Real Estate Market and Feasibility Analysis Submitted to: Mallory Butler Director Department of Economic Development 801 Crawford Street Portsmouth, VA 23704 May 17, 2017 May 17, 2017 Mallory Butler Director Department of Economic Development 801 Crawford Street Portsmouth, VA 23704 Dear Ms. Butler, The City of Portsmouth, Virginia engaged Hunden Strategic Partners to perform a real estate market analysis and feasibility study for the downtown area, as defined in the RFP. The study reviewed key real estate uses in the downtown market to help the City understand prospects for growth. Real estate uses analyzed included hotel, retail, office, residential, entertainment, dining, and related developments/uses. The attached is our report. This deliverable has been prepared under the following general assumptions and limiting conditions: § The findings presented herein reflect analysis of primary and secondary sources of information that are assumed to be correct. HSP utilized sources deemed to be reliable, but cannot guarantee their accuracy. § No responsibility is taken for changes in market conditions after the due diligence dates of this report, which was originally completed in the summer of 2016, and no obligation is assumed to revise this report to reflect events or conditions occurring after the summer of 2016, unless otherwise provided herein. § Macroeconomic events affecting travel and the economy cannot be predicted and may impact the development and performance of the project. We have enjoyed serving you on this engagement and look forward to providing you with continuing service. Sincerely yours, Hunden Strategic Partners TABLE OF CONTENTS ------------ Executive Summary Chapter 1 Portsmouth Profile and General Market Conditions Chapter 2 Portsmouth Strengths, Weaknesses and Incentive Discussion Chapter 3 Downtown and Uptown Zoning Discussion Chapter 4 Vacant Waterfront Properties and D2 Form Based Code District Chapter 5 Incentive Programs Chapter 6 Recommendations Appendix A Office Market Analysis Appendix B Residential Market Analysis Appendix C Hotel Market Analysis Appendix D Retail and Restaurant Market Analysis Appendix E Specialty and Entertainment Analysis Appendix F Relevant Waterfront Community Profiles EXECUTIVE SUMMARY The City of Portsmouth, Virginia (City or Client) continues its efforts to redevelop and enhance the Downtown area, which has been the subject of a number of studies, plans and efforts over the past several years. The City engaged Hunden Strategic Partners (HSP) to perform a real estate market analysis and feasibility study for the downtown area. The purpose of the analysis is to determine the answers to several questions: ▪ What are the market conditions for each type of major real estate use? ▪ What do the market conditions imply for future development? ▪ Is development hindered in any way by current zoning? If so, what changes are recommended? ▪ What are the incentives locally for real estate development and how do they compare with other Hampton Roads communities? ▪ What type of development is recommended for priority sites in downtown Portsmouth? ▪ What is the conclusion and recommendation for each type of real estate use downtown in the near term? In order to answer the questions posed, HSP completed the following: ▪ Analyzed national economic factors influencing real estate development, ▪ Analyzed local and regional economic and demographic conditions, ▪ Analyzed local and downtown market conditions for multiple uses, ▪ Interviewed residential and commercial brokers, managers, and stakeholders, ▪ Reviewed and commented on zoning codes, ▪ Profiled other waterfront communities’ downtowns and discussed their redevelopment efforts, ▪ Analyzed incentives available for real estate development or redevelopment in Portsmouth and surrounding communities. Downtown Portsmouth is a unique community and the revitalization efforts are currently being impacted by several forces that will shape development fundamentals. Most waterfront communities in the Hampton Roads area face some access issues given the bridges and tunnels. However, investments have been made to minimize this challenge and improve the flow of people, goods and spending from place to place. Additional tunnels and/or bridges, even when they come with tolls, help to lower barriers to economic flows. Connectivity and ease of access is an improving factor. Small Town Market Feel within a Large Metro Market. Downtown Portsmouth exhibits the type of real estate market characteristics that often accompany much smaller cities. Its downtown has relatively shallow markets for each real estate use type compared with downtowns of other large metro areas. This is a result of the fact that the Hampton Roads metro area is comprised of multiple individual cities, all with their own downtowns, attractions, economic demand generators, employment centers and neighborhoods. In this way, Portsmouth is not unlike Durham, Raleigh and Chapel Hill, North Carolina. The metro includes all three and is Downtown Portsmouth Real Estate Market Study Executive Summary – Page 2 large, but the individual cities making up the region are small because there is no center city where most of the assets and central business district is located. Employers. The good news is that Portsmouth is home to a large employer, the Naval Medical Center- Portsmouth, not to mention the Atlantic 5th District Headquarters of the Coast Guard and the Norfolk Naval Shipyard. Even better, the Medical Center attracts more than 10,000 visitors per day as well as patients and employees. The facilities generate significant traffic of employees and visitors and are located adjacent to the downtown commercial area. The challenge, however, is the security associated with coming and going from the Medical Center. The security issues make it more difficult for visitors and employees to walk downtown and have lunch, dinner or shop. However, the more compelling downtown is, the more likely that visitors will visit and employees will want to become residents. As downtown becomes a more vibrant place, it is more likely to benefit from the massive market that sits beside it. Overview. HSP’s analysis of the real estate market quickly revealed these shallow markets. For example, there is essentially no Class A office market. There are Class B, C and government-owned buildings. There is only one true hotel in the downtown area, although there are two very small limited service properties within one mile. The restaurant market is shallow, and it is seemingly always stuck between achieving critical mass when a new restaurant opens and being a hodgepodge when one closes. The retail market is very sparse and is primarily made up of boutique, home furnishing and novelty-type stores. Attractions are limited and the one true opportunity, the waterfront, has not been leveraged for development of highest-and-best use options like residential, hotel or Class A office, except for the Renaissance hotel. Residential. On the other hand, there is one market that is growing and thriving: residential multi-family. Portsmouth has long had an outstanding historic residential neighborhood right in the heart of the city. However, in order to attract residents, newer multi-family were needed. The market has delivered, likely due to the megatrend over the past ten years of Millennials and Empty Nesters moving to urban centers where walkability was preferred. This same trend has been manifesting itself in most other urban centers in the U.S. It has taken hold in downtown Portsmouth and HSP believes this could be the lynchpin of a sustainable downtown, where many more types of development are feasible. As one residential project is built and absorbed positively by the market, others are planned and financed. This creation of a solid mass of residents is critical to the long-term health of downtown Portsmouth. Real estate uses are symbiotic in nature. Most uses have a need or usefulness to other types of development. For example, residents like to have convenient groceries, drug stores and general merchandise stores nearby. Those same use types need a critical mass of residents nearby in order to support their economics. Without enough nearby residents, drug, grocery and general merchandise stores are not feasible. Without the stores, residential development is harder to rationalize. However, enough residential is being developed that the market is starting to move toward the ability to support smaller versions of these stores. For true market sustainability, more residents are needed. The addition of more daytime worker activity would help provide daytime shopping support. The public sector should prioritize developable sites and areas in order to induce more residential and commercial demand downtown. The residential developments will continue to drive the need for food and beverage options, retail and other amenities to enhance the quality of life. Downtown Portsmouth Real Estate Market Study Executive Summary – Page 3 Restaurants. Restaurants are similarly symbiotic with residential development, yet they are also critical to tourism. For the first time in U.S. history, the amount of money spent on prepared meals at restaurants has surpassed the amount spent in grocery stores. This megatrend suggests that a choice of restaurant cuisines, price points and styles is critical to developing a strong resident base…and this has been realized in most other downtowns over the past ten years. Also, a strong resident base is critical