The apartment market in Richmond, Va., a city of nearly 1.28 million people, finished 2010 with its highest level of positive net absorption—1,536 units—since 1998. And the area is expected to top that figure this year, according to New York–based market research firm Reis.

This rapid momentum in what is considered a secondary market can be traced to a few dynamics, including a lack of development during 2010 and the weak single-family housing market that has driven many residents into multifamily housing. Most important, however, occupancies in the city rose just as the market's employment outlook began to brighten. Like many state capitals, Richmond avoided the depths of the recession due to a large and stable government sector. Yet private-sector job loss didn't leave the city unscathed.

Employment in the Richmond area fell 5.1 percent (or 32,000 jobs) from 2007 to 2010, according to the U.S. Bureau of Labor Statistics. But the local economy began to show notable improvement as widespread job loss ceased toward the end of 2010, and modest annual increases were seen in the professional and business services and construction sectors.

Since January, the metro has added roughly 2,000 jobs. The unemployment rate fell to 6.7 percent in May, registering a yearover- year decrease of 80 basis points (bps), and comparing favorably with the national rate of 9.1 percent. Additionally, expansion announcements at Capital One (700 employees), General Electric (200 employees), and other corporate headquarters will propel growth in the region through the end of 2011.

While only modest employment growth is expected this year, steeper gains are forecasted from 2012 to 2014, with a peak of 15,000 new jobs predicted to come on line in 2013, according to Moody's Economy.com. And that job growth, coupled with a lack of new units coming on line, should push rent growth for years to come.

Fundamentally Sound

Only 635 units were added to the Richmond metro area last year, a steep decline from the 1,412 units that came on line in 2009. Yet the development pipeline is coming back to life, due to available construction financing and rebounding fundamentals.

The majority of recent development in Richmond has been concentrated in the downtown submarket—approximately 700 of the 1,300 units under construction in Richmond are found in the city center. The concentration of new supply downtown can be attributed to the popular trend of warehouse redevelopment into loft-style apartments, as well as the submarket's leading fundamentals, bolstered by the continued growth of Virginia Commonwealth University and the Medical College of Virginia.

Additionally, the Midlothian and Short Pump submarkets have undergone recent waves of development that have driven impressive retail growth and demographic shifts toward the Richmond suburbs. Developments of note in the two submarkets include the 2010 delivery of 339 units at The Flats at West Broad Village, as well as The Estates at Midlothian, which is scheduled to deliver 242 units by the first quarter of 2013.

Overall market fundamentals for the Richmond metro improved substantially during 2010, reversing the 2009 declines. Effective rents grew 1.9 percent to $748, and vacancy rates declined 140 bps to 6.9 percent last year, according to Reis. Leading the Richmond metro metrics is, naturally, the downtown submarket, which posted the highest average effective rent at $894 and an average vacancy rate of 4.9 percent, down 190 bps over the 12 months ending June 2011. Going forward, effective rents in the Richmond market are expected to grow at an average pace of 3 percent annually through 2014 and pick up speed in 2015, nearing 4 percent growth. Vacancy rates are forecasted to stabilize in the low 5 percent range through 2015 as construction starts regain strength and tighten the gap between Richmond's heightened demand and constrained supply.

Transaction Velocity

Investment sales activity in the Richmond metro increased significantly during the first half of 2011, marking a stark turnaround from last year, when just one deal closed. Three deals totaling $79.9 million have closed so far this year, and 166 units remain under contract in the Richmond metro.

The continued strength of the area's apartment market, combined with financing through Fannie Mae, Freddie Mac, the Federal Housing Administration, and life insurance companies, will continue to drive investor activity. Additionally, investors seeking multifamily product in the highpriced Washington, D.C., metro may find Richmond to be an attractive alternative.

Indeed, the future appears bright for the Richmond apartment market. Planned corporate expansions will help drive employment growth and ensure that the region's economy doesn't founder in a secondary recession.

Al Cissel and Scott Melnick are managing directors of Jones Lang LaSalle's Mid-Atlantic multifamily investment sales business.