Commercial Development Marked by Challenges and Opportunities

By Joanne DiMaggio

Take a ride around the multi-county area that makes up Central Virginia, and you will see locales in which commercial development is readily visible. What you may not know, however, is that most of these projects have been in the works for years. 

“There are a number that are slated to start, like Albemarle Place,” said Benton Downer of Downer & Associates. “They are building Whole Foods, but the negotiations have been going on for five years on that site. We’re not void of development, but many of these projects have been in the planning stages for a fairly long time and they just came together now.”

Mason Graham, CCIM, also with Downer & Associates, said that Albemarle Place is one of those long-anticipated projects. “Albemarle Place is one that is high on the public’s radar screen because of the recent press and the retail component that it brings to our region. But it has really struggled to get through the approval processes and still faces issues that need to be dealt with regarding water and sewer capacities and the expansion of Route 29.”

Graham and Downer know what it’s like to work through the long process of lending and project approval, as evidenced by their involvement with Rivanna Plaza, located on Route 29 in front of Kegler’s. “That has been held up by the lending environment, but we are hoping to break ground on that by the end of the summer,” Graham said. “The site plan approval has been accomplished and we have tenants for the first two phases signed up.”

Downer stated what everyone knows to be the central issue—that the economy has dramatically slowed commercial development. “I use statements like we’re in a ‘new world order,’” he explained. “All the rules we used in the past are gone. Lenders are not as willing to lend on any type of project that has any speculative risk involved without significant developer capital. You still can develop a project today, but you have to put up 50% cash, and not everybody’s in a position to do that. It’s not that lenders are unwilling to do transactions. They’re unwilling to do it with the rules that were established when the market behaved differently. It makes the whole pyramid very difficult to move through.” 

Bill Howard, CCIM, Broker with Real Estate III Commercial Properties, echoed Downer’s statement that the banks are much more cautious. “The banks were loaning money with very few guidelines and very few reasons to say no. They just went ahead and loaned the money. Now that’s changed. Charlottesville has been an area that we always thought was protected. We’re not as protected anymore, because the game has changed and the banking industry, with their new federal regulations, has slowed down building.”

Graham said that lending has been a challenge for most of her clients. “Even with lower interest rates, the banks are not lending for new development because of the risk involved. Even for those projects that were already approved and started, the property values have decreased beyond what the lenders require for debt-to-equity ratios, so they will not refinance or extend existing credit. Companies that thought in 2007 that they would be expanding their personnel and office space needs in 2008 had to stop and reassess their path.”

Fulfilling Community Needs

Commercial projects play an important role in the expansion and value of nearby residential housing. 

Graham said an enormous amount of research goes into each project by the developers, the community planners, and the tenants, particularly if it’s a retail project. “The tenants of retail projects want to know that they are within reach of their end users and target markets and there are many research firms out there that can help with that.”

Howard added that with the current economy, people don’t want to drive long distances to shop. “I think development in northern Albemarle and southern Greene and Madison has flourished because of Hollymead Town Center. People would prefer to own homes in those areas, and therefore they are selling more.” 

Downer said that real estate values across the board have been impacted. “If you don’t have goods and services near where you live and work, that location becomes less desirable. It’s important to have a model that encompasses both residential and commercial development. It’s a complicated puzzle. The economic downturn that we’ve experienced is something that nobody’s been through before. We can’t continue to go on the path we’re on. We have to do something to fix it and we have to do it pretty quickly. We’ve seen a drop in value in our market between 20-25% and maybe more in some pockets—both residential and commercial value—and that’s a significant amount of money. I think people that think that it’s going to be 2005 in 2015 are misreading the tea leaves. It’s just not going to happen. I think you’re going to see a gradual, slow, methodical, small annual incremental increase, and I think that’s across the board—residential and commercial alike.”

Challenges and Opportunities

While the market offers many challenges, it also holds opportunities.

“I’ve never seen a better opportunity in the marketplace than I have today,” said Downer. “I don’t think where we are today is where we’re going to be forever but from the landlord’s perspective, if they have flexibility, this is a great time to get tenants. From a tenant’s perspective, it’s been 20 years since we’ve been in a market where the tenants have good selection of projects available to them. Landlords are getting extremely motivated and creating opportunities in value to sustain us through the next 2-3 years. In the new world order, both landlords and tenants want more flexibility. We aren’t seeing long-term deals. Everybody recognizes that the world is changing and we have to do things a little differently.” 

That being said, Downer sees the next five years as promising.

“I really feel like this is a wonderful community with mixed commercial and residential projects that have meshed fairly well together. There are tons of businesses here because of the quality of life, school systems, and because of Charlottesville. They could be anywhere, but they chose to operate here. As long as we maintain those things that got us where we are today, even though the market is flat, we’ll continue to outperform it. If we continue to hold to our core beliefs that got us to where we are, we’ll be okay.”

Graham agrees. “I don’t see many developers standing in line to stick their necks out in this environment, and I don’t think that will change much for the next 2 to 3 years. As employment growth returns, we’ll start to see a turnaround, but we’ll continue to see a downturn in the commercial sector for the foreseeable future.”

Howard said to never discount the draw that Charlottesville has to the general public. “You have to remember Charlottesville is a location that people want to move to. It’s one of the top places to live in the U.S., so people will continue to come and as that happens commercial growth will continue. I think the board of supervisors has opened up a bit, making it a little easier for people to get their property approved for development. They’re striving for an economic development program that this county hasn’t had, so I think if they can put that together, which they’re working hard on, then we’ll have a plan that tells people that want to come to here that Albemarle County is open for business.”