upzoningisgood

Once you go above 6 stories, you have to use steel. So in a way, you might think of the additional cost to convert the first 6 floors to steel as a fixed cost for buildings 7+ stories. Every floor you add divides that fixed cost across more units. A 7-story building divides that fixed cost across one new floor of units. A 10-story building divides it across 4 stories.

I have no insight into this project specifically, but I suspect what he’s getting at is: 1) It should be easier to rezone (if necessary) and get permits because the city has a direct interest in the project’s success. I’m not saying the city will bend the rules, but I’m sure Diamond District will be pushed to the front of the line for any dealings with the city, leading to faster permitting. 2) It’s probably easier to get debt because the master-planned nature will give banks more confidence in the submarket. If Diamond District goes out for 3rd-party equity, the same holds.

It seems like the Long Bridge and Raleigh to RVA projects are much more intensive, so you would need to announce funding as early as possible, no? Grants come out for stuff every year, so why would today's news suggest anything about the RVA bridge?

Also, interest rates spiked from 2005-2007 which didn't help.

Land values have gone down everywhere and will not return to 2021 levels until interest rates come back down. You would be crazy to sell in this market if you don’t have to.

Land sellers think they’re going to get 2021 prices in 2023. In this rate environment, urban land sellers either commit to a number that is really paltry or they go under contract for 2+ years.

It’s easier to sell a parcel starting with good zoning, especially in this environment. If planning and council are pro-development right now, and by national standards they are (even if Council could always stand to be moreso), then you might as well take advantage while you can.

No way, you want to be AA! That’s where all the best prospects are. MLB teams have transitioned AAA to more of a taxi-cab squad of emergency call ups instead of a finishing school for top players. Maybe with the widening gap between MiLB and MLB that will change, but the best guys sometimes skip AAA. They basically never skip AA.

So, pickleball. Fun

You've seen the suburbs grow while cities have maintained or flatlined throughout the US. It's called the "donut effect." Basically, remote + higher housing prices have made the suburbs relatively attractive. Notably, Richmond serves as a partial beneficiary of this effect, since it sort of forms the outer ring of the DC's donut. So, people are moving from DC to RVA, and from RVA to the suburbs. Cities which are not donuts to larger metros are getting thwacked--look at Hampton Roads in the file I attached, although I'm sure the insurance markets are not helping out HR either. At current growth levels, RVA would on pace for 6.2% growth by the end of the decade, which would be disappointing but not calamitous. co-est2022-comp-51 (1).xlsx

I think the implication is she had a lot of experience turning over every corner to get those grants, so she knows them really well.

Tax rules were also different from 1981-1986 that made capital cheap. If you look in a lot of cities you’ll see a ton of high rises coming online in the mid-80s for this reason. It’s not apples to apples, imo. Also keep in mind those were office buildings, and office tend(ed) to be more lucrative than multifamily. Being on the other side, the interest rate factor is real. Right now the yield on 3-year treasuries is 4.6%. Basically, if I have a giant sum of money I can sit on my ass and make 4.6% risk-free right now, where that wasn’t true 2 years ago. So the goal posts really have shifted. You don’t have to be an active investor to make decent percent returns right now in the same way you did in 2019 or 2021. However, I fully agree with your next paragraph about construction volume and defense of tradespeople. As someone on the white collar side, the people on the blue collar side deeply impress me on a daily basis. I think this was a very speculative, risky proposal. With the risk-free rate so high, they would have probably needed an insurmountable return on investment to make the numbers work. And that’s assuming the construction estimate came in anywhere near where they thought it would.

The interest rates are the biggest deal. They affect a lot of things, mostly on a second order basis. Higher interest rates -> higher financing costs for private equity, lower returns to development -> higher target returns for PE acquisitions, less money floating around -> fewer purchases -> fewer construction loans paid off ahead of schedule -> less money for banks to lend out -> harder to borrow for development. Development, especially for relatively cost-dense projects, gets squeezed on multiple sides. It’s harder to find people to play ball, those people are pickier, and then even if you find someone for equity it’s hard to get debt. Hard costs (at least in Nashville) spiked over the last two years as contractors 1) had to price unknown inflation risk and 2) had full enough pipelines that they could price in fatter profit margins. The pricing might cool down because, in markets across the nation, there’s a supply cliff entering in 2025 and a construction cliff entering 2024. But, hard costs (as well as rents!) are still way elevated from pre-pandemic. That makes it harder to achieve quality returns on cost because now the returns have to be much bigger because the cost is much bigger. If hard costs grow faster than rents, returns on cost decline as they did nationwide post-pandemic, but that is a doubly tough pill to swallow when investors are pickier and debt is harder to come by. Insurance is getting more expensive. The wildfires in CA and rising exposure to global warming are hurting the books of the insurers and they are raising premiums to compensate. RVA isn’t as screwed as California or Florida is, but issues there permeate throughout the country. That also hurts target return metrics and I’m sure provides complications for a project on the waterfront, even if it’s behind a flood wall. I always come back to tech change and building codes because I think they’re the best way out. I’ve talked about CLT, I think building codes could be loosened some to enable smaller two and three-bedroom units that would help affordability and costs, and I think laws should should be streamlined (I’m not exactly sure how) to enable more modular construction. We still build everything on-site. That seems crazy to me in 2023. You can’t do anything about interest rates and insurance but you can provide more flexibility to accommodate these factors.

My guess: costs exploded at the same time investors got pickier and banks got spooked. People don’t want to/can’t cut big checks right now. Basically, because investors can’t cut as big checks, they want more bang for their buck. So they want returns/dollar invested to be higher than a few years ago. Because so many people are out, those still in can be, and must be, pickier. That means tall, costly projects like Hourigan’s is behind the 8-ball now in a way they weren’t a few years ago even before the other factors listed above.

How accurate is the “CJ Estimate?” $53M in hard costs seems very low

This is a good example of the value of eliminating parking minimums. They’ll probably need at least 1.1 spaces/unit +something for commercial. If there were parking minimums similar to Nashville’s outside of the urban zoning overlay, they would need at least 1.3-1.4 spaces per units + something more for commercial. At 368 units, that opens up 25-35k SF for development.

They have to. You need every bit of economies of scale in this environment.

My recollection was that they were building that stupid solar panel surface parking lot, right? So this seems good?

My guess is the holdout complicated rezoning that block. I assume the strategy is to wait for that owner to sell, buy the parcel, then rezone the whole block. Otherwise you’re wasting your time on the rezoning because TOD-type midrises need all the land they can get for the numbers to work, so the land would be worth much more if the whole block was rezoned as opposed to there being a cutout . Additionally, one holdout parcel can really screw with the architecture if it’s in the wrong place, and in the middle of the street is a tough spot.

@I miss RVAI see both sides of it. I think there's a perfect world where the city invests in necessary infrastructure upgrades, does a great job designating public spaces, and successfully sells off lots for 20 years and after 30 years there's a bustling neighborhood. In practice, I would not trust that strategy to survive 4 elections.

For private multifamily development, the first-order effects of interest rates aren't that bad as long as your leverage isn't too high. Like, the cost difference for a development with 5% vs 8% interest isn't that different as long as you're funding with like 50% debt. The pain comes from how those interest rates affect buyers of multifamily properties, which affects when loans get paid off, which affects how much new debt can be extended. Where the first-order effects higher interest rates get hard is if you're funding with like 70% debt. Then you really start to feel the impacts of 8% interest. The above is true for private MF development. I don't know what kind of leverage RVA is using or how interest rates affect municipal TIF financing vs. private financing.

The other thing is the Reagan administration clamped way down on how you could deduct expenses. https://www.nytimes.com/1985/06/16/realestate/reagan-tax-plan-waiting-for-the-other-shoe-to-drop.html

No, it matters. It prevents a type of error where the government mandates too much parking, more than makes economic sense. It just won’t get parking counts as low as you might want for big projects.

First of all, and I say this as someone who works for an institutional developer--Tom Dick and Harry development is super important! It's good that people have different options in different places other than 300+ unit apartments. Anyway, I would define Tom Papa as a mom and pop developer because he is exclusively local, but I have real respect for his game. Being exclusively local (and likely securing equity from smaller, more idiosyncratic firms) and successful probably affords him some latitude to get weird with parking if he wants. Our version of Tom Papa, Giarratana, actually has a skyscaper with 250 units, 50 of which are Affordable, and no parking spaces. All of that with worse transit in Nashville than RVA. Local developers who like to go vertical might still benefit from no parking minimums. But, that doesn't get rid of parking unless there is a credible reason to think prospective tenants will go sans car. Nashville has no parking minimums downtown. Go look on Google Maps and tell me how much it looks like NYC. Yes, although this would be the miracle grow for every city in the current environment. More important I think would be relatively low construction costs. I think RVA could benefit from embracing cost efficiencies during construction and design that other cities would not. There is some talk around loosening design restrictions around corridors (right now basically every apartment has a hallway with doors on either side called a dual loaded corridor. This forces buildings to be quite wide. Single-loaded corridors or (I think they're called) point access blocks are two options that allow you to design buildings that are economical at smaller scales). I have talked about cross-laminated timber before--I think updating the zoning code to allow construction of CLT would help the economics of large-scale construction. I think embracing things that let RVA be relatively cheap could be a real competitive advantage in the short and medium-term. (I think in the long term these will eventually be adopted).

@Hike @I miss RVA Very kind, thank you!