CHARLOTTE, N.C. — Things are feeling a little frothy in the Carolinas, according to Wells Fargo senior economist Mark Vitner, who opened the sixth-annual InterFace Carolinas show with a keynote economic overview on topics such as oil prices, interest rates, single-family housing and overall economic growth.
“Nobody wants to use the term ‘bubble’, but ‘froth’ seems to be the right tone,” said Vitner, addressing more than 200 commercial real estate brokers, developers, investors, lenders, owners and managers last Wednesday, June 3 at the Charlotte Convention Center in downtown Charlotte. InterFace Carolinas featured panels discussing the state of commercial real estate in the Carolinas, the economic health of the region, capital markets and the health of the four principal property types — office, retail, industrial and multifamily.
Vitner set the table for the conference with his valuation of the market as frothy, a term that Investopedia describes as the market condition preceding an actual market bubble where demand for assets drives their prices to unsustainable levels.
“The Carolinas are very frothy,” echoed Larry Brown, president of Starwood Mortgage Capital, during the capital markets panel. “The bond buying community thinks it’s very frothy, it’s getting to very aggressive levels. If you’re a borrower, there’s room to run because of the interest rate environment. It’s frothy, but we’re going to be here for a little while, which is not an unsafe place to be.”
In the national economy, Vitner forecasted that oil prices have bottomed out, interest rates will rise in the next six months and the single-family housing market will gain momentum through the end of the year. He contended that these national trends and the Carolinas’ job growth have elevated the region’s commercial real estate market to become a safe haven for institutional capital. Travis Anderson, senior managing director of HFF, agreed that the market is busy to an extent but that it may not be for long.
The Capital Markets Update panel at the InterFace Carolinas show included, from left, Michael Ortlip of Grandbridge Real Estate Capital, Larry Brown of Starwood Mortgage Capital, Michael Beidelman of Nationwide Investments, Kirk Booher of BB&T Real Estate Funding, Travis Anderson of HFF and Ed Gagermeier of Freddie Mac.
“Everybody says it’s a frothy market and it is to some degree. The fundamentals of the real estate are very sound compared to when you look back at the market in 2005 to 2007,” said Anderson during the capital markets panel. “We’re seeing more institutional equity come in, but when and where they think that the pricing starts to hit peaks, you’ll see the equity guys drift into the mezzanine space or a little bit lower down the risk spectrum.”
Seventh-Inning Stretch
During his keynote address, Vitner analogously described the Carolinas as being in the seventh-inning of its cycle, where the wheels of the recovery are in full motion and heading toward pricing peaks. Several panelists agreed, and during the state of the market panel, Brian Leary, president of commercial/mixed-use at Crescent Communities, was quick to point out that each product type is in its own game.
“While multifamily probably feels like they’re in mid-season form, for those of us in office it feels like we’re just getting out of spring training,” said Leary, who went on to say that real estate is probably an extra-inning game because of the slow recovery and institutional control on underwriting.
Gary Chesson, partner at Trinity Capital, agreed with Vitner’s seventh-inning assessment, saying that property fundamentals are finally catching up to the capital invested in the Carolinas since 2011. Ronnie Bryant, president and CEO of the Charlotte Regional Partnership, also agreed that the Carolinas are in the seventh inning, while Peter A. Pappas, founder and president of Pappas Properties, said that it’s earlier in the game.
“With the young and highly educated workforce of the future coming to the Southeast and Carolinas, our markets are going to fare better and be positive longer than the rest of the country,” said Pappas. “We’re really in the fifth or sixth inning as it relates to the Carolinas.”
Added Brown during the capital markets panel, “We at Starwood think it’s squarely in the fifth inning, not because of where things are now but because where we’re going.”
Crowded Trades
“One of the terms that you’re hearing with greater frequency is that everything is becoming a crowded trade,” said Vitner. A crowded trade denotes heightened competition among like-minded investors for the same product.
Vitner later crystalized the message saying “Everything worth doing has become a crowded trade.” Vitner listed some of the crowded trades he’s seeing: building apartments, opening hamburger joints and micro-breweries and buying high-yield debt.
During each panel of the conference, speakers discussed how each property sector and major market in the Carolinas have seen growth in the past several years. The increased competition for deals among investors in the region is a sign that the market is in “later innings.”
“Charlotte and Raleigh are so appealing to investors that there’s competition everywhere. I wouldn’t go so far as to call it frothy, but there’s a lot of inconsistency as far as where things are getting priced,” said Michael Beidman, senior real estate portfolio manager of Nationwide Investments. “The Carolinas have served us well.”
For some investment firms, the fundamentals in the Carolinas are such that it makes more sense to build than to buy.
“The buying opportunities on the distressed side are few and far between,” said Chesson. “We’re focusing on development. We are building in Charleston where the office market has single-digit vacancy.”
Carolinas 3.0
Vitner assessed that the Carolinas are reaching uncharted territory in terms of its economic health and regional commercial real estate activity. He described the region as “Carolinas 3.0,” where Charlotte is out and front as the top market in the region.
“Charlotte is a primary market,” agreed Starwood’s Brown. “Charlotte is on the map whereas 12 years ago it was considered tertiary. It’s moved from a tertiary market to a secondary market, which is a big deal.”
During the capital markets panel, Nationwide’s Beidelman discussed the Carolinas’ appeal from a mortgage lending perspective.
“Charlotte is a primary market but it’s not a Chicago, San Francisco or Los Angeles. Nationwide doesn’t do as many deals in those markets now because we’ve been priced out. We’re very active in Charleston, and we’ve done deals in Greensboro and Asheville. We’re not afraid to go to these markets,” said Beidelman. “The right location matters.”
The main underpinning behind Carolinas 3.0 is the job growth in the region. During the state of the market panel, Crescent’s Leary said that the No. 1 predictor of whether a populace has healthy job growth is educational attainment, and with the University of North Carolina, Duke University and several other top institutions in the region, the Carolinas have a healthy predictor of a highly educated workforce.
“Charlotte is growing jobs,” said Leary. “With this jobless recovery, it’s tough to get going on office when you’re not seeing jobs.”
For office, Chesson said Charlotte and Raleigh are attracting office tenants that want to employ Millennials and be near the educated workforce, infrastructure and amenity base that North Carolina offers.
“In Raleigh, demand has been terrific. Biotech and the technology businesses in that market have led the growth. Raleigh, from a tenant demand perspective, was hot back in 2011 and 2012. It was a full year ahead of the Charlotte demand curve,” said Chesson.
— John Nelson