Richmond has become a multifamily safe haven with unemployment rates below the national average and the second-best annual rental returns in the nation at 20.42 percent. Richmond’s high annual returns are due in large part to its population. The city has become a mecca for young adults as 32.2 percent of the population is in its 20s and 30s — well above the national average of 22 percent.
This population’s drive for an urban, walkable lifestyle is generating a great deal of development in the CBD, as well as the Manchester submarket where Virginia Commonwealth University’s (VCU) Institute for Contemporary Art is located. VCU’s art institute is the No. 1 art and design school in the country, and continues to draw in Millennials looking to take advantage of the open and historic downtown district surrounding the James River.
Richmond’s flourishing, younger population is demanding adaptive re-use and new development and developers in Richmond are answering the call. Areas such as Scott’s Addition, Shockoe Bottom and Manchester have all seen new mid and high-rise developments in recent months that are attracting a plethora of new tenants.
Highlights of Richmond’s apartment market include:
• 1,000 units are currently under construction with an additional 1,100 proposed in Richmond’s Central submarket.
• In recent months, rents for newly constructed and revitalized multifamily properties in the Central and West submarkets have exceeded $1.60 per square foot, thereby increasing the ability for local and regional developers to capitalize on development opportunities in areas that exceed the required rates of return for new construction.
• As evidenced by the current effective lease rates, occupancies, and projected growth of the Richmond market’s apartment sector, demand continues to increase among tenants and investors alike for high-quality, urban multifamily communities.
Economic Drivers
The Richmond MSA has experienced moderate employment growth with more than 7,000 jobs created over the last year. As of May 2015, the unemployment rate continued to remain steadily below the national average at 5.3 percent, with an average annual salary of $47,060. In particular, with more than 600 companies in the sector, the financial services industry has remained a commanding force in the MSA as it employs the largest number of residents.
Jared Alcorn, Capstone Apartment Properties
Todd Conner, Capstone Apartment Properties
New industries have recognized the success of the financial sector, the work ethic of Richmond’s residents, and the MSAs thriving economy and decided to take advantage. Domestic and international companies like Amazon, Capital One, Shandong Tranlin Paper Co., Altria, BH Media Group, SunTrust and Wells Fargo now call Richmond home. In fact, Shandong Tranlin Paper Co. plans to invest $2 billion and employ 2,000 people in constructing an advanced manufacturing plant in Chesterfield County, its first facility in the United States.
Short Pump Town Center has become a leader in new commercial retail development in Henrico County and drives the West 1 & 2 submarkets. The center services 320,000 residents and shoppers throughout the region given its convenient proximity to several major highways. In fact, the Richmond Times-Dispatch reported that Short Pump’s total sales in 2012, the last year for which numbers were available, doubled the sales of any other regional mall at $352 million.
Attractive Stability
Historically speaking, owners in the Richmond MSA have been reluctant to let go of their assets, and the transactional volume of multifamily properties has been relatively low in comparison to similar MSAs in the Mid-Atlantic. Increasingly resilient multifamily fundamentals in the Richmond MSA have reached a national audience in recent months, as institutional and private capital investors alike are beginning to take notice of Richmond’s strong economic environment.
Therefore, transactional volume is expected to increase during the next 12 months as investors are expected to capitalize on a real estate cycle that boasts highly compressed cap rates. The aggressive nature of investors looking for stabilized and opportunistic multifamily assets in the primary and secondary markets of Virginia are driving the cap rate compression.
While offering a stable investment environment that has become progressively more competitive, Richmond has not yet reached the high barrier to entry levels of markets such as Washington, D.C., Charlotte and Raleigh. Downtown Richmond exudes an emerging vibrancy that is attracting Millennials with disposable income, while the vitality and diversity in its economic drivers assures investors that the city will continue to be a sound apartment market for the foreseeable future.
— By Jared Alcorn, Investment Advisor and Todd Conner, Principal Broker, Capstone Apartment Properties. This article originally appeared in the August 2015 issue of Southeast Real Estate Business.