110
Charlotte has become one of the most desirable and sought-after investment markets in the nation with a diverse economy fueling job growth, attracting new talent and enticing investors. In fact, Charlotte had the largest population growth rate for urban areas of 1 million people or more in the decade from 2000 to 2010 and is expected to increase its population by another quarter-million people by 2020, fueled by diverse industries such as banking, energy, healthcare, manufacturing and transportation.
With 37,000 jobs created in 2012, Charlotte’s employment has added back every job lost during the recent recession, eclipsing its previous high-water mark set in 2007. Approximately 50 companies have announced major expansions or relocations in the Charlotte area over the past year-and-a-half. Highlights include Metlife announcing plans to establish a hub for its U.S. retail business in Charlotte bringing 1,300 jobs to the city and Convergys, the business process outsourcing giant, announced plans to create 1,600 jobs.
From a multifamily operations perspective, the Charlotte MSA has seen outstanding performance over the last two years with both total occupancy and average rents at their highest levels in the past 10 years. With current occupancy levels above 95 percent (increased by approximately 490 basis points since 2010) and annual effective rent growth over 5 percent, Charlotte is poised for continued rent growth.
From an investment standpoint, transaction volume in Charlotte continued its upward trend in 2012, bouncing back from historic lows in 2009-2010. The number of units traded and number of transactions each increased by more than 70 percent in 2012. The city reported more than $900 million in transactions in 2012, marking Charlotte’s second highest total transaction volume behind the $1.25 billion in 2007. Year-to-date transaction volume for the Charlotte MSA has kept pace and stands at just over $300 million through April 2013.
Charlotte achieved record per unit sales in 2012 with The Vue Charlotte on 5th representing one of the highest per unit transactions on record between the East Coast gateway markets of Washington, D.C., and South Florida. The property is a mostly vacant high-rise condominium project converted to apartments. Furthermore, the $200,000 per unit barrier was eclipsed for the first time in Charlotte with stick-built, mid-rise product.
These record prices spurred the development community and equity providers to the point that four high-rise development projects are now in process across the Carolinas.
After two years of perpetual conversations over future supply concerns, the first wave of new product both conceived and capitalized since the market bottomed in 2009 delivered in the Carolinas. Luxury product with a superior level of interior finish, architectural detail and well-targeted amenities — when compared to the existing Class A stock — hit the market mid-year 2012 and continues to deliver in 2013. Early returns on leasing are extremely positive.
These assets have achieved rent levels per square foot that are above proforma and well in excess of comparable product only three to five years older. The results are a testament to developers and management teams fine tuning their product to include an amalgam of essential design elements that an exacting prospective resident base is willing to pay for.
During the last three years in the face of economic headwinds, the Charlotte multifamily market has thrived with consistent year-over-year rent growth, outperforming absorption expectations despite modest job growth — a divergence from the traditional heuristics.
There are several critical demographic phenomena that suggest the momentum behind the supply concern groupthink may be alarmist as well: rent versus buy metrics among the millennial generation, who comprise a large component of the targeted tenant pool; in-migration from MSAs where residents are accustomed to paying a higher percentage of their income toward rental housing; the average MSA-wide rental rates in Charlotte are still 12 to 15 percent below their inflation-adjusted levels of 2000; the rental gap between Charlotte and the Mid-Atlantic and Sunbelt MSAs (Atlanta, Metro D.C., South Florida) is gradually closing, which suggests continued maturity and growth. Rent growth in the urban infill mid-rise product has been staggering in the last 12 months, which suggests outsized demand for this product. New deliveries may temper growth down toward historic year-over-year norms, but is unlikely the curve will plateau.
In fact, within Charlotte, a largely untapped pool of luxury renters continues to be revealed. As of year-end 2012, more than 62 percent of the demand from renters earning more than $50,000 per year comes from households 35 years and younger. Furthermore, 29 percent of existing multifamily renters under the age of 35 can afford monthly rent of $1,500 or more; 12 percent can afford monthly rent of $2,000 or more. However, only 2 percent of renters are actually paying $1,500, while less than 1 percent of renters are paying more than $2,000 per month. Subsequently, prospects are bright for positive absorption well into the future.
As we look ahead into the remainder of the year and beyond, we are seeing several new trends emerge. Pre-stabilized acquisitions and “build-to-core” investments have become an avenue for institutional, low-cost capital sources to access brand new product in a lower deal flow environment. Early-cycle developers and their opportunistic equity partners are eager to post strong returns to augment their track records and assist in active fundraising efforts.
A strong rebound in the housing market and increases in consumer discretionary spending are bolstering valuations in the Class B and C market as their primary resident base — construction, retailers and other service industry employers — sees a hiring boost. Equity capital raised for value-add is pursuing these assets in joint venture arrangements with regional operators targeting comprehensive rehab opportunities to bridge the widening rent gap between these assets and more contemporary product. The amount of eligible joint venture equity continues to swell while the “deals to dollars” ratio remains low, a reality that continues to create intense buy-side demand.
— Dean Smith, principal at ARA's Charlotte office