‘Undeniably the biggest challenge’: Richmond developers reckon with rising interest rates
Richmond’s bustling development scene is facing the most formidable foe it has seen in recent years: rising interest rates.
The spike in loan rates that began in 2022 has prompted some real estate developers to rethink their math, leading some to delay construction on previously announced projects in the Richmond region or, in some cases, to put project sites back up for sale.
Interest rates had been historically low for more than a decade until last spring when, in the face of rising inflation, the Fed began raising rates at a breakneck pace, thereby increasing the costs to finance new projects.
According to data from the Federal Reserve, its baseline interest rate spent the overwhelming majority of the past 15 years below 1 percent, which allowed developers to typically receive financing from lenders at rates between 3 percent and 5 percent.
As of last month, the Fed had raised the baseline rate for nine months straight, putting it between 4.75 and 5 percent. That means the minimum interest rate many developers are offered by lenders could be nearly 7 percent, in some cases double what they were seeing just a year or two ago.
Combined with increased construction costs, the broader economic environment is making it increasingly difficult for developers in the region to plan and build projects. That includes apartment buildings, which have fueled much of the ground-up construction locally in recent years.
Jason Guillot is a principal at Thalhimer Realty Partners, a local firm that has multiple apartment buildings in the queue in Manchester and is actively building in Scott’s Addition. TRP is also part of the RVA Diamond Partners team that’s leading the 67-acre Diamond District redevelopment on Arthur Ashe Boulevard, one of the biggest projects ever planned in the city.
Guillot said inbound migration of residents and businesses into Richmond give the region good fundamentals, but the area can’t escape the macroeconomic environment of high interest rates.
“The current rate and cost environment is undeniably the biggest challenge Richmond’s development and real estate market has faced in recent years,” Guillot said.
He said the rate trend affects developments of all sizes – from an infill townhome project to the $2.4 billion Diamond District redevelopment. And though the sight of cranes and ongoing construction projects around the region may give the impression of business as usual, Guillot said what most don’t see is the lag effect from the recent rise in rates.
“While people may question the real effect of these rate increases as they continue to see cranes hanging over the city, what they don’t realize is that those projects were funded prior to the change in the market,” Guillot said.
‘Prices are just out of control’
Andy Little, a principal at John B. Levy & Co., a local investment banking firm that helps developers assemble their capital sources for projects, said that because of the change in interest rates, an apartment building that would have cost $50 million to build in 2020 might now cost around $70 million.
“I think you could get things built in 2020 for probably $200,000 per unit,” Little said. “I’d say today that’s more like $275,000 per unit.”
With that cost factor looming, some developers have looked to unload certain projects by listing for sale both the land and approved plans for new apartment buildings in the city.
Bonaventure, a Northern Virginia-based developer, is trying to sell a 1.7-acre site and approved plans for a 203-unit apartment building in Scott’s Addition after paying $4.45 million for the property in a series of deals from 2020 to 2022. Local development firm SNP Properties put a 1-acre site and corresponding plans for a 12-story apartment tower in Jackson Ward on the market in March. It paid $6.1 million for that site in September, a sale that was the highest per-acre tag the neighborhood’s seen.