic, man-made, and natural events Initial reports in January 2011 showed the national market stabilizing in 2010 and initiating a growth trajectory in 2011, these forecasts were overly optimistic and could not predict global conflicts and natural disasters that placed a drag on hopes for a global economic recovery in In 2011, Moody s forecasted the net addition of 131,900 new jobs and 37,900 new office jobs to the region s economy by In 2012, those figures had dropped to 105,600 and 30,800, respectively. 2

4 (7,158) (2,493) (882) 3,341 5,267 4,065 4,552 4,650 4,414 4,112 3,837 3,115 2,612 2,558 2,255 2,429 2,711 7,627 13,027 18,730 19, MOODY S JOB GROWTH FORECAST SHOWS RECOVERY FROM VS Comparison of Net New Annual Employment Growth Forecasts Virginia Beach-Norfolk-Newport News MSA ,000 20,000 15,000 10,000 5,000 - (5,000) (10,000) 2011 forecast 2012 forecast Source: Moody s 3

5 OFFICE-USING EMPLOYMENT IS HISTORICALLY ~20% OF TOTAL IN THE MSA; SIMILAR PERFORMANCE PROJECTED 30,000 20,000 10, % 20% Year Total Employment CAGR , , % , % , % , % , % , % , % Avg. Annual 15% Growth , , , ,295 10,000 20,000 10% 5% Year Total Office Employment CAGR , , % , % , % , % , % , % , % 30,000 Source: Moody's Office Employment Total Employment % Office of Total 0% Avg. Annual Growth Avg. % Office of Total ,160 19% % ,910 20% ,170 21% 4

6 OFFICE MARKET STATISTICS MSA Southside Virginia Beach 2011 TOTAL SF 26,861,756 19,640,174 6,758,535 VAC % 15.4% 16.2% 15.1% NET ABS -198, ,997-79,942 AVG ASKING RENT $18.96 $19.45 $ TOTAL SF 26,816,106 19,573,427 6,712,577 VAC % 14.6% 15.1% 13.6% NET ABS 255, ,776 14,428 AVG ASKING RENT $18.91 $18.99 $17.98 VACANCY RATE ASKING LEASE RATES 20.0% $ % $ % $18.00 $ % $ % MSA Southside Virginia Beach $15.00 MSA Southside Virginia Beach Source: Jones Lang LaSalle, Q Q

7 OFFICE EMPLOYMENT CAPTURE SCENARIOS Estimated Office Demand in the City of Virginia Beach, City of Virginia Beach s Average Capture Virginia Beach Office Employment Realized Demand for New Office Space Scenario 1: Aggressive Growth Scenario 2: Optimistic Growth Scenario 3: Steady State Scenario 4: Decline 35.7% 31.5% 28% 26% 11,000 9,700 8,600 8,000 2,310,000 SF 2,060,000 SF 1,830,000 SF 1,690,000 SF Competitive Regional Position is Key Small changes may have a large impact Returning the City to its previous share of regional office employment vs. allowing current trends to continue suggests a difference of nearly 500,000 SF over the next 20 years Scenario 2 used to project individual SGA Captures. Redevelopment of the SGAs and addition of transit will enhance the City s attractiveness for office Development 50% 45% 40% 35% 30% 25% 20% Historic Capture Continuation of Trend Steady Optimistic Aggressive 6

8 2.0 MILLION FEET OF OFFICE DELIVERIES DEMANDED THROUGH 2030 Summary Total Deliveries 368, , , ,000 2,059,000 Absorption 651, , , ,481 2,169,481 Avg. Annual Deliveries 73, ,800 91, ,800 Avg. Annual Absorption 130, ,400 83,400 93,896 Projected Office Deliveries and Office Vacancy Rate Virginia Beach, VA , , , , , , ,000 50, % 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% % Source: Jones Lang LaSalle, Moody s, RCLCO Projected Deliveries Vacancy Rate 7

9 1.2 MILLION SQUARE FEET OF MEDICAL OFFICE DEMANDED THROUGH MSA Education and Virginia Beach Virginia Beach Medical Virginia Beach Medical Office Square Feet Medical 2030 Health Services Job Education and Health Virginia Beach Office Employment Share of Health and Services Demand per Office Growth 1 Services Job Growth 2 Capture of Growth Growth 3 Jobs Employee 4 Demand Average 1, % % ,172 Total 27,374 10,516 5,597 1,203, , , , ,000 80,000 60,000 40,000 20, Medical Office Space Demand Source: Moody s, BLS, RCLCO 8

10 RETAIL MARKET REMAINS FLAT Overall, a Saturated Retail Market New development will be commensurate with household and employment growth in local submarkets Possible reconfiguration or demolition of underperforming or outdated space into new retail centers, with no overall net gain of retail SF % 10.00% 8.00% 6.00% 4.00% 2.00% VACANCY RATE MSA Southside Lynnhaven Road 2011 GLA (SF) 52,567,962 34,019,555 1,822,451 NUMBER OF PROPERTIES % VACANT 8.94% 7.42% 9.51% AVG IN-LINE ASKING RATE $16.00 $16.16 $ GLA (SF) 51,696,243 33,535,280 1,822,451 NUMBER OF PROPERTIES % VACANT 9.88% 8.09% 9.91% AVG IN-LINE ASKING RATE $16.16 $16.32 $18.40 $20.00 $19.00 $18.00 $17.00 $16.00 ASKING LEASE RATES 0.00% Source: ODU CREED MSA Southside Lynnhaven Road $ MSA Southside Lynnhaven Road 9

11 OUTLINE Economic Outlook and Commercial Market Update Demographic Trends and Residential Market Update SGAs in Context Considerations 10

12 MSA HOUSEHOLD GROWTH PROJECTED TO CONTINUE TO AT SIMILAR PACE TO 2000s Historical and Projected Household Growth Virginia Beach-Norfolk-Newport News MSA ,000 16,000 Avg. Annual Growth , , , , ,181 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Year Total Households CAGR , , % , % , % , % , % , % , % , % Annual Household Growth 11 Source: Moody s

13 50% OF 2010 CITY OF VIRGINIA BEACH HOUSEHOLDS EARN $50,000 - $100,000 PER YEAR Plus TOTAL INCOME RANGE # % # % # % # % # % # % # % Less Than $15,000 1, % 1, % % 1, % 1, % 2, % 9, % $15,000 - $24, % 1, % 1, % 1, % 1, % 2, % 8, % $25,000 - $34,999 1, % 3, % 1, % 1, % 1, % 2, % 11, % $35,000 - $49,999 2, % 6, % 5, % 4, % 3, % 4, % 26, % $50,000 - $74,999 2, % 10, % 10, % 9, % 6, % 6, % 45, % $75,000 - $99, % 5, % 8, % 10, % 6, % 5, % 36, % $100,000 - $149, % 1, % 3, % 6, % 4, % 3, % 19, % $150,000 - $199, % % % 1, % 1, % 1, % 5, % $200,000 - $250, % % % % % % 1, % $250,000 - $499, % % % % % % 1, % $500,000 or more 0 0.0% 4 0.0% 23 0% % % 29 0% % TOTAL 9, % 31, % 31, % 36, % 27, % 29, % 165, % Percent of Total 6% 19% 19% 22% 17% 18% 100% 5.7% 5.2% 7.0% HOUSEHOLD INCOME DISTRIBUTION 16.0% 27.3% 22.2% 11.5% 3.1% 1.1% 0.8% 0.1% DISTRIBUTION BY AGE OF HOUSEHOLDER 5.6% 18.9% 19.2% 21.9% 16.7% 17.8% Less Than $15,000 $15,000 - $24,999 $25,000 - $34,999 $35,000 - $49,999 $50,000 - $74,999 $75,000 - $99,999 Income Ranges $100,000 - $149,999 $150,000 - $199,999 $200,000 - $250,000 $250,000 - $499,999 $500,000 or More Age of Householder Source: ESRI 12

14 2000 TO 2010 HOUSEHOLDS INCREASED BY 10,634 WITH GAINS IN AGES 45+ AND DECLINES IN AGES Total Households and Household Growth by Age Cohort City of Virginia Beach ,000 15,000 35,000 9,707 10,000 25,000 15,000 5,445 3,261 4,367 5,000 5,000-5,000-15, , ,000-25,000-35,000-9,524-10,000-45, Change -15,000 Source: US Census 13

15 CITY OF VIRGINIA BEACH HOUSHOLDS ARE PROJECTED TO AGE IN PLACE State Forecasts 2000 Age Age Age Age Age Age 65+ Total For Comparison MSA Households 36, , , ,596 73, , ,553 City of Virginia Beach Households 9,454 33,561 41,162 30,741 17,841 21, ,455 City of Virginia Beach Capture 25.9% 31.6% 29.0% 27.5% 24.3% 20.7% 26.9% 2010 MSA Households 34, , , , , , ,058 City of Virginia Beach Households 9,134 31,259 31,638 36,186 27,548 29, , ,865 City of Virginia Beach Capture 26.4% 28.2% 27.5% 26.0% 25.6% 24.6% 26.5% 26.5% 5.5% 18.9% 19.1% 21.8% 16.6% 17.7% MSA Households 35, , , , , , ,358 City of Virginia Beach Households 9,299 37,387 32,956 32,193 31,069 41, , ,180 City of Virginia Beach Capture 26.4% 29.0% 28.3% 26.8% 25.6% 24.6% 26.5% 25.3% 5.0% 20.3% 17.9% 17.5% 16.9% 22.4% 2030 MSA Households 38, , , , , , ,169 City of Virginia Beach Households 10,152 38,864 38,304 32,999 27,761 52, , ,630 City of Virginia Beach Capture 26.4% 29.9% 29.2% 27.6% 25.6% 24.6% 26.7% 24.6% 5.1% 19.4% 19.1% 16.4% 13.8% 26.2% City of Virginia Beach Total Household Growth ,018 7,605 6,666-3, ,317 34,912 16,765 30% 25% 20% 15% 10% 5% 0% 26.2% 21.8% 18.9% 19.4% 19.1% 19.1% 16.4% 16.6% 17.7% 13.8% 5.5% 5.1% Age Age Age Age Age Age

16 MSA BUILDING PERMITS PULLED EXPECTED TO TAPER TO 7,500 WITH 14% MULTIFAMILY 20,000 50% 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, % 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Moody s Single-Family Multifamily % Multifamily 15

17 CITY CAPTURING ~20% OF MSA PERMITTING MULTIFAMILY AN INCREASING SHARE 10,000 9,000 8,000 7,000 6,000 5,000 60% 50% 40% 30% Year MSA Avg. Annual Permits SF % MF % ,591 10,201 70% 4,390 30% ,862 7,114 80% 1,748 20% ,212 6,819 83% 1,393 17% ,175 7,526 74% 2,648 26% ,685 4,025 71% 1,660 29% ,482 5,905 79% 1,577 21% ,548 7,396 87% 1,151 13% ,742 5,888 87% % ,116 5,383 88% % 4,000 3,000 2,000 1,000 0 Single-Family Multifamily Capture of MSA Source: Moody s, SOCDS 20% 10% 0% City of Virginia Beach Avg. Annual Year Permits SF % MF % ,555 3,649 80% % ,055 1,562 76% % ,984 1,428 72% % ,127 1,569 74% % , % % Capture of MSA Avg. Annual Year Permits SF MF % 36% 21% % 22% 28% % 21% 40% % 21% 21% % 17% 30% 16

18 FOR-SALE DEMAND OF 5,850 TO 7,350 HOUSEHOLDS ANNUALLY THROUGH Income Range Price Range Demand % New Demand for New Demand % New Demand for New Demand % New Demand for New Demand % New $35,000 - $50,000 $145,000 - $192,000 5,954 5% 298 5,818 5% 291 6,051 5% 303 6,321 5% 316 $50,000 - $75,000 $192,000 - $288,000 13,480 15% 2,022 11,082 15% ,514 15% 1,727 12,070 15% 1,810 $75,000 - $100,000 $288,000 - $384,000 9,943 18% 1,790 8,505 18% ,885 18% 1,599 9,282 18% 1,671 $100,000 - $150,000 $384,000 - $576,000 5,206 20% 1,041 9,064 20% ,520 20% 1,904 9,910 20% 1,982 $150,000 - AND OVER $576,000 - AND OVER 3,491 20% 698 7,238 20% ,523 20% 1,505 7,879 20% 1,576 Total 38,074 15% 5,849 41,707 16% 6,745 43,493 16% 7,038 45,461 16% 7,355 Demand for New New Housing Demand Distribution by Product Type Income Range Price Range % SFD % TH % MF % SFD % TH % MF % SFD % TH % MF % SFD % TH % MF $35,000 - $50,000 $145,000 - $192,000 10% 55% 35% 10% 55% 35% 10% 55% 35% 10% 55% 35% $50,000 - $75,000 $192,000 - $288,000 60% 25% 15% 60% 25% 15% 60% 25% 15% 60% 25% 15% $75,000 - $100,000 $288,000 - $384,000 65% 25% 10% 65% 25% 10% 65% 25% 10% 65% 25% 10% $100,000 - $150,000 $384,000 - $576,000 75% 20% 5% 75% 20% 5% 75% 20% 5% 75% 20% 5% $150,000 - AND OVER $576,000 - AND OVER 85% 15% 0% 85% 15% 0% 85% 15% 0% 85% 15% 0% Total New Housing by Product Type Income Range Price Range SFD TH MF SFD TH MF SFD TH MF SFD TH MF $35,000 - $50,000 $145,000 - $192, $50,000 - $75,000 $192,000 - $288, $75,000 - $100,000 $288,000 - $384, $100,000 - $150,000 $384,000 - $576, $150,000 - AND OVER $576,000 - AND OVER Total 3,781 1, ,612 1, ,813 1, ,030 1, Source: US Census, ESRI, RCLCO 17

19 AVERAGE ANNUAL RENTAL DEMAND OF UNITS Demand for New Demand %MF % New Demand for New Income Range Price Range Demand %MF % New $35,000 - $50,000 $817 - $1,167 22,146 60% 3% ,947 60% 3% 395 $50,000 - $75,000 $1,167 - $1,750 20,840 50% 11% 1,146 17,593 50% 11% 968 $75,000 - $100,000 $1,750 - $2,333 8,379 40% 11% 369 7,294 40% 11% 321 $100,000 - $150,000 $2,333 - $3,500 2,421 35% 11% 93 3,925 35% 11% 151 $150,000 - AND OVER $3,500 - AND OVER % 11% 32 1,083 30% 11% 36 Total 54,743 4% 2,038 51,843 4% 1, SGA Capture 40% 40% SGA Rental Multifamily Demand Potential Avg. Annual , Demand for New Demand %MF % New Demand for New Income Range Price Range Demand %MF % New $35,000 - $50,000 $817 - $1,167 22,645 60% 3% ,672 60% 3% 426 $50,000 - $75,000 $1,167 - $1,750 18,195 50% 11% 1,001 19,046 50% 11% 1,048 $75,000 - $100,000 $1,750 - $2,333 7,642 40% 11% 336 7,947 40% 11% 350 $100,000 - $150,000 $2,333 - $3,500 4,069 35% 11% 157 4,253 35% 11% 164 $150,000 - AND OVER $3,500 - AND OVER 1,084 30% 11% 36 1,143 30% 11% 38 Total 53,635 4% 1,937 56,061 4% 2, SGA Capture 40% 40% SGA Rental Multifamily Demand Potential Avg. Annual Source: US Census, ESRI, RCLCO 18

20 OUTLINE Economic Outlook and Commercial Market Update Demographic Trends and Residential Market Update SGAs in Context Considerations 19

21 CASCADE MODEL LIKELY SGA EVOLUTION PEMBROKE WAS FIRST IN, WILL BE FIRST TO RESTART Pembroke is the likely first destination for new urban development in Virginia Beach New developments can connect to the town center Shovel-ready sites available As Pembroke develops, prices for land and products will rise, leading to opportunities to divert increasing demand to other SGAs For residential development, Rosemont becomes marketsensible secondary destination Office development segmented by price, user, class, and format and may develop simultaneously in multiple SGAs. Projected Capture of New Multifamily and Townhouse Residential Demand in the City of Virginia Beach 80% 70% 60% 50% 40% 30% 20% 10% 0% Rosemont SGA Pembroke SGA Centerville Burton Station 20

22 CASCADE MODEL LIKELY SGA EVOLUTION PEMBROKE WAS FIRST IN, WILL BE FIRST TO RESTART Pembroke is the likely first destination for new urban development in Virginia Beach Near-term residential development will enhance climate for commercial office. Remaining commercial development should be focused on build-out of existing office cores like Newtown, and otherwise concentrated in locations that cannot accommodate residential due to AICUZ restrictions. Office development segmented by price, user, class, and format and may develop simultaneously in multiple SGAs. Projected Capture of New Commercial Office Demand in the City of Virginia Beach 60% 50% 40% 30% 20% 10% 0% Lynnhaven SGA Hilltop SGA Newtown SGA Pembroke SGA Centerville 21

23 KEY ASSUMPTIONS Assumptions City is land constrained. For the city to continue capturing its historical share of MSA growth, an increasing portion of city growth will occur as redevelopment of underutilized parcels. Up to 90% of total office and residential demand (excluding SFD) could be captured within SGA boundaries. Introduction of rail transit a necessary impetus for (re)development in SGAs. Consistent with case study evidence, a 20% value premium for TOD has been incorporated in the RLV modeling and is necessary to achieve feasibility for certain forecasted product types. Creation of compelling environments that will attract the HH and jobs that are currently leaving the city for more desirable locations. The above factors will result in a trajectory that returns the city to its historical share of MSA growth by Distribution of development between SGAs respects AICUZ restrictions on residential and specific types of commercial development. The city currently demonstrates an abundance of retail environments that preclude any significant new retail development in the near term. However, we have assumed that despite being oversupplied relative to calculated demand, the city's current retail market is in statis. Forecasted retail demand is commensurate with household and employment growth within each SGA. As the early SGAs build out, increasing supply constraints will put upward pressure on prices and rents, making new development feasible in other SGAs that lack the market dynamics today to spur new development in the short term. Programmed SF of development are exclusive of the repositioning of existing assets. The total SF in each SGA is the net gain through Economic forecasts, including employment projections and market conditions, have been updated to reflect January 2012 data. New forecasts reflect a more pessimistic outlook on job growth and demonstrate that Virginia Beach will need to be even more aggressive in attracting and retaining jobs and HH to achieve the forecasted development totals. 22

24 OUTLINE Economic Outlook and Commercial Market Update Demographic Trends and Residential Market Update SGAs in Context Considerations 23

25 CONSIDERATIONS Importance of fixed rail transit as a means to create compelling demand-side scenario for SGA locations specifically for residential cannot be overstated. Even with market premiums, given underlying economic and demographic factors, there will need to be some level of public investment in order to make the redevelopment of the SGAs palatable to the private development community. Transformation will be a long-term phenomenon, but can and should accelerate over that period with proper branding and phase management. Long-term competitiveness of Virginia Beach perhaps contingent on successful execution of the above, especially given current demographic and job decline and projections. Cost of SGA investment must be weighed against the cost of a do nothing scenario in which younger households and their employment/spending activity continue to leave the City and the region. 24

26 CRITICAL ASSUMPTIONS The conclusions and recommendations presented in this report are based on our analysis of the information available to us from our own sources and from the client as of the date of this report. We assume that the information is correct, complete, and reliable. Our conclusions and recommendations are based on certain assumptions about the future performance of the global, national, and/or local economy and real estate market, and on other factors similarly outside either our control or that of the client. We analyzed trends and the information available to us in drawing conclusions and making the appropriate recommendations. However, given the fluid and dynamic nature of the economy and real estate markets, it is critical to monitor the economy and markets continuously and to revisit the aforementioned conclusions and recommendations periodically to ensure that they stand the test of time. We assume that, in the future, the economy and real estate markets will grow at a stable and moderate rate. However, history tells us that stable and moderate growth patterns are not sustainable over extended periods of time. Indeed, we find that the economy is cyclical and that the real estate markets are typically highly sensitive to business cycles. Our analysis does not necessarily take into account the potential impact of major economic "shocks" on the national and/or local economy and does not necessarily account for the potential benefits from a major "boom." Similarly, the analysis does not necessarily reflect the residual impact on the real estate market and the competitive environment of such a shock or boom. The future is always difficult to predict, particularly given changing consumer and market psychology. Therefore, we recommend the close monitoring of the economy and the marketplace. The project and investment economics should be stress tested to ensure that potential fluctuations in the economy and real estate market conditions will not cause failure. In addition, we assume that economic, employment, and household growth will occur more or less in accordance with current expectations, along with other forecasts of trends and demographic and economic patterns. Along these lines, we are not taking into account any major shifts in the level of consumer confidence; in the cost of development and construction; in tax laws (i.e., property and income tax rates, deductibility of mortgage interest, and so forth); or in the availability and/or cost of capital and mortgage financing for real estate developers, owners, and buyers. Should any of the above change, this analysis should probably be updated, with the conclusions and recommendations summarized herein reviewed accordingly (and possibly revised). We also assume that competitive projects will be developed as planned (active and future) and that a reasonable stream of supply offerings will satisfy real estate demand. Finally, we assume that major public works projects occur and are completed as planned. 25

27 GENERAL LIMITING CONDITIONS Reasonable efforts have been made to ensure that the data contained in this study reflect accurate and timely information and are believed to be reliable. This study is based on estimates, assumptions, and other information developed by RCLCO from its independent research effort, general knowledge of the industry, and consultations with the client and its representatives. No responsibility is assumed for inaccuracies in reporting by the client, its agent, and representatives or in any other data source used in preparing or presenting this study. This report is based on information that to our knowledge was current as of the date of this report, and RCLCO has not undertaken any update of its research effort since such date. Our report may contain prospective financial information, estimates, or opinions that represent our view of reasonable expectations at a particular time, but such information, estimates, or opinions are not offered as predictions or assurances that a particular level of income or profit will be achieved, that particular events will occur, or that a particular price will be offered or accepted. Actual results achieved during the period covered by our prospective financial analysis may vary from those described in our report, and the variations may be material. Therefore, no warranty or representation is made by RCLCO that any of the projected values or results contained in this study will be achieved. Possession of this study does not carry with it the right of publication thereof or to use the name of "Robert Charles Lesser & Co." or "RCLCO" in any manner without first obtaining the prior written consent of RCLCO. No abstracting, excerpting, or summarization of this study may be made without first obtaining the prior written consent of RCLCO. This report is not to be used in conjunction with any public or private offering of securities or other similar purpose where it may be relied upon to any degree by any person other than the client without first obtaining the prior written consent of RCLCO. This study may not be used for any purpose other than that for which it is prepared or for which prior written consent has first been obtained from RCLCO. 26