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Commercial

2022 Market Housing Market Forecast

January 14, 2022 By Rick Jarvis

Each year, we try to push out our thoughts about the housing market in the coming year.

2022 is no different.

The presentation we did this year we feel is one of the most important ones we have ever done.

Why?

Because the market conditions are quite frankly, unprecedented.

At no time in our history have we had so many extreme inputs to the market –– from inventory to stimulus to mortgage rates to inflation to migration –– everything.

To offer you a taste of what is in the presentation, here is a sample of what we see coming:

  • prices should continue to increase –– even possibly spike again
  • mortgage rates should rise
  • inventory conditions will continue to be near historic lows
  • migration to our region has never been higher
  • 2008 vs 2022 price analysis
  • new housing difficulties

And so much more…

Enjoy!

What to Expect in 2020

January 1, 2020 By Rick Jarvis

Forgive me, readers, for I have sinned. It has been 4 months since the last blog. Got busy, you know? Had a lot going on this year.

I’ve been busy …

But that said, there is no better time to jump back on the writing horse and no better topic than the predictions for the coming year, which has become a bit of a tradition on the blog.

So without any further adieu, here are the things we are keeping an eye on and some trends we are seeing (and feel we will continue to see) as we move through the next 12 months.

Navy Hill

For those of you who are not aware of Navy Hill –– well, you should be. Navy Hill is the proposed redevelopment of the Richmond Coliseum and the surrounding blocks into a new 18,000 seat arena plus beaucoup office, residential, and retail space.

When completed, it stands to be the most transformative project the city has seen in 50 years.

Photo courtesy of Navy Hill.

To say the least, it is a pretty big deal.

Opposition is Loud

Any development project will bring with it its share of opposition, whether it is a simple townhome project or a large planned community –– that is the nature of development.

But when you start talking about a project on the scale of Navy Hill ($1.5B, if you are asking), then the opposition increases exponentially.

And thus it is with Navy Hill.

So as the noise gets louder, make sure to separate logical and thoughtful opposition from the ‘I don’t like change’ opposition. Sometimes it is difficult to tell the two apart.

Decision on 2nd Dominion tower looms large over Navy Hill project
Want to know more? Our good friends at Richmond Biz Sense are, as always, on top of things.

So 6th Street Marketplace Redux?

So what makes this project different than, say, the 6th Street Marketplace debacle of the 1990s, or the ‘comedy-of-errors-effort’ at building a baseball park in Shockoe Bottom, or even the horrible deal cut with the Redskins for training camp?

Well, two basic reasons:

  • The development team is extremely accomplished at sports arena/ballpark redevelopment
  • The city isn’t acting as developer, they are SELLING the land to a private development group

The TIF (not the TIFF!)

The basic deal is that the city is selling the land to the developer and then using a form of financing called a TIF Overlay District (Tax Incremental Financing) to pay for the new arena and infrastructure.

The tax revenues from the improved values in the district would be what pays off the debt –– and once paid off, the city would not only own the arena outright, but they would have an insane amount of new tax revenue flowing into their coffers.

Map courtesy of Richmond Biz Sense

Good News. Bad News.

The good news ––  the City will NOT be the developer. The City of Richmond has repeatedly shown that they are terrible at playing developer. And (more good news), they will have activated a tremendous amount of taxable land in the middle of Downtown that currently brings them no revenue.

The bad news –– well, what if it doesn’t work as planned? And don’t the schools need money now?

Yeah, there is that …

Ambitious, But Transformative

The plan is ambitious for sure, but the development team is extremely accomplished. The lead architects were involved in some of the most high profile sports arena developments in the US –– Quicken Loans (Cleveland Cavaliers), Staples Center (LA Lakers, Clippers, and LA Kings), and America West (Phoenix Suns) to name a few.

Another project from Future Cities. The new home of the Golden State Warriors

I, for one, would love to see it happen. The number of concerts, sporting events, and other entertainment productions that skip Richmond currently is frustrating –– especially for a lifelong Richmonder accustomed to seeing of the best shows ever right here at our own Coliseum.

Furthermore, the idea that something like 10 Downtown blocks are currently NOT providing revenue (it actually costs money to maintain so it is technically a drain on revenues, but who cares about such minor details) to a city in such desperate need of fixing its crumbling schools also appalls me –– especially when you see the impact that a sports/entertainment district anchored by office, retail, and residential development has had on other cities.

Yes, the schools are in dire need of additional funding, but so is every other department. When your revenues are fixed, paying Peter means robbing Paul.

So stay tuned –– there is a lot more to be said and written about Navy Hill.

Moving East

Have you ever really looked at a map of Richmond’s development?

If you have, you are one of the few.

Red means old. Green means new. Can you see the difference in the direction of development?

By and large, it moves from the fall line of the James River (i.e. Downtown) and moves primarily up the river (west and north) and out Midlothian Turnpike, Hull Street, Broad Street, and along 95.

What it does not do is move east at anywhere near the same pace as it does in the other directions (see the map.)

Well, that is starting to change.

The Rise of the East

Back in the days when the cleanest air and water were upwind and upstream, moving west made a lot of sense.

Today, the impact of pollution isn’t nearly the same as it was in say, 1930, and thus the need to continually go west isn’t nearly as strong. And the quest to find reasonably priced housing that isn’t 45 minutes from urban Richmond is leading the change in attitudes.

The first chart shows the $/SF of the two easternmost high schools in Henrico County (Varina and Highland Springs.) Look not at the amount per square foot –– but the rate of change –– when compared to the two westernmost high schools in Henrico (Godwin and Deep Run.)

Bet you didn’t expect that, did you?

Now, take a look at what is happening in the North Church Hill neighborhoods, as well as those to the east of Chamberlayne between Laburnum and Brookland Parkway.

Notice anything? Oh, just pricing that is up anywhere from 3 to 5x since 2011.

Wait, did you say 300 to 500% since 2011?!? Yep.

Affordability

What is driving the change? Affordability (well, at least for now.)

As the prices for entry to the Fan District, Museum District, West End, and even the new home communities in Midlothian and Moseley are reaching into the middle to upper $400’s, people, especially the first-timers, are looking for housing that is both affordable and close in.

Check out the pricing for new housing in four of Chesterfield’s largest new home communities on the chart below:

Cue ‘the east.’

Pricing below $400k, 10-15 minute commutes, and a rapidly growing amenity base are what is underpinning the growth –– and as more and more investment occurs at points east of 95, the better the appreciation will get.

The smart investors are already there.

Inventory

A Growing Metro

Question –– do you know what the rate of population growth is right now in the Richmond region? (And by region, I mean the City of Richmond and surrounding counties)

Regional Demographics
Some interesting stats about our region.

Answer –– Depending on what you read, the population growth in the region is between 1% and 1.5%.

Now that doesn’t sound like a big number until you do the math.

1.3M people x 1% = 13,000 new people each year.

That is a little over 1,000 people per month.

And that is roughly 35 people per day.

Think about that number for a second –– 35 new people per day are moving to Richmond. WHERE IN THE WORLD ARE THEY GOING TO LIVE?

Now you see the problem.

Median Income

Want me to blow your mind even more? The median income in our region is $65,000.

$65,000 translates to roughly a $250,000 to (maybe) $300,000 home in terms of buying power.

Guess what? There is less than 2 months of inventory below $300k in the Richmond region.

Spoken differently, there is twice as much inventory ABOVE $300k than there is below it.

So here we are.

Crisis Mode

Several years ago, we wrote about the coming affordability crisis in housing. Well, it is finally here –– and inventory (or the lack thereof) is the primary culprit.

To quote the great Roger Daltry –– Meet the new boss, same as the old boss! (and I start the video right at his famed scream …)

So until we either find another 1,000 acres in the middle of the city (not going to happen,) or we rewrite mortgage financing to allow for vertical development (not happening fast enough,) we are going to keep seeing prices spike –– especially in the more affordable segments.

Manchester

We were just in Manchester doing a video shoot for one of our listings and man, it has gotten tall. Like really shockingly tall. And I would like to think that I know a lot about Manchester and even I was shocked.

It is tall.

< Don’t believe me? Check the references to ‘Manchester + Tower‘ in Richmond Biz Sense >

For those who do not know much about Manchester, you should. It is basically becoming an entirely new city.

The Terraces at Manchester recently sold for $30M

The amount of development that has occurred in manchester is unprecedented, especially by Richmond standards. Towers, towers, and more towers are now the norm, as is new retail, new residential, and new office.

And did I mention the towers?

Housing

So what impact do you think all of this development had on house prices in Manchester? Yeah, you guessed it –– they went UP!

If you haven’t been to Manchester in a while, I highly suggest you walk the T Pot Bridge, grab a beverage at Legend, and take a look. You won’t believe the activity.

What We Didn’t Talk About

So we left off several topics in hopes of a) making this post of reasonable length and b) leaving something else to talk about over the coming year.

But here are some of the things we did not touch on:

  • iBuying –– having a company like Zillow buy your home
  • Building Costs –– still going up!
  • Politics –– sorry, I don’t have the stomach to write about it
  • Scotts 2.0 –– the Westwood Tract redevelopment (i.e. the industrial neighborhood just west of Scotts Addition)
  • Sauer Center –– can I please just have my Whole Foods?!?
  • 2020 Census –– should be interesting, to say the least

So look for us to tackle a few of these topics in the coming months.

And Finally …

2019 was another banner year for One South. We got a lot done.

Performance Metrics

We broke our prior year’s record for transactional volume.

We cracked the Top 10 in volume (by office) in our MLS.

And we still outpace the market averages in pretty every important metric:

  • Median Days to Sell –– 8 days
  • Median Percentage of Asking Price –– 100% (yeah, that’s not a misprint)
  • $/SF –– $31 above the market average
  • Price –– $30k above the market average.

AND we have continued to conduct our business in an ethical manner (i.e. –– another year of a spotless record with all of the governing bodies.) That makes me especially proud of not just One South’s agents, but of the management team and staff who play a huge role in both our agent’s success and our consumer’s experience.

So to summarize –– more transactions at higher prices with smaller discounts and at a faster rate than the market, all while maintaining the highest level of ethical behavior –– not too shabby.

Expansion

We also grew geographically.

Our new office in White Stone, moments from the Rappahannock River

We recently opened another satellite office in White Stone, Virginia (along the Chesapeake Bay) and are in the process of partnering with a videography firm to even better promote the listings we carry and the neighborhoods we frequent (more on this soon.)

Commercial

And did I mention how well our commercial team is doing? Just read Biz Sense and you will get a sense of how well …

Salomonsky sells Shockoe Slip apartments building for $8M
Oh, just another $8M sale…

The One South Commercial team continued to grow their name and presence with more high profile sales, additional team members, and a new best for volume.

In Closing

We fully expect 2020 to be another banner year for us as the economy remains strong, interest rates low, and our region continues to attract new residents.

Most prognosticators expect the market to get started even earlier this year (but that also depends on the sellers and the weather, so stay tuned.)

And while we expect to see a bit of a slowdown around the election (it happens every election year), don’t sweat it –– just plan accordingly.

Thanks and we look forward to serving you in the coming year!

Why July Defines One South Realty Group

August 5, 2018 By Rick Jarvis

I will always have a soft spot in my heart for July.

My wife is a July baby.
My oldest daughter was born in July.
5 years ago, in July, we moved from our old office into our brand new renovated office in the Fan.

And ten years ago in July, we should have gone out of business.

Before the Bubble

In case you don’t remember, 2008 was the year everything changed for the real estate market. The economy that began to really gain speed in the early 2000’s still seemed to be robust, and though we were beginning to see some weakness at the upper price points, development was healthy and opportunities were all around us.

In the last half of 2007, we had made the decision to open One South. We saw an opportunity for a more progressive brokerage that had both a residential and commercial aspect to it. Everyone thought we were crazy. Perhaps we were; or perhaps just crazy enough to make it work.

We were actively recruiting, making hires, finalizing logos, and doing all of those tasks that you do when you are opening a company.

We were equal parts optimistic and oblivious.

One South is Born

So on January 2, 2008, we opened the doors and went to work. Our new signs went up on properties, our logo was proudly displayed on Main Street, and the Realtor community was asking ‘Who are these guys and where in the heck did they come from?!’

For the first 6 months of the year, we went gangbusters. We had convinced some really great agents to come over and were making a bigger splash faster than I would ever dreamed possible.

We represented numerous redevelopment projects — The Emrick Flats, The Reserve, Tribeca Brownstones, the Cary Mews, and the Marshall Street Bakery — and had quickly developed a reputation as the go-to city development folks. It was a great position to be in.

And then it happened: we had a purchaser of one of our condo units get their loan denied for no real reason. It was 2008 and the middle of July. And for the first time, I sensed that something was bad was happening and it was bigger than we could imagine.

July of 2008

When you are a Realtor in the spring, you are busy.
When you are a Realtor in the spring trying to sell and recruit, manage, market, hire, and grow, you are really busy. And you are aren’t really paying attention to the nightly news and the reports of rising defaults in the subprime sections of mortgage.

So when, on July 30th of 2008, former President Bush signed the Housing and Economic Recovery Act that gave the Treasury Department the ability to prop up a collapsing banking industry, it was the first inkling that this wasn’t a blip on the radar but rather, a long and cold winter was coming.

For a company as small as ours, with no history and little working capital, we had big problems on our hands.

We Were Lucky, and Good

Maybe it was fate, maybe it was intelligence, or maybe a little of both, but we had aligned ourselves with smart people and smart bankers. We all recognized that we needed to figure out the best way to get our collective exposure down and get the unsold units we were marketing sold and sold fast. And if Fannie Mae and Freddie Mac were not going to make loans, we needed to figure out a way.

We worked together. Price adjustments, creative incentives, some good hard nosed selling, and a dogged determination to succeed got us through and even earned us several new engagements. We developed a bit of a playbook for solving problematic projects (that we still use today) and earned the equivalent of a PhD in mortgage finance.

Slowly but surely, we managed to maintain growth despite a market that lost 30-50% of its value and a Realtor population that dropped by nearly the same amount by the end of 2011.

July of 2013

But by 2012, we could feel the change coming.

Inventory levels were falling. Prices were leveling out. Banks were coming out of receivership.

We decided to double down on ourselves and started looking for our next home. In December of 2012, we were able to secure 2314 W Main Street, the old Kicker’s HQ, known to all for the soccer player murals on the side of the building and construction began.

7 months later, in July of 2013, the renovation was complete and we took possession of a 8,000 SF mixed use industrial chic renovation in Richmond’s Fan District.

It was a proud moment and a testament to how far we had come.

July of 2018

We recently had an event in our space to celebrate One South’s 10th birthday. We invited many of our architect, contractor and developer clients who had allowed us to help them dream and execute their vision through the creation of new housing.

And in doing so, it gave us time to reflect back on what we had done in our first decade:

  • We opened with 5 agents and 1 staff member. We now are basically 100 agents and staff in two locations.
  • We sold a little over $20M in real estate in our first year. Last year we sold over $200M in real estate.
  • When we opened, we had 4 projects we represented. That count now exceeds 30.
  • Maybe 5% of our business came from the commercial side in 2008. We now have about 35% of our business come from our rapidly growing commercial team, including two $20M+ sales this year.
  • And finally, we have been named in Richmond Biz Sense’s RVA 25 for the past two consecutive years as one of Richmond’s fastest growing firms (the only real estate brokerage to make it back to back!)

July of 2028

So as we prepare for fall of 2018 (is it really August already?) and continue to fight the inventory shortage, we are full steam ahead.

We continue to work on creating a better experience for our clients and our agents, and to grow our own knowledge and capabilities. The real estate market is ever changing and the minute you think you have it figured out, you find yourself playing catch up.

We can’t wait to write the July update in 2028.

2018 Housing Predictions and the Coming Affordability Crisis

December 22, 2017 By Rick Jarvis

The Next Crisis in Housing, and the 2018 Predictions

Each year, as December comes to a close and the promise of the new year begins, I try to share my thoughts on what the next 12 months will bring. And while I am not an economist, I did stay at a Holiday Inn Express last night … does that count?

(And here are 2017’s predictions, if you care to see how well we did)

I love data and what it can tell you if you look a little bit deeper. Furthermore, when you can add empirical evidence to anecdotal, you get some powerful intel about not only where the market is headed, but why it is headed where it is.

Welcome to 2018!

What the next 12 months will bring is important for all of us to know — from renters in Shockoe, to homebuilders in Chesterfield, to land owners in Goochland — in order to place our real estate holdings in the best position possible.

And just so you know, the words we will hear repeatedly in 2018:

  • Inventory
  • Interest rates
  • Affordability
  • Millennial

Inventory — Richmond, We Still Have a Problem

Unless you have been living under a rock (which also appreciated by about 4.8% last year), you have heard about the inventory crisis. Bidding wars are up, ‘Days on Market’ are down, houses are going for more than their asking prices on a regular basis, and everyone is clamoring for more inventory to help fix the problem.

If this chart doesn’t illustrate the extent of the problem, nothing can. This shows the available housing supply over the last 10 years.

In the aggregate, inventory levels are off by well over half from the heights in 2008 through 2010, and that doesn’t even look at the sub markets individually.

Now lets look at the buyer pool. The chart below tracks the number of houses that go under contract in any given month over the past 10 years (i.e. — absorption of housing)

Do you notice a trend?

The rate of sales, while not up anywhere as much as the inventory is down, it is still up by about 30% from the 2007-2011 period. As a matter of fact, there are actually more houses selling now than there were in 2007 and 2008.

So, just to reiterate:

↑ Absorption is up by about 30%
↓ Inventory is down by 60-70%

Yeah, that pretty much explains the price increases.

While I think we all recognize the inventory issue, unless you look at it critically, the deeper message is lost. What has really been happening is that population is realigning where it wants to live, impacting housing availability differently in individual sub-markets.

The Fall and Rise of the City

In the late 1980’s, Chesterfield, Henrico, and the City of Richmond were all populated equally with just over 200,000 residents each. Only a decade later (by 2000), the City’s population had fallen below 200,000 while both Chesterfield and Henrico had exploded to over 260,000 residents each.

It was an incredible shift.

Where Are the New Urban Houses?

But if you fast forward to today, what do you see? You see a city with a population growing at the same rate as the surrounding counties, if not slightly faster. And while growth of the urban core brings with it many positives, it poses a big problem with what is a fixed supply of housing.

Take a look at the table below — despite the same basic rate of growth in population, the number of new houses being built in the city accounts for anywhere from 4 to 6% of the overall market. When you compare that to 15 to 21% of the sales in Chesterfield being newly constructed homes, you begin to see the extent of the problem.

Year

New Homes in the City

Resale in the City

%

New Homes in Chesterfield

Resale in Chesterfield

%

2012

83

2110

3.9%

550

3588

15.3%

2013

121

2356

5.1%

723

3785

19.1%

2014

113

2370

4.8%

729

3818

19.1%

2015

108

2461

4.4%

828

4467

18.5%

2016

150

2629

5.7%

934

5039

18.5%

2017

154

2672

5.8%

1022

4819

21.2%

All cities, not just Richmond, lack sufficient land to develop housing with any scale. And when the population begins to seek housing in the urban environment, it puts pressure on the fixed stock of available housing. When supply is fixed and demand rising, you get rapid price increases. When supply can be added to offset demand, you might still see prices rise, just not at the same rates.

Richmond’s Affordable Housing

So where is the problem the most acute? In the affordable urban markets, that’s where.

The table below shows the number of sales in excess of $300,000 in the north and eastern quadrants of the city of Richmond, long a bastion of affordable housing. The number of transactions over $300,000 has increased from 15 to 129 in the past 5 years — nearly a 900% increase!! 

Compare this to west/central Chesterfield and, while you still see a problem, a 264% increase to be exact, it’s not quite as dramatic. Furthermore, the ability for Chesterfield (or Henrico, or Hanover) to manage their affordability issue is far greater as they still have hundreds of thousands of acres to develop to relieve the pressure.

Primary Year Number of Sales Above $300,000 in NE Richmond City Number of Sales Above $300,000 in West Central Chesterfield

2012

15

318

2013

29

379

2014

38

451

2015

56

620

2016

88

812

2017

129

842

The Problem Becomes a Crisis

In my opinion, this lack of urban housing will make 2018 the year Richmond’s affordable housing problem becomes an affordable housing crisis.

So if you are looking for urban housing, especially a more ‘affordable’ home in the city, here are some strategies you should employ to make your efforts as successful as possible:

  • get started earlier than normal
  • steer clear of online lenders as sellers — ok, seller’s agents — hate Quicken and USAA. Oh and their rates are the same, if not worse, so don’t believe the hype
  • expect to be involved in a bidding war
  • don’t rely solely on last year’s comparable sales to dictate predict pricing
  • act with urgency

(And if you want to read a reeeeeallly deep dive on affordable housing, you can do so here — The Affordable Housing Post)

Interest Rates

I think we have all been dreading the day when rates will rise. Sorry, but I’m calling it. Rates will rise in 2018 and continue to do so until they return to ‘normal’ levels in the coming 3 to 5 years.

Why? The economy is actually pretty healthy. Tax breaks, North Korea, and bipartisan bickering aside, we are doing pretty well, at least economically. Yes, we have crushing debt that our children’s children’s children will have to deal with, but all in all, employment is solid and the economy is growing at a decent pace.

So what is a ‘normal’ interest rate? I think the new normal remains to be seen as the inputs have all changed, but 6% to 7.5% or so for 30 year mortgages is what I think most industry veterans would consider to be ‘normal.’

Inflation

One of the primary drivers of interest rates (ok, mortgage rates) is inflation and when the market sees that inflation is creeping up, the price of money rises to hedge the loss of buying power over time. Stated differently, when you borrow money, each dollar you repay the bank has lost a little bit of its value. And while dollar today will have a similar value tomorrow, how much buying power is lost 5, 10 or 30 years in the future? You get the picture.

So the more inflation the market expects, the higher rates will rise, and as you can see, the trend line, while still below historical norms, seems to be moving up more than it is moving down.

And when you take the same chart and add historical mortgage rates, you see what is a pretty strong correlation. As inflation expectations rise, the interest rates tend to do the same thing (at least once the housing market stabilized in 2013.)

So if you want to know where the mortgage rates are headed? Keep an eye on the inflation expectation in the market. It will tell you (most) all of what you need to know.

Rising Rates — Good or Bad?

So are rising interest rates a bad thing? Does it matter if that rates are in the 5’s, 6’s, or <gasp!> even in the 7’s if the economy is roaring? If salaries are up, the stock market is at record highs, and profits are everywhere, does a mortgage payment 15 to 20% higher than today really matter?

As you can see, the percentage of our collective incomes that we spend on housing is not nearly as out of whack as it was in the years preceding the bubble — and that makes me feel good.

Do you know what else makes me feel good? The amount of housing debt we currently have outstanding relative to where we were. (And, for what it is worth, I am yet to see a chart that better illustrates the ‘bubble’ and the impact of it’s bursting …)

The bottom line is that we are still well below the debt levels of the bubble, and we are spending less of of our incomes on housing.

And also know that, as rates rise, people will begin to use loan products with built in rate adjustments to offset the increased mortgage payments.

Which leads us to …

Adjustable Rate Mortgages (ARMs) and 2018

Wait, did I just say adjustable rate mortgage?!? Isn’t what that got us in trouble the last time?!? Aren’t those loan products evil, and dangerous?!? Oh no, we are doomed!

Don’t panic …

In 2008, these were the reasons we developed a bubble, not the existence of the adjustable rate mortgage:

  • Credit score requirements were essentially non-existent
  • Verification of salary, job history, and liquid assets, all of which should have been confirmed by underwriters and processors, were not
  • Intentionally fraudulent (think — criminal) underwriting was far too common
  • Down payment requirements were as low as 0% (or even lower in some cases — do you remember the 125% mortgage?!?)
  • Many loans were interest only
  • No rate caps during each adjustment period

So when you allow someone with no liquid assets, a shaky job history, and basically no skin in the game to buy a house with a payment that will not only double in a year, but never pay down the debt, then yeah, you have a big problem.

The ARMs of Today

The adjustable rate loan products today look nothing like the adjustable rate products of 2006-2008. Today’s ARMs have realistic rate caps (meaning how much they can rise is limited), less frequent adjustment periods (every 3 years, 5 years or 7 years), and are underwritten to higher standards for income, debt, job history, and down payment.

So don’t worry, the adjustable rate mortgage that will soon reappear will be strategically used by buyers who are making a bet about how long they will live in a home, and not as bait to lure ill-prepared buyers into a ticking time bomb.

And the chart (below) showing homeowner ship rates in the US would seem to corroborate that statement.

The mortgage practices that created the 2008 bubble seem to not be in practice today.

Home Building

I’m worried about Richmond’s home building industry.

Huntt’s Row was a 8 units upscale town home project in Richmond’s Fan District.

Am I worried it is going to crash? No, not at all. I think you might see a little softening at some of the upper price points, but nothing to worry about.

Am I worried about the land developers? Not really, provided they have enough Xanax to deal with the public process that rezoning and development has become. But headaches aside, creating lots right now is not where the danger is (like it was in 2008.)

Then who am I worried about? I am worried about Richmond’s smaller and mid-sized, LOCAL homebuilders right now. They are in trouble if they don’t understand what is coming at them and adjust their business models.

Subs Rule

So imagine you are a subcontractor — bricklayer, carpenter, plumber, roofer, etc. — and you are bidding a job in Richmond for a local homebuilder. You turn on CNN and see Hurricane Harvey flooding out Houston ($200B in damage), followed immediately by Irma ($67B in damage) cruising up the gulf coast of Florida flooding out houses and ripping off roofs. And then a few short months later, you see that California is completely on fire (and still is as we write this article) with entire communities going up in flames instantaneously.

So what do you do? Do you pack up the van and move to Houston, Tampa, or Santa Barbara to set up shop for the next several years while rebuilding beachfront mansions on the insurance company’s dime? Or do you simply add 20 to 30% to your bid knowing that many of your competitors are already on 64W or 85S to do exactly that.

In 2008, when new homebuilding essentially ceased, much of the homebuilding labor pool disappeared. They retired, got other jobs, or simply left the business altogether. So when you combine an already reduced labor pool with a sharp demand increase in extremely affluent markets (i.e. — California / Florida’s gulf coast) destroyed by recent natural disasters, you can imagine the impact not only on the price of labor, but of materials.

The Big Guys Have Arrived

And if a spike in labor and materials is not reason enough to stress, Richmond now is home to two new regional / national homebuilders who bring efficiencies and economies of scale that can suck all of the margins out of a market.

DR Horton, the nations LARGEST homebuilder, and Schell Brothers (only #74 if you are scoring at home, but still an extremely large regional homebuilder), arrived in 2017. Stanley Martin, #57, arrived in 2015, and lets not forget about NVR / Ryan Homes (#4 overall) that has been building in Richmond for decades.

DR Horton closed 41,000 houses in 2016, if you care to know…

The big guys come with unlimited buying power to take control of the available lot inventory, the ability to build models that contain every imaginable option to wow the public, a sales organization designed to hook the buyers with low prices and then upgrade the heck out of ’em, the promise of volume to suck up all of the labor, and engineered floorpans that can be built at significant cost savings.

AND (and this is a big AND), the national builders build fast. When they get rolling, they can produce housing at an incredible rate. When the music stops (and it will, but I still don’t think it is anytime soon), overproduction will impact both the rate and the length of the housing adjustment. So when they decide the time has come to cut prices and unload inventory, their actions can really hurt the smaller guys whose pockets are not nearly as deep.

Local vs. National

When compared to the smaller and mid-sized builders that have traditionally populated Richmond’s building scene, you can see how the future for our local guys will be far more difficult.

In 2018, I think you will see a fundamental shift in power from the 5 to 50 home per year local builder to a 100 unit-per-quarter type publicly traded builder, especially at the middle and upper price points, whose production machine will change the way Richmond builds (and buys) houses.

So while home pricing might be going up and demand is still rising, building costs are rising even faster and competition from extremely well funded large builders is rising as well. Much like the impact WalMart and Target had on local retail, the arrival of the big builders will drive down margins to levels that will make building a very dangerous endeavor for those who lack the ability to build at greatly reduced costs.

And I am not ok with that, if you care to know. Maybe it is the prideful Richmonder in me, but I don’t like the idea of national homebuilders determining our local stock of homes and the Richmond stalwarts getting squeezed.

So What Does it Mean for the Local Guy?

It means being nimble, opportunistic, and above all else, smart.

Going head to head with Ryan, DR Horton or even local behemoths like Eagle or HH Hunt is a no-win game. The new way will be more of a hit and run model, seek opportunity where others are not looking, operating in markets where it is difficult to find scale (think — infill and urban markets!), and/or establishing a specific stylistic niche that will cause clients to seek you out.

Trying to beat a national volume builder with endless capital is like trying to beat a Las Vegas casino — over time, the casino always wins. Their cost of capital, cost of labor and materials, access to lots, and sales infrastructure give them a 10 to 15% baked in advantage — and those advantages are really hard to compete with day in and day out.

The Commercial BOOM

Most of you probably realize that One South is a mixed-use firm that offers residential sales, commercial sales, and development representation, and thus we can speak about the commercial market a bit as well.

From Richmond BizSense’s commercial market round up a few months back. It was a good week, to say the least.

The commercial market is rolling, in case you haven’t heard.

Without going into too much nitty gritty detail, pricing on the commercial side is pretty insane. Cap Rates (which represent the ratio of income to price) have shifted significantly in the past 24 months – about a 2 to 3 point shift – especially for multi-family opportunities.

When Cap Rates shift from 7% to 5%, a property that used to cost $1,000,000, will now trade closer to $1,400,000. That’s no small change.

From REIS, Inc, a real estate data provider. This chart shows nationwide Multi-Family cap rates over 5 years.

Why the Shift?

The reasons are many but what is driving the market as much as anything is an influx of out of town buyers who have been priced out of the larger metropolitan areas (D.C, NYC, Charlotte) looking for deals in Richmond. Richmond’s improving profile and exploding local scene, as well as the insatiable appetite for apartments mostly driven by VCU, has given larger regional and national players in the multi-family scene reason to stop in and buy up our buildings. And when they look at our relative value, they feel excited to pick up properties here that are fully leased, well built, and extremely well located.

So to Summarize

If you made it this far, thanks.

And while we covered a lot, we didn’t even touch on rising rents, the Bus Rapid Transit that has physically destroyed Broad Street, the condo market, college debt, or tax breaks, either!

I guess we’ll save those topics for another day.

But don’t worry! Despite rising pricing, 2008 redux is not on the horizon. The conditions that existed in 2008 do not, I repeat, DO NOT exist currently. (And if you want to dive in deeper to the differences, you can read this article — The B Word, Bubble — that we wrote last year.)

Can pricing continue to rise unabated?

If demand outpaces supply, then yes it can.

Are we seeing some some softness in the suburban new home markets at upper price points? Maybe. But as a whole, the market is still significantly undersupplied.

Furthermore, there is neither a fix for the supply issue (other than building more homes further and further from the urban core) nor a likelihood that the first time homebuyer will give up and stay a tenant. As a matter of a fact, I actually think the buyer supply will increase as more and more millennials decide to become homeowners and the supply problem will get worse before it gets better.

Will interest rates rising make housing more expensive to own and temper prices?

Perhaps, but when our wallets are fat and our confidence high, then we buy, even if our mortgage payments take a little more of our disposable income. I don’t think we will see prices flatten until we see 2 to 3 points of increase in long term mortgage rates.

So if you are getting ready to buy …

Prepare yourself.

It is a highly competitive market, especially if you are looking at urban markets or for quality affordable housing.

If you are thinking of selling …

Make sure to extract the correct terms from your buyer that will allow you to re-purchase comfortably and without undue stress (just ask us how!)

And if you decide to build a new home …

And you are buying it from one of the large builders in Richmond with a flashy showroom and highly skilled upgraders, beware. They are reeeeeallly good at their job.

Renewing Old Urbanism

September 25, 2015 By Rick Jarvis

Walking is a foundation of new urbanism. But you know what, walking has always been the foundation of old urbanism.

Urban Renewal and Richmond

As the development momentum of Richmond gained steam in the late 1990’s and into the 2000’s, the planners at City Hall began to mandate that the developers adopt a mixed-use model for their projects. Dedicating spaces along the street for commercial uses (instead of residential ones) became the requirement. It was not exactly embraced by the development community as commercial office and retail was harder to lease than the residential spaces.

decatur living room
The Decatur project in Manchester is about as amazing of a space as there is in Richmond. The project consists of three residential condos and one commercial one.

Why? Demand for residential space far exceeded the demand for urban commercial spaces, especially during the years following the crash of 2008. For several years, vacancy in the street level commercial spaces was extremely high and developers fought to build a little as possible as it was not only hard to lease but hard to keep leased.

The Impact of Mixed-Use Today

Was street-level commercial the correct development model for Richmond? While the mandate to build commercial spaces during the recession was met with resistance, it seems to now be paying dividends. Far more start-ups, pop-ups, cafes, restaurants and galleries have begun to fill these spaces and is creating the vibrant street life that RVA lacked for decades.

Given time and a better economy, mixed-use seems to have been the right path.

The Quirk Hotel, opened in September of 2015, is yet another transformative project in Richmond's historic Downtown.
The stunning Quirk Hotel, opened in September of 2015 by Ted and Katie Ukrop, is yet another transformative project helping redefine Richmond’s historic Broad Street corridor.

So Why Mixed-Use?

In theory, placing commerce spaces in proximity to living spaces reduces the need for automobiles and fosters a neighborhood’s micro-economy. When done right, neighborhoods to develop their own ecosystem and move towards a harmonious balance of live-work. So when there’s a deli downstairs, right next to the dry cleaner and down the block from a wine store, people don’t have to jump into the car so much to get stuff done … and the idea of supporting the local shopkeeper is, on its own, a cool thing, too.

So is it Time to Lease or Buy?

And yes, we are still in recovery from the crisis of 2008-11, but it is far better than the darkest days. There’s still an excess of retail space in some zones, but nearly not at the same levels as just a few years prior.

Huntt's Row is a series of 8 townhouses in the Fan District that will be coming on line in the late Spring of 2016
Huntt’s Row is a series of 8 townhouses in the Fan District that will be coming on line in the late Spring of 2016. Click the image to learn more.

Potential office/retail lessees/purchasers are still in a pretty good position right now, but free rent and below market build-outs are far less common than before. And where tenants of 2010 used to find 10 -15 great options, tenants today now only find a handful. Same with the buyers.

One South's new office was built in the bones of a historic warehouse in the Fan District. Did I mention we won an award for it?
One South’s new office was built in the bones of a historic warehouse in the Fan District. Did I mention we won an award for it?

Residentially, from the Fan and Museum District to Jackson Ward, Shockoe, and Manchester, many areas are again seeing pricing at or above the 2007 peak … and if 2016’s spring is anything like the last two, it will go even higher. Inventory is still down and rates are still at or near historic lows.

Downtown and Bikes

Personally, I loved the energy from the bike race.

bike race
This photo was taken from in front of Lift Cafe along Broad Street. The level of energy and life brought by the race from Richmonder’s and non-Richmonders alike was unlike anything I had ever experienced.

While different perspectives exist as to its importance and its impact, there is no doubt that the UCI Championships gave incredible exposure to the city and placed it in an extremely positive light. Hopefully, not just the international community walked away with a positive feeling about Richmond, but so did many of Richmond’s own non-believers.  The Downtown that many remember as ignored, blighted and lifeless is now quite the opposite. I think the 600k people that attended can attest to that fact.

A Great Environment

Give the idea of investing in Richmond, either residentially or commercially (or BOTH!), serious consideration.

These prime conditions should help illuminate an oft-ignored consideration in the purchase decision matrix: investing in interesting space in a vibrant and emerging neighborhood helps attract and retain talent for the business you’re starting or expanding. And better personnel translates into a fatter bottom line.

Most understand the value of owing housing but don’t ignore the possibility of owning your own business space. You’ve already taken the leap of starting a business. Doubling down with real estate might be the best bet you could make.

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From the Blog

Making Sense of the Numbers

It used to be simple(er). When I first became licensed (1993), things were far different than they are today.  Back then, if you wanted to know what homes were available for sale, you used to have to wait for the Richmond Association of Realtors to deliver the 'MLS Book.' Each Friday, our local …

[Read More...] about Making Sense of the Numbers

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