Is it Time to Start Investing in Richmond’s Office Market? All Signs Point to ‘Yes’

Richmond has been considered a secondary market in the eyes of many national investors, and for good reason. Rental rates don’t compare to Washington D.C., New York City or other major primary markets. But a strong leasing market mixed with a large-scale population shift leads to one question: is now the time to start investing in the Richmond office market?

Cameron Maxey, NAI Dominion

Home to seven Fortune 500 companies, as well as fast-growing companies such as CoStar Group and Capital One, Richmond has made its mark as one of the top cities in the country when it comes to attracting recent college graduates. Offering affordable and diverse housing, amazing food and entertainment, close proximity to beaches and the nation’s capital with a high demand for skilled workers, Richmond is the perfect city for just about anyone. Hence, Richmond has seen a massive boom in its working-class population, which has led to lower vacancy rates, increased rents and a rise in new office developments.

The revitalization of two major submarkets is also impacting the growth in millennial population. Scotts Addition and Manchester have both seen significant interest and investment from local and national developers. These submarkets are bringing the live-work-play feel to Richmond’s downtown by offering upscale housing, ample nightlife and dining options, and a excellent walkability to the outskirts of the city. While Scotts Addition is nearing its peak, Manchester is just beginning to see the effects of this revitalization and is an area to be excited about.

Once the capitol of Richmond, Manchester had seen decades of neglect and was becoming an eyesore in the heart of a beautiful city. Due to the Historic Tax Credit and Opportunity Zone programs, this all changed, and it changed fast. With beautiful views of the James River and Richmond skyline, ample restaurants and breweries, and high-density and modern multifamily developments, there is much to envy about locating one’s business in Manchester.

To meet this demand, over 350,000 square feet of Class A office space is currently under construction or proposed to begin construction in the near future. Many local developers can be credited with the rapid revitalization efforts, two of the more prominent being Fountainhead Properties and Lynx Ventures. Development efforts are in full swing, but to the investor with a vision toward the future, Manchester is a unique opportunity and one that should yield long-term rewards for companies that take the risk.

On top of the population shift that we’re currently experiencing, leasing activity as well as other market factors are all looking strong in Richmond.

In the midst of nationwide shutdowns and economic volatility, office leasing has not slowed down one bit. In fact, Richmond is on pace for 2.7 million square feet of positive absorption, which is higher than the annual average since 2006 and higher than the approximately 2.5 million square feet absorbed in 2019. Occupancy rates in downtown Richmond are nearing 95 percent, while rent growth has steadily grown year-over-year.

Richmond is on pace for 2.7 million square feet of positive absorption

That said, investment activity in 2020 has seen a rapid decline, and is on pace to be the lowest in a calendar year since the last recovery in 2012. Investment activity is on pace for $160 million in 2020, whereas the annual average since 2006 is just north of $250 million. On top of this, cap rates are rising, following an upward trend that started in 2016. This is a trend that has left many investors and analysts scratching their heads, as the amount of inventory has not differed from recent years.

Yes, the current state of our economy stemming from the COVID-19 pandemic is a large reason for this decline in investment activity. However, for the investor that has available capital, now is the time to consider Richmond. Strong leasing demand, growth in the workforce and the current rise in cap rates all suggest that Richmond will offer a strong return over a long-term investment.

— By Cameron Maxey, Assistant Vice President, NAI Dominion

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