Central Virginia Real Estate Market Outlook and Trends
Posted on 01.29.18
In Fall 2017, the VCU Kornblau Real Estate Program and Knight, Dorin, & Rountrey conducted a survey to provide insight into current real estate trends in Virginia. The survey includes responses from 769 respondents with varying real estate backgrounds from across the state – Central Virginia, Hampton Roads, Northern Virginia, and Southwest Virginia. This article serves as a summary of the results of this study and offers some insights as to the potential implications for the Central Virginia region.
The real estate market in the Central Virginia area is relatively strong, with investors receiving returns ranging from 8% to 20% on projects. Lease cap rates in the region are lower than the state average, indicating that land values in Central Virginia are relatively high. The biggest sectors for concern are the retail and hospitality segments. Market participants generally see those segments as having peaked and now entering a recessionary phase. In addition, it is typically harder to obtain financing in those segments, and the lenders expect higher returns to compensate them for their increased risk. Respondents also indicated that developments planned for the City of Richmond can be very difficult and time-consuming from a legislative and administrative approval process. Approvals within the City of Richmond generally take at least twice as long as some of the surrounding counties.
In general, the respondents feel that most industry segments are in growth phases and have strong economic outlooks. However, the participants do not feel as strongly about the retail industry. Approximately 33% of respondents expect the retail real estate industry to be worse off in six months than it is today. That is the only segment (hospitality, industrial, multi-family, office, residential, and retail) where more than 10% of respondents answered in that manner. In addition, 71% and 58% of respondents feel as though the office and retail segments, respectively, have either reached their maturity or have entered into a recessionary period.
Market Participant Expectations:
Real estate investors are, on average, looking for profits of approximately 14% on real estate ventures in the Central Virginia area. In the residential segment, average lot prices range from 20-25% of the total price of the home sale in Central Virginia, with starter housing coming in at an average of 20% and high-end luxury homes coming in at an average of 25%.
In the leasing space, the survey notes that average cap rates in Central Virginia range from 6.0% to 7.1%, which are higher than comparable rates in Northern Virginia, but lower than those of Hampton Roads and Southwest Virginia. A lower cap rate indicates that land values are higher in proportion to the annual rent charged to the tenant. This would indicate, as expected, that land values in Northern Virginia are higher than anywhere else in the state.
Average commissions and other sale costs range from 2.3% - 5.4% in Central Virginia, which is lower than state average for sale prices below $5 million and higher than state average for prices above $5 million.
Across the state, all industries are reporting adequate or higher levels of funding availability. The hospitality (31%) and retail (25%) segments show the largest number of “inadequate” responses. Given the relatively poor economic outlook for those segments, it makes sense that banks may be a little tighter on the lending requirements for projects in those industries.
On a macro-economic note, 95% of respondents expect the treasury yield curve to increase in the next 6 months. To relate that trend to the financing of real estate projects, lenders typically expect to see returns of 2%-2.6% greater than the treasury yield curve. Multi-family projects have the lowest expected return at 2%, and retail and hospitality projects have the highest expected return at 2.6%. Again, this trend is in line with the overall general economic outlook; with a perceived weaker environment and harder access to funds, lenders are demanding a higher return on their investment due to the higher perceived risk.
Major Roadblocks to Development:
Respondents noted significant lead times necessary to start on new developments needed to obtain legislative and regulatory approval. The legislative approval process generally takes no more than 9 months; however, 20% of respondents noted that the process can take over 2 years in the City of Richmond. Administrative approvals generally take another 3 to 6 months, but again, the City of Richmond’s process can take up to 6 to 9 months.
The issues that seem to cause the largest time delays are 1) neighborhood opposition, 2) timeline for local planning department to review, and 3) zoning agenda caseloads in a jurisdiction.
Source: VCU Kornblau Real Estate - Real Estate Market Particpants' Survey