Similar to the early stages of the COVID-19 pandemic in 2020, a gap has started forming with price expectations between apartment owners and investors. The price disparity at the start of the pandemic was driven namely by market uncertainty, adjustments to underwriting assumptions and increases to lender and insurance escrow requirements.
As the pandemic played out, we saw a mass exodus from denser gateway cities, an influx of government stimulus money and a phasing out of state-specific stay-at-home orders that allowed the economy to open back up.
Capital moved away from the retail and hospitality industries hit the hardest, with the multifamily sector reaping the benefit. The second half of 2020 saw a dramatic rise in rents, occupancy and new lease and renewal signings.
These trends led to a calming of the debt and capital markets, paving the way for the price gap between buyers and sellers to evaporate as an unprecedented wave of investment flooded into the multifamily space, with 2021 hitting a new high of $213 billion of investment volume, well above the previous peak of $129 billion in 2019, according to Yardi Matrix data.
Now midway through 2022, we’re seeing a buyer-seller price gap begin to take shape again, but for different reasons.
Richmond’s bid-ask gap
The buyer-seller gap forming today stems from the ongoing rapidly rising interest rate environment coming to fruition in 2022. The Federal Reserve increased the federal funds rate by 75 basis points to a target rate of 1.5 percent-1.75 percent at the Federal Open Market Committee (FOMC) meeting in June. The central bank announced another 75-basis-point hike at the FOMC July meeting.
As the Federal Reserve raises interest rates to combat inflation, which accelerated to 9.1 percent in June (according to the Consumer Price Index, the highest rate since November 1981), a corresponding increase in cap rates is necessitated to satisfy multifamily investor return metrics.
The cap rate compression experienced over the last 12 months in the greater Richmond MSA resulted in the average price per unit to climb north of $175,000, a nearly 25 percent increase from the approximately $136,000 figure recorded through the first half of 2021. Last year saw records for deliveries and transactions, with 5,591 units coming on line and $2.4 billion in multifamily assets trading across the Richmond MSA.
As interest rates continue to rise, investors will seek relief via higher cap rates that translate to acquisition pricing below what sellers have become accustomed to over the past 24 months. This leaves uncertainty around how the Richmond MSA will perform going forward.
How will Richmond perform?
Despite the uncertainly around interest rates and the U.S. economy, the Richmond MSA boasts strong multifamily fundamentals that are expected to display ongoing resiliency.
Metro Richmond recorded just under 12,300 units under construction at the end of the second quarter, with Scott’s Addition leading the development pipeline with just over 10 percent of that total. The metro holds an additional 40,000 apartments in the planning and permitting stages, confirming developers’ confidence in the market’s long-term potential.
Even with deliveries heating up, occupancy in metro Richmond over the last 12 months has been able to keep pace with the national average at just under 97 percent thanks to a well-educated, young workforce and tenant base.
With nearly 30 higher education institutions in the region, Richmond has been able to attract and retain businesses of all sizes, helping satisfy multifamily demand.
The MSA’s unemployment rate continues to stay in-line with the national average — hovering at 3.5 percent (down about 40 basis points from the end of 2021). In the past 18 months, ASGN Inc., Babylon Micro-Farms and Vytal Studios all committed to establishing operations in and around Richmond, moving operations from Los Angeles, Charlottesville and Austin, respectively.
Most notably, LEGO also committed to investing more than $1 billion to build its second North American factory in Chesterfield County. The expansion will establish more than 1,760 new jobs (see more on page 20). The arrival of these employers paired with the in-migration of residents from higher-cost metros paints a favorable outlook on Richmond continuing to fuel multifamily demand.
As it relates to rents, the Richmond multifamily market has grown despite strong supply. With rent growth greater than 13 percent year-over-year through June, and submarkets such as Highland Springs elevating to more than a 20 percent increase over the past 12 months, Richmond continues to yield strong rent appreciation. The MSA’s average rent sits roughly $250 less than the national average at $1,375, which is a testament to the market’s affordability relative to other major metros.
Although deceleration toward a more sustainable pace is expected as interest rates rise and buyers and sellers work to find common ground, the multifamily fundamentals present throughout the Richmond MSA positions the market favorably for long-term growth that will continue to garner national attention and the interest of institutional-level capital.
— By Eric Liebich, Senior Advisor, Capstone. This article was originally published in the August 2022 issue of Southeast Real Estate Business.