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The Charlotte, N.C., apartment market is well into its recovery; 2012 proved to be a strong year with improving fundamentals, healthy transaction volume and the formation of a robust new development pipeline.
The exceptional year that Charlotte experienced in 2012 was not fully anticipated at year’s end 2011. However, MPF Research’s second quarter report (July 2012) showed Charlotte’s year-over-year rent growth at 6.8 percent, placing it third in the top 10 markets for rent growth nationally (of the top 50 national markets). This trend was reinforced by MPF’s third quarter publication which reported year-over-year rent growth of 6.3 percent. This marked the fourth straight quarter of year-over-year rent growth in excess of 6 percent. In addition, the report showed overall market occupancy levels of 95.9 percent, the second highest achieved in 14 years. Such favorable news serves as confirmation that the Charlotte economy has remained strong through the financial crisis, as banking sector jobs have remained largely intact and the overall economy of Charlotte is more diverse than many once thought.
As a result of the favorable market dynamics, Charlotte’s visibility amidst the national investment landscape has increased, causing investors, developers and lenders alike to take note. Charlotte has quickly become a strong alternative to the Raleigh/Durham market, which had been the most desirable market for multifamily investment in North Carolina in 2011 — and one of the leading markets in the nation.
According to Real Capital Analytics, Charlotte’s transaction volume was just shy of $900 million in 2012. Capital sources continue to flock to the highest grade assets, particularly in infill locations. There is steady sale activity in all tranches of the market, including some lingering foreclosure sales in the C and D asset space (where the foreclosure process serves to right-size deals that were overleveraged at the peak of the market). Historically low interest rates are fueling the multifamily investment sales market, with rates remaining at or below four percent for long-term, fixed-rate financing. This low interest rate environment has resulted in historically low cap rates, ranging from just below five percent for high-
quality assets, to just below eight percent for assets of lower quality.
Predictably, the strong market fundamentals have, and continue to attract significant development activity. Real Data reported in September 2012 that 3,200 new units had been absorbed in the preceding 12 months, while an additional 4,000 units are currently under construction and another 10,000 units are in various stages of planning. Development financing has become more readily available over the last 12 months and providers of both debt and equity are more tolerant of higher-risk investments (thereby enabling development).
Current development activity is segregated to a few distinct geographic clusters. The majority of new development projects are located in infill locations, predominately close to Uptown. Such areas include South End, NoDa (North Davidson), and Elizabeth. In addition, the affluent suburban submarkets of Southpark and Northlake have several projects currently under construction.
Of these active submarkets, the South End submarket has been most active. Development in South End has been driven by its proximity to Uptown Charlotte; as well as the award-winning light-rail public transportation infrastructure, which has sparked an abundance of retail, restaurant, and entertainment venues in the immediate vicinity. The result is a highly desirable urban-lifestyle that appeals to the Gen-Y renter pool (the population that is driving current demand for apartments). JLB Partners, Colonial Properties Trust, Proffitt Dixon Partners, and Mid-America are currently building more than 850 units at various points along the rail line. Long term, South End is well on its way to becoming one of Charlotte’s most dynamic areas; however in the short term, oversupply poses a legitimate threat.
Despite documented high barriers to entry, the Southpark submarket will deliver two new rental communities beginning in the summer of 2013, including a $52 million, 321-unit high-profile project by Crescent Resources called Circle at Southpark. The Northlake submarket has also been a hotbed for development. Charlotte-based Charter Properties recently completed a 264-unit community called Longview. Ashton Reserve at Northlake, a 330-unit property developed by Tynes Development, and Madison Square at Northlake, a 285-unit property developed by Spectrum Properties, are both nearing completion. Wood Partners just began work on the 246-unit Perimeter Lofts that will begin leasing in the summer of 2013.
The Charlotte apartment market will remain strong in 2013 and should perform in the top tier of apartment markets in the Southeast. We expect investment activity to remain brisk, driven by the continued low interest rate environment and strong appetite for hard assets (real estate). Due to the city’s strong leadership, pro-business attitude, and the high quality of life available, Charlotte’s population growth should continue to build upon the growth seen during the previous decade (2000 to 2010). The Charlotte/Douglas International Airport remains a key economic driver for the city while ongoing investment and expansion of the airport will continue to attract business. Charlotte remains one of the most vibrant cities in the Sunbelt by maintaining a low cost of living, quality transportation options and a diverse economic base.
— Marc Robinson, Managing Partner, MultiHousing Advisors (formerly Southeast Apartment Partners)