Crisp Charlottesville autumns draw people from all walks of life to stroll on the Downtown Mall, dine at its fine restaurants and buy gifts in its many shops. These days, though, as the markets continue to slow and economic sentiment further deteriorates, it’s hard not to notice the rows of storefronts that no longer display antiques or clothing. Instead, dusty interiors lay barren, advertisements for upcoming acts at the Paramount taped to the windows despite the protests of signs that read “Post no Bills.” Is it a sign of the times or just the natural flow of business?
No matter what is happening here in Charlottesville, it is starting to become the consensus that the U.S. economy is in, and will remain in, a recession. The debate now rages on over its duration and severity. Some believe the markets are acting the same as they did in the early 1980s in the midst of our country’s last severe recession, which would imply a recovery in mid-2009. In late October, though, JPMorgan economists predicted a recovery starting in the second half of next year, followed by three full years of sluggish growth, according to the Wall Street Journal. To put it bluntly, the report stated that “from the perspective of wealth losses and declines in real consumption, the current recession is likely to prove more severe than any of the previous ten in the post World War II era.” Clearly, previous predictions that the crisis would make the jump “from Wall Street to Main Street” have been validated. But, just how much will it affect Charlottesville’s own Main Street in particular?
Up until this point, much of the focus has been on Elm Street, if you will. Most analyses of the crisis point the finger directly at a residential housing bubble during the last few years that popped as supply caught up with, and surpassed, demand. Bad lending practices resulted in loans to people who simply could not pay them off. A prominent local real estate attorney who chose to remain anonymous said he was uncomfortable with 80 percent of the mortgage refinancings he has seen recently. He said some borrowers never even made the first payments on their homes. Now, it is widely reported that home prices continue to plummet around the country, with year-over-year declines of up to 30 percent in hard-hit areas like Las Vegas.
Developers such as Hovnanian Enterprises have seen their stocks drop almost 94 percent since mid-2005. Economists, however, worry that residential real estate is only the tip of the iceberg. If banks made bad loans to homeowners, why wouldn’t they make them to businesses? Just as distressed homeowners lose their jobs in a bad economy and can’t make their mortgage payments, a slowing economy decreases commercial traffic, causing some stores to miss rent payments and shutter their doors. Mall-owning commercial REITs like Simon Property Group have lost nearly 50 percent in market value since their highs. Some think this suggests a lag to the residential decline, meaning there is still plenty of downside to go.
Commerce School Prof. George Overstreet agreed. “The Case-Shiller [home price] index is down 20-plus percent, and we have another 15 to go,” he said. On the commercial side, he added that “there will likely be some pain in some of the retail around here.” His analysis of commercial properties shows that transaction volumes in the first quarter of this year were the same as in 2004, erasing four years of explosive growth. “I would be concerned especially about new shopping units,” he said.
Cass Kawecki, vice president of the Charlottesville office of commercial real estate firm CB Richard Ellis, expressed a different take on the situation. “In commercial real estate in Charlottesville, I would say there is some indication of a slowdown, though the impact appears to be considerably less than you’re finding in the national averages,” he said. He added that he believes the Charlottesville market is uniquely sheltered for several reasons. The University, student housing and the medical community provide some stability. In addition, Kawecki said he believes the barriers to entry for new development are very high: “Owners in Charlottesville are reluctant to sell their properties, and there are strict public approval laws in place.” As a result, supply of commercial property in the area has remained relatively fixed, insulating the city from rapid property devaluation.
Nevertheless, the CB Richard Ellis 2008 MarketView report on Charlottesville retail property states that over 2.7 million square feet of new retail space has been approved through 2009, including major new shopping centers along Route 29 North. The report claims that only 2.3 percent of total property inventory is currently available in the region. It remains to be seen how much this figure will increase, if at all, during the next several months. At this point, though, it seems as if Charlottesville could potentially avoid the worst of what is to come.
David Victor-Smith is the president of the McIntire Investment Institute, a student-run equity fund.
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