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The economic development outlook for the Richmond region is exceeding expectations with companies increasingly choosing Richmond over other mid-sized cities.

The work-from-home trend is driving population growth as young workers and families relocate from primary cities seeking a higher quality of life. But rising inflation means the costs of homes have skyrocketed, along with rents and the costs of building materials.

The region is flush with federal money for infrastructure upgrades. Low interest rates and favorable cap rates mean investors are eagerly seeking real estate investments. Yet residential lots, commercial sites and skilled labor remain difficult to secure.

These were just a few of the insights shared during the VCU School of Business Kornblau Real Estate Program’s recent “Industry Talk.” (Full video and speaker transcript now available.)

Moderated by Jennifer Mullen, a partner at Roth Jackson, the 90-minute talk featured perspectives from members of the program’s Real Estate Circle of Excellence, including:

  • Alan Davis, principal and architect at Baskervill (architect)
  • Diane Linderman, managing director at VHB (urban planning)
  • Mike Lowry, senior vice president at NorthMarq Capital (commercial real estate)
  • Matthew Raggi, principal at Thalhimer Realty Partners (mixed-use developer)
  • Craig Toalson, CEO of Home Builders Association of Virginia (residential homes); and
  • Jennifer Wakefield, president and CEO of the Greater Richmond Partnership (economic development)

Here are some takeaways:

Richmond region is at an inflection point: Jennifer Wakefield reports that four of the nation’s top site consultants recently concluded that our region is well positioned to become a top mid-sized region in the U.S. for companies seeking to invest.

Advanced manufacturing has been and continues to be a regional strength. But prospects are diversifying with the world’s fastest internet now in our region. Transatlantic cables that land in Virginia Beach pass directly through Richmond (on their way to D.C.), fueling interest in a variety of promising new IT and data center projects.

Inflation hardest on renters, homebuyers and builders: Though two panelists expect the Federal Reserve to raise rates to slow inflation to 2 or 3% in the coming years, inflation currently is at 7%. Property owners and landlords, seeking to protect themselves from higher costs, are pushing rent increases to their residents.

Over the last 10 years in Richmond, the average residential apartment rental growth has been 2.4% per year. But in 2021, there was 12% growth in rental rates across the board. In 2022, rental rates are expected to grow another 12-15%.

“This is why, if you follow investment sales, we’re seeing properties trade in the 3.5 – 4.5% cap rate range. There are record-low interest rates, and tons of excess capital in the system since it’s so cheap to borrow. On top of that we’ve got rental growth of 12-15% which some buyers think will continue, driving cap rates down. It’s a perfect storm for the investment sales world, especially if you are a seller,” Raggi says.

Pandemic changes home and office environments: Richmond has been a big beneficiary of the pandemic and work-from-home trends that have fueled relocation to the region for a number of reasons.

As businesses start to think about new offices or retrofitting their existing office, Davis suggests they ask, “Why are people coming into the office and what do they need to be most effective both individually and collaboratively when working remotely or in-office?”

Employees are looking for stability, so Davis recommends considering all of the intended and unintended consequences of making changes to dedicated workspace. “Think about spaces you have. Are they optimal for virtual engagement? Are they the best representation of your brand? Consider lighting, acoustics and technology.”

In December, Richmond reported its highest level of office usage since the beginning of pandemic. In the office sector, flexibility, collaboration and wellness have become essential. Expect an increased effort to have views and opportunities that allow employees to connect with outdoors and their community.

Residential and mixed-use builders adapt to inflation: According to Toalson, lumber prices have skyrocketed again and just since November are adding $18,000 to the cost to build a new home. To compensate for the large fluctuation in material costs, the lack of labor to build homes, and the lack of lot supply, many builders are capping or limiting sales in certain communities. This practice ensures that the builder can meet the customers’ expectations, get the proper materials, have the labor to install those materials, deliver the home on time, and make a small profit for their services.

Builders also are limiting options. “Instead of 20 different siding colors, customers may have half as many color options” he says. The most popular options remain but the rare, hard-to-get options in many instances are being eliminated. Home Builders need to know up front if they are able to produce each of the customers choices. Eliminating hard-to-get options is creating greater efficiency in the home building industry. Still, “labor and materials don’t matter if a builder doesn’t have access to buildable lots,” says Toalson. 

Cost increases are also hitting mixed-used developments. Matt Raggi says, “What used to cost $150,000 per unit to build two years ago now costs $200,000. It’s put a renewed focus on value engineering.” Developers are now locking in fixed-rate debt on construction loans to reduce interest rate exposure.

Homes in the Richmond region: With four rate hikes projected for 2022, buyers are eager to buy while rates are low. The average new home price in Richmond market last year was $424,000, up 5% from 2020. But as we approach the price-to-income ratios of the mid-2000s, expect some pull back.

Anticipate an acceleration of “for sale” (condos), apartment and retail all mixed in, even in urban environments like Scott’s Addition and Manchester. Dog parks, walkability, social gathering spots, fire pits, outdoor space, bigger courtyards, bigger balconies, and trails have become increasingly desirable.

Affordable housing continues to lag despite tremendous need and the City allocating $20 million in ARPA funds for that purpose. “We need to get over the NIMBY [“not in my backyard”] role and make sure we are developing affordable housing with viable transportation for the long term,” said Linderman.

Expect infrastructure upgrades: “I’ve never seen so much money out there for infrastructure,” said Linderman. As a result of the American Rescue Plan Act, the Richmond region received $280 million that must be spent in five years.

The Infrastructure and Jobs Act brings another $20 billion to Virginia. The region anticipates the reauthorization of the Transportation Bill and the Build Back Better Bill could potentially emerge from Congress. In addition, the Central Virginia Transportation Authority, funded by gas taxes, collected $137 million for regional projects like transit.

Upcoming real estate events

Register now for the next Kornblau Real Estate Industry Talk, the Spring Housing Forum, on Thursday, March 31 from 9:00 – 10:30 a.m.

The next VCU Real Estate Trends Conference will be held on Thursday, October 13, 2022 at the Greater Richmond Convention Center. Learn more or review sponsorship opportunities today.

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