Suburban Barriers to Entry Create Investment Demand for Class B Apartment Communities in Richmond

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1 Research & Forecast Report RICHMOND Q Multifamily Suburban Barriers to Entry Create Investment Demand for Class B Apartment Communities in Richmond Market Indicators RVA Q Relative to prior period RVA Q3 2016* VACANCY RENTS CONCESSIONS TRANSACTIONS PRICE PER UNIT CAP RATES *Projected Historical Apartment Occupancy & Rents 97% 95% 94% Occupancy % 96% 93% % $1,200 $1,000 $800 AVG Monthly Rent $1,400 $600 US SOUTH RICHMOND 2016 $400 There s been a great deal of attention in the media for the phenomenal rebound of the apartment market in the urban core. Certainly the City of Richmond is no exception as suburban flight has created a terrific market for new communities of apartments in every sector of the City. However, the story that has been ignored is the creation of a new dynamic in the Class B suburban market. The severe barriers to entry for new product in the suburbs have come to the attention of global investors. They are coming to Richmond to purchase welllocated properties with good bones and upside potential. The demand for such product is so high that the cap rate for sales of Class B product is sometimes lower than that of Class A product. Last year, The Retreat at West Creek, a Class A garden deal adjacent to Short Pump, sold at a 5.75 Cap. The Colliers MF team had three Class B properties, each 1980 s vintage with deferred maintenance needs, close over the last 30 days. Richmond occupancy declined 0.3 points quarter-over-quarter. Annually, demand for 1,644 units outpaced supply of 1,618 units, pushing occupancy up 0.1 point to 94.6%. On the pricing side, rents ticked up 0.2% in the 1st quarter Previous increases took annual rent growth to 2.7%. Richmond isn t a fast-growth market like some others in the Southeast region, but it does offer opportunity as a relatively lowrisk, low-upside market with stable demand drivers. Richmond s demand levels have picked up with the recent supply wave. With solid demand, occupancy continues to gain momentum, averaging roughly 95% since mid-. Following five years of mostly solid job growth, demand appears to be getting a boost from solid economic fundamentals. Meanwhile, unemployment remains low. While healthy demand has pushed up occupancy, annual rent growth has averaged roughly 2% over the past three years. That could be due to a consistent supply pipeline that saw completion volumes pick up to levels above historical norms. Furthermore, rent growth will likely face some headwinds through 2017 as elevated supply continues, testing metro-level demand for high-price, Class A product. Multifamily permit volumes remain elevated, suggesting the supply wave should continue through at least Market Overview Source: MPF Research

2 Richmond Multifamily Market (continued) DEMAND Apartment demand remains moderate-to-solid, as annual absorption levels ranged from roughly 1,600 units to 2,700 units in each of the last 10 quarters. These results compare to the five-year average of approximately 1,600 units annually. The metro absorbed 1,644 units in the year ending 1st quarter 2016, outpacing annual completions for the 10th consecutive quarter. By product class, demand for new supply appears firm. Among submarkets, demand has also generally followed supply. Going forward, structural drivers should continue to produce substantial apartment demand results. SUPPLY Supply levels have remained elevated by historical standards over much of the past four years. Over that time, annual inventory growth has mostly hovered between 1.5% and 2.5%, with completions averaging roughly 1,600 units annually. In the yearending 1st quarter 2016, completions reached 1,618 units, growing inventory 1.8%. Expansion should continue around current levels, as the apartment stock is set to grow around 2% with completion of 1,754 units over the next year. Deliveries in the past four years were concentrated in Scott s Addition, Shockoe and Manchester, with adjacent submarkets also recording elevated completion levels. Over the next year, the bulk of completions are scheduled for those same submarkets. Identified projects and permit volumes suggest that supply levels should remain steady through OCCUPANCY Even with elevated supply, recent demand levels are keeping occupancy tight in Richmond. Occupancy registered 94.5% to 95.5% for the past eight quarters. In 1st quarter 2016, occupancy registered at 94.6%, down 0.3 points quarter-over-quarter. Occupancy has been historically tighter in Class A and B units and weaker in lower-tier product. Class A and B product have maintained occupancy above 95% for the past two years, while Class C product trails slightly, averaging occupancy closer to 93% over that time. Most submarket-level occupancy stayed around to 94.5% or higher over that same time period. The primary exception was Petersburg/Colonial Heights/Hopewell, the usual laggard. Looking ahead, demand is expected to remain firm, likely keeping occupancy levels within the current range. OUTLOOK FOR 2016 In the short term, the biggest headwind is the supply outlook. New development is primed to be a fairly meaningful factor through 1st quarter That could restrain occupancy and rent growth potential. While the numbers aren t dramatic, Richmond isn t a market that has the demand drivers or demographics to support elevated supply for any sustained period. Longer term, as supply normalizes again, Richmond should be able to sustain occupancy at 94.5% to 95.5% and annual rent growth between approximately 2% and 3%. Notable Sales Activity PROPERTY SUBMARKET SALES DATE SALE PRICE SIZE (UNITS) PRICE / UNIT BUYER Jefferson Pointe Apartments Prince George 2/17/16 $20,570, $93,500 Douglas Management Realty Inc Townhomes of Chesterfield Deerbourne 3/1/2016 $5,343, $46,066 William Walde Source: CoStar Comps 2 Research & Forecast Report Q Richmond Multifamily Colliers International

3 Multifamily Pipeline Richmond 2 9 Sources: CoStar Property, MPF Research LEASE UP # Name Developer/Owner Address Market Units 1 8th & Main The Edison Co. 800 E Main Street City Center Clairmont at Chesterfield KOT 2000 Breezy Point Circle Midlothian Deco at CNB Douglas Development 219 E Broad Street City Center Main 2323 MacFarlane Partners LLC 2323 E Main Street Shockoe Bottom 71 5 Oxygen at Centerpointe Robinson Development Group Palladium Drive Midlothian Centennial CMB Development 523 E Main Street City Center 24 7 Element at Stonebridge Boyd Homes 7201 Midlothian Turnpike Outer Chesterfield Plant 1 Larson Development 403 Stockton Street Old Town Manchester Retreat at West Creek II Kassinger Development Group SW of Broad at Rt. 288 Goochland County Terraces at Manchester Robin Miller 800 Semmes Avenue Old Town Manchester 140 TOTAL 1088 UNDER CONSTRUCTION # Name Developer/Owner Address Market Units S Davis Ave (GRTC) Edison Co. 101 S. Davis Avenue The Fan Avia Commonwealth Group W Broad Street Western Henrico County City View Lofts Thalhimer Realty Partners 611 Bainbridge Street Old Town Manchester Courtyard Lofts Thalhimer Realty Partners 3200 W Clay Street Scott s Addition 90 5 Element at Stonebridge II Boyd Homes 7201 Midlothian Turnpike Outer Chesterfield First & Canal Residences Monument Realty S 1st Street Monroe Ward 93 7 Libbie Mill Gumenick Properties Staples Mill Road at Bethlehem Road Western Henrico County Osprey Lofts Cushman & Wakefield 3210 W Leigh Street Scott s Addition 30 9 The Symbol The Holladay Corp Rockbridge St & Highpoint Ave Scott s Addition 202 TOTAL Research & Forecast Report Q Richmond Multifamily Colliers International

4 Market Experience Historical Investment Volume & Cap Rates Millions % 7.5% % % % % 0 5.0% Sales Volume AVG Cap Rate Source: Real Capital Analytics Metro Richmond Employment Overview 25.0 Recent Transactions by Colliers Multifamily Team > Hickory Creek SOLD 6/23/ unit apartment community located in Henrico County built in The Property is situated on ±20.40 acres and features one, and two bedroom Jobs Added/Lost (thousands) (5.0) (10.0) (15.0) (20.0) (25.0) (30.0) > Park West End SOLD 7/7/ unit apartment community located in Henrico County built in The Property is situated on ±18.06 acres and features one and two bedroom Source: Bureau of Labor Statistics; Metro Level Data March 2016(p) Average, not Seasonally Adjusted Metro Richmond Employment Comparison > Champions Club SOLD 7/13/ unit apartment community located in Henrico County built in The Property is situated on ±19.4 acres and features one and two bedroom > The Spectrum CURRENTLY MARKETING 103-unit apartment community located in the City of Richmond completed in. The Property is situated on ±2.34 acres and features one, two, and three bedroom METRO AREA RANK Y-O-Y EMPLOYMENT Y-O-Y PERCENT UNEMPLOYMENT RATE New York/NNJ 1 193, % 5.0% Los Angeles/OC 2 145, % 4.8% Dallas-Fort Worth 3 129, % 3.8% DC-Arlington 4 86, % 4.1% Chicago 5 81, % 6.6% Atlanta 6 77, % 5.2% Philadelphia 7 71, % 5.0% San Francisco 8 71, % 3.8% Phoenix 9 69, % 4.5% Miami 10 64, % 4.9% Seattle 11 60, % 5.1% Richmond 26 28, % 4.2% U.S. Total 2,785, % 5.1% Source: US Dept. of Labor Statistics/Moody s Analytics 4 Research & Forecast Report Q Richmond Multifamily Colliers International

5 Richmond Submarkets MULTIFAMILY ADVISORY GROUP EAST REGION AT-A-GLANCE MORE THAN 50 Dedicated Multifamily Professionals & Advisors COVERING OVER 20 STATES Expansive geographic footprint MORE THAN 30,000 Units sold since 2011 $2.0 B Group gross transactional value since 2011 FOR MORE INFORMATION Bruce Milam Senior Vice President Richmond bruce.milam@colliers.com Jackie Noel, CCIM Senior Broker Richmond jackie.noel@colliers.com Jason Hetherington, SIOR Senior Vice President Richmond jason.hetherington@colliers.com Will Mathews Vice President East Region will.mathews@colliers.com CONTRIBUTORS Scott Amoson Director of Research Atlanta Statia Gibson Marketing & PR Coordinator Richmond & Norfolk Copyright 2016 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Multifamily Advisory Group East Region Colliers International Richmond 6606 W Broad Street, Suite 400 Richmond, Virginia USA North American Research & Forecast Report Q4 Office Market Outlook Colliers International