Storm Proof 

Richmond's real estate market may have already weathered the worst of Wall Street's meltdown.

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The confused, eerie fog of uncertainty from Wall Street's financial crisis has occupied the public consciousness for the better part of two weeks. It has taken over just about everything political, from the presidential campaign to the governor's mansion to the local mayoral debates. But the worst of the storm may have already passed. In Richmond, at least.

There will be layoffs and some industries will undoubtedly suffer, as the 500 employees dumped by Reynolds Metals last week can attest, but don't buy the panic talk. Richmond always weathers these storms better than most, by virtue of state government jobs and a diverse economic base.

Look no further than the region's real estate market, the local economy's most important bellwether. For a meltdown that started in earnest with a housing bubble and the loose lending practices that allowed banks to, in effect, bundle and securitize subprime mortgage loans, Richmond's much-touted condo market has largely emerged unscathed.

It's a familiar story: Nationally, overbuilt condo markets in places such as Northern Virginia are in the tank while Richmond suffers from only a few bruised egos. Is Wall Street's meltdown casting a pall over the city's unsold condos? Not yet.

In fact, Sam McDonald, a local condo and apartment developer, sold his most expensive unit at Emrick Flats in Jackson Ward less than two weeks ago, and has only eight of the 26 condos at 101 W. Marshall St. still on the market.

“We aren't panicking but we certainly are guarded,” he says. Condo buyers have been waiting on the sidelines while the market fluctuates, McDonald says, and there are upper-end buyers “people with good jobs and good credit” who suddenly can't get financing.

It's hurting the rich guys, sure. Richmond developer Robin Miller says the market for moderately priced condos is relatively strong. “The under-$200,000 range is doing well,” he says.
So far, the downturn is simply forcing McDonald to shift his focus to apartments. He and his partners are about to finish a new apartment project on Hull Street in Manchester, in the old Cauthorne Paper factory. Rental in the units is between $700 and $900 a month.

The bailout isn't half bad, says Tom Tyler, senior analyst for Integra Realty Resources. He sees the $700 billion rescue mission floated last week as a catalyst, finally infusing local banks with enough capital to rejuvenate new-home sales. There were 3,996 new-home closings in metropolitan Richmond for fiscal 2008, which ended in June, a decrease from the peak of 5,759 in 2005. Having already reached the bottom, the market can only go up from here, Tyler speculates. Banks already have tightened their lending practices to both home buyers and builders, and weeded out the riskier deals.

“Back when the market peaked the lenders were basically loaning, or approving loans to people with 100 percent financing and very easy qualifications,” Tyler says. “With a lot of subprime loans defaulting, banks tightened up their restrictions. They also tightened up on builders. I would think that if this bailout plan does happen — putting more capital back into the hands of the lenders — that might start the engine going again.”

That's not to say that some aren't feeling the pinch. So far the stress has been primarily relegated to those projects in the development stage — particularly in the suburbs. “We're seeing a lot of deals crater,” says Sam Worley, senior vice president and partner at Commonwealth Commercial Partners in Henrico County. “[The developers] had their financing lined up, and the banks pulled out,” he says. “I just lost one last week. It's scary out there.”

No doubt the market still has some adjusting to do — -and the lack of credit isn't good for anybody — but perhaps the worst thing to happen is a slowdown on speculative developments that were threatening to overload the housing market anyhow.

The commercial real estate market is in worse shape.

Mark Douglas, senior vice president of commercial real estate at Thalhimer, says banks are scuttling bigger deals, demanding higher deposits and “skin” from developers.

“I have had more deals die in the last 30 days,” he says. “All of them have left security deposits on the table.” These aren't little projects, but big office deals — five, to be exact, ranging from $6.8 million to $3.2 million.

Still, Douglas says the impact on Richmond is being offset by a state buying spree. The state recently purchased the former headquarters of United Dominion Realty Trust at 400 E. Cary St., a 49,000-square-foot building, not to mention 600 E. Main St., a 425,000-square-foot building. Meanwhile, Virginia Commonwealth University recently purchased the 25-story office building at Ninth and Main. All are putting tenants on the street, Douglas says, which means multiple office tenants are in the market for office space — a good thing for his firm.

“The state's not going anywhere,” he says. “It's opportunity for downtown. The downtown marketplace now is actually going to be stronger than the suburbs.”

Perhaps. Or those tenants in the market could leave downtown altogether. One investment banker worries that new Richmond leases won't catch up to vacancies for the next three years. Wachovia Corp., which is being purchased by Citigroup, has already left nearly 300,000 square feet of office space on the market by leaving the Riverfront Towers downtown.

Still, it's not all bad.  

The oft-delayed Miller & Rhoads hotel and condo project, which many left for dead years ago, is almost finished. How's the financial collapse affecting the developers of that project?
“No effect. Our financing is all in place, we're opening here in three months,” sums up Michael Laing, managing officer of ECI Development Services, which is co-developing the project with Historic Restorations Inc. out of New Orleans.

The project, a 252-room hotel with 133 condos on the upper floors, is scheduled to open in January.

“When we're in a position to do our condo marketing we're not concerned,” Laing says. “In January, they will be ready for occupancy. It's a terrific story.” S


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