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Apartment boom expected to double Richmond area’s multifamily inventory

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Print this page By Richard Foster

Rob McDaniel doesn’t worry about being late to class. His new apartment in downtown Richmond is just a short walk from Virginia Commonwealth University’s Brandcenter, where he takes graduate classes in marketing.

A Richmond native who grew up on Cherokee Road, near the city’s boundary with the suburbs of Chesterfield County, McDaniel, 31, never considered looking for a suburban apartment when he returned to Richmond to go back to school after working in North Carolina as a community relations manager for Barnes & Noble. Instead, he moved into the Residences at the John Marshall.

“Downtown is really becoming a much more vibrant place, and that’s what drove me to it,” says McDaniel, who shares his apartment at the former Hotel John Marshall at Fifth and Franklin streets with a 10-year-old dachshund named Miles.  Dominion Realty Partners owns the property and oversaw the renovation of one of Richmond’s best known landmarks.

McDaniel is not alone in his sentiments about living in downtown Richmond. Demand for downtown-area apartments has skyrocketed, and developers are building inventory at exponential speed, driven by historic tax credits and city tax abatement incentives. The market is so hot, in fact, that developers are able to get as much as $700 a month or more for apartments without windows.
The local boom mirrors a national trend with multifamily housing one of the hottest sectors in real estate. For six consecutive quarters, the National Multi Housing Council Quarterly Survey of Apartment Market Conditions showed improvement across all four indexes measuring supply and demand and financing for multifamily properties. The council’s chief economist, Mark Obrinsky, told CoStar Group Inc., a Washington, D.C.-based commercial real estate research and analytics firm, that “even as new construction ramps up, higher demand for apartment residences still outstrips new supply with no letup in sight.”

While financing has been easiest to get in top-tier markets, lending volume for multifamily properties rose 19 percent in the second quarter compared with the same time a year ago and 21 percent from the first quarter, according to a recent survey by the Mortgage Bankers Association. The year-over-year increase in apartment mortgages ranked behind hotels and retail, but ahead of office and health-care property originations.

In downtown Richmond, the tenants are a mix of young urban professionals, students and empty nesters who want the convenience of short commutes and the excitement of an urban lifestyle. They will pay $1,000 or more a month for an attractive, 650- to 800-square-foot studio apartment with polished wood floors, granite countertops and a modern design sensibility. An upscale two- or three-bedroom apartment can command up to $2,000 a month.

$1 billion in new projects

In response to demand, development is currently under way on nearly $1 billion in construction projects in the downtown area, much of it with a residential component.
“The downtown market is performing very well,” says Drew Wiltshire, a vice president with Thalhimer Realty Partners. There are currently about 2,500 apartments either being built or about to begin construction downtown in the near future, Wiltshire says. By some estimates, that would almost double the available downtown inventory.

According to Real Data Inc.’s Apartment Insights, which tracks rental inventory in Virginia and the Carolinas, vacancy rates in the metro Richmond region were 6.2 percent this summer, down from a recent high of 9.9 percent in early 2010.

“We’ve got 500 apartments and less than 2 percent vacancies, and we’re steadily able to increase the prices because of demand,” says Richard W. Gregory, a principal partner with Fountainhead Properties, which owns and manages several mixed-use residential and commercial properties in the Manchester area, just south of the river from downtown Richmond. 

Fountainhead’s latest project is The Locks, a $35 million renovation of the former Reynolds Metals North factory complex on the Haxall Canal near the Christopher Newport Cross commemorating the 1607 landing of the first English settlers in the area. A joint project with WVS Cos. ― developers of the Rocketts Landing riverfront mixed-use project ― The Locks will begin leasing its first phase of 179 apartments late this year, just in time for the opening of Casa Del Barco, a new restaurant that will be operated by the owner of the Boathouse restaurants at Rocketts Landing and Brandermill. Nestled amid the shadows of the Wells Fargo and SunTrust buildings, it is smack-dab in the middle of the city skyline. A bridge and walkways will connect it with nearby Browns Island.

Dropping more than 200 new full-time, upscale residents into the city also will drive the construction of new services, restaurants and stores, Gregory says. When completed in two years, The Locks will offer a total of 460 apartments in a complex of five buildings on the former Reynolds site where workers once cut and packaged Reynolds Wrap aluminum foil.

Just as the apartment market in Henrico County’s West End is largely driven by Capital One Financial Corp., ― one of the region’s largest employers ― Richmond’s downtown rental market is booming largely because of the tens of thousands of students and employees at VCU’s ever-expanding academic campus and medical center, say Gregory and others.

Nightlife options

Nonetheless, proximity to VCU is hardly the only reason McDaniel decided to live at the iconic John Marshall with its signature neon rooftop sign visible from miles away. “It’s such a great location because you can go anywhere in terms of nightlife,” he says.

He’s a couple blocks from The National theater, a mecca for famous performers ranging from Snoop Dogg to Elvis Costello. The Residences at the John Marshall, which opened in late 2011, also offer performances in the building’s ballroom, featuring the likes of Patterson Hood, leader of the Athens, Ga., band Drive-By Truckers. For those with high-minded musical tastes, nearby CenterStage on Grace Street features ballet, symphony and opera.

Within walking distance of McDaniel’s apartment are Penny Lane Pub and Capital Ale House, where he says “you can’t beat two-dollar burger night on Mondays.” A slightly longer walk or bike ride leads to riverfront walking trails on Browns Island or the bars of Richmond’s Shockoe Bottom and Fan District.

“It’s such a great living experience,” McDaniel says. “You’re near a lot of cool landmarks. … Who doesn’t want to live in the building where you have your own barbershop downstairs? ... And the view doesn’t hurt. I look out my window and there’s the State Capitol. It’s just a gorgeous, gorgeous apartment.”

Yet, in the West End or South Side for the same money, one could rent a much larger, two- or three-bedroom apartment. It’s a different way of thinking, Gregory says. Today’s young urban professionals are less interested in square footage than what’s within walking distance, he says. And while downtown properties like The Locks retain similar amenities as their suburban counterparts, like pools, fitness centers and rooftop common areas, urban renters are more interested in the convenience of on-site concierge services such as dry-cleaning pickup.

Unlike their parents’ generation, Gregory says, these tenants are not interested in buying houses. In some cases, their parents’ homes are “underwater,” with a mortgage higher than the house is worth. With banks tightening up on lending and requiring larger down payments for mortgages, renting makes more sense.

The apartment development boom is a major shift from the early 2000s when most downtown developers wanted to build condos. After the 2008 economic downturn, projects like the Miller & Rhoads building on East Broad Street changed from condos into upscale apartments.  “When you sell a condo, you’re gone, you’re out of it, you’ve made your money,” Gregory says. It’s not that way when you build and lease apartments. With demand continuing, he adds, rents will rise incrementally.

Not everyone thinks the market will keep growing. Andrew K. Ryan, a partner with marketing firm Commonwealth Partnerships Group, is concerned that an apartment bust could be looming. He cites a controversial U.S. Census Bureau report released this year that ranked Richmond’s apartment vacancy rates as the fifth-highest city in the nation, at 15.1 percent. Local real estate professionals, though, have long said the census vacancy surveys provide a highly flawed and inaccurate picture of the market’s rental activity.

“The strong multifamily market is certainly evident in the Richmond building boom, but there are some potentially worrisome signs,” Ryan says. “Larger multifamily mixed-use projects such as The Locks along the canal should continue to attract tenants, given their locations and features. However, smaller developments that plan to convert any office or industrial site into apartments could pose long-term absorption risks for the Richmond region, especially when the apartment market cools.”

Nevertheless, developers think the downtown residential market has just gotten started. “Downtown Richmond has something in the neighborhood of 80,000 jobs and the downtown market has something in the neighborhood of 3,000 housing units, so you’re talking about a market that has been massively underdeveloped, given the number of jobs,” says Jason Vickers-Smith of WVS Cos.
“Ten years ago, there were definitely less than 1,000 apartments in the central business district, and now we’re building up to 10,000,” Gregory says. “I feel like the speed limit is 70 and we were going 10 miles an hour, and now we’re at 40. … When you’ve got zero vacancies and you’re raising prices … we’re not up to 70 yet.” 

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