Due to the nature of the current constrained inventory environment, if you are an owner of multi-family or mixed-use property, you are in a wonderful position.
Tax incentivized development — Historic Tax Credits, Abatement programs, Enterprise Zones, LIHTEC, etc — is an art form that is not employed across all markets and thus not always understood by outside investors. It takes a group familiar with these local processes to help shine some light on development patterns and to help those from outside the RVA marketplace connect the dots and understand the landscape.
Current Market Conditions
Richmond is in a renaissance and quickly becoming a popular city for outside investment. For a myriad of reasons, investment groups and funds that used to overlook Richmond have begun to now seek opportunity here.
We have been approached by several types of investment groups who have tasked us with finding suitable properties for their objectives.
Cap Rate Arbitrage
Cap Rates in the markets of DC, Baltimore, Philly, and NY are all trading at or near all-time lows. Between interest rates, a better overall economy, and European capital seeking safe haven from Brexit, we have been deluged with brokers from other markets seeking opportunity. VCU’s stable presence is obviously helpful, but so is the fact that the Richmond’s population trend has not been this positive since the 1950’s.
The acute housing shortage is transforming the market, especially in urban areas where the addition of new housing is constrained. We have several clients who specialize in converting apartments, especially the loft-styled/industrial feeling warehouse conversions, into a stock of ‘affordable urban’ housing units.
Since 2008, less than 5% of the residential development in the city has been in the form of condominiums or townhomes. This ratio has been even more apartment heavy in the neighborhoods of Shockoe, Jackson Ward, Monroe Ward, and Manchester. The Fan District has seen several new For Sale projects brought to market that sold quickly, sold well, and sold at top of the market prices.
Condo inventory has fallen from its heights in 2008 – 2010 to only a small fraction of its pre-bubble levels and the conditions are favorable to add units. Recent changes to the Fannie Mae, Freddie Mac, and FHA Condominium underwriting guidelines have also been helpful to the market resurgence.
Several of our investors are capital heavy and look for projects with opportunity to add more units, amenities, or other ways to increase the yield from a property — typically in a way that is cash intense.
The tax-favorable methods of development, especially Historic Credits, can limit density and only become available to develop once the hold period has expired. With no credits available to offset development costs, often the ability for the original developer to capture upside is limited and thus, a sale to an investment group with capital to deploy may be a better strategy.
Repositioning or Deferred Maintenance
Properties developed in the earlier period of Richmond’s rebirth (1995-2003) were built in the days before the multi-family amenity battle began in earnest. Smaller kitchens, more pedestrian finish levels, fewer common amenities (movie rooms, exercise facilities, pools) and less engaging entry areas/hallways, are all hallmarks of the first generation of warehouse redevelopment.
For many current owners, rents have flattened as new competition has entered the market with resident packages and interior aesthetics that are preferable. In order to compete, either a sizable investment in the property or an adjustment in rent levels is required.
We have investors who specialize in moving a property into a higher strata via an capital infusion, albeit to address deferred maintenance issues or the addition of amenities that are now required to compete in the market.
If you would like to talk about what your property may be worth, we are happy to help. Our list of investors seeking opportunity is extensive and growing.
Please contact Tom Rosman, Director of Commercial Sales to discuss your objectives, pricing expectations, and term preferences.