Best Deals for Investors, Lenders Lie Outside of Urban Cores, Say InterFace Carolinas Panelists
CHARLOTTE, N.C. — The urban districts in the Carolinas have a lot going for them: Honeywell is leasing nine floors within downtown Charlotte’s Legacy Union project; The Fallon Co. is building a 20-story office tower in downtown Raleigh; and The Beach Co. and Centennial American Properties are separately building mixed-use developments in downtown Greenville.
While these projects only scratch the surface of the new developments in the Carolinas’ urban markets — especially for new apartments — speakers at the 10th annual InterFace Carolinas conference said that for a market to be truly successful, there needs to be “growth in both” urban and suburban districts. Panelists emphasized that some of the best deals for their businesses lie outside of the urban cores in the two-state region.
“[Suburban] projects aren’t as expensive to develop,” said Carman Liuzzo, senior vice president of investments at Highwoods Properties. “I hope suburban [developments] don’t go away, our most recent three office developments have been in suburban Nashville, Tampa and Raleigh.”
Liuzzo was a participant on the “State of the Market” panel that took place Thursday, May 30 at Hilton City Center in Uptown Charlotte. InterFace Conference Group and Southeast Real Estate Business hosted the conference, which attracted more than 240 attendees.
Liuzzo was joined on stage by Steven McClure, chief operating officer of The Spectrum Cos., who said that suburban markets offer the most intriguing options for investors seeking attractive returns.
“We’ll continue to see investors come here to chase yield,” said McClure.
Kary Nordholz, senior vice president of investments at Bell Partners, said that the suburbs are attractive from his vantage point as a multifamily investor because of the growth in both population and rental rates outside of city centers.
“There is a lot of growth in the urban core, but we hear all the time that population growth is still strongest in the suburbs,” said Nordholz.
New construction in the past decade has been concentrated in urban districts, and that supply has put downward pressure on occupancy as demand has leveled off for higher end assets in urban cores. Nordholz said that rent growth tends to be stronger in the suburbs now because not as much supply has been delivered comparatively. Despite their level of rent growth being superior, Nordholz says suburban rental rates are still not high enough to justify the development costs for new construction, therefore suburban’s fundamentals are more enticing for multifamily investors.
“They’re not as sexy as [intown high-rises], but for buyers looking for Class B product near good schools, they’re much more likely to go to suburban markets,” said Nordholz.
Liuzzo said that his firm is marketing an office property in Winston-Salem for sale, and there are a handful of international investors bidding.
“Who knows if they show up, but they’re paying attention to the returns,” said Liuzzo.
Lenders bullish on secondary markets
During the “Capital Markets” panel, Chad Hagwood, senior managing director of Hunt Real Estate Capital, said that the best deals for lenders also lie outside of major markets.
“The best opportunities for lenders are serving the middle and small markets with the mid-sized borrowing community,” said Hagwood. “There’s always talk about the big cities, and that’s very important in our world of originations. But at the same time, there is so much growth going on in cities and areas that weren’t on the radar a few years ago. That’s a tremendous opportunity for us and for owners, operators and developers.”
Fellow lender panelist Gary Bechtel, president of Money360, echoed Hagwood’s sentiment.
“We’ve done our fair share in ‘core markets,’ but the bulk of what we’ve done has been in secondary and tertiary markets,” said Bechtel. “We’re in all asset classes and all markets, but we’re mostly in the underserved markets.”
For multifamily lenders and borrowers, the liquidity that government-sponsored enterprises Fannie Mae and Freddie Mac provide in those underserved markets are creating a lot of attractive opportunities for pricing. For Fannie and Freddie, in addition to HUD, the Federal Housing Finance Agency (FHFA) has given them free rein to make deals in the more rural and tertiary markets.
“Smaller markets have a tremendous runway because you can do aggressive deals there,” said Hagwood. “I’ve done deals in tertiary markets that are more favorable than loans in major markets. You have to have the right property and business plan, but people want to make deals in underserved areas.”
Replicating downtowns in the suburbs
While new construction of apartments and office are muted in suburban markets compared with their urban counterparts, enough growth has occurred in the suburbs that there are suburban nodes that have been established.
“Developers are taking the amenities and finishes that everyone wants and taking it to the suburbs,” said McClure, who maintains that these touches give individuals an urban lifestyle at lower rents and with green space so they can escape the city aesthetic at a moment’s notice.
“It’s nice for people to have a selection of where they can live,” said McClure.
A healthy byproduct of these suburban nodes, according to the panelists, is that they help alleviate traffic for major markets.
“Raleigh is developing multiple nodes, and new development has dispersed the traffic,” said Liuzzo. “Mass transit is a long way out for Raleigh, but the road system seems to be suitable. Other nodes around town have captured some of the growth as Raleigh’s office projects are also sprinkled throughout the market with the way traffic patterns are now.”
“We’re starting to see Rock Hill, South Carolina and surrounding areas creating suburban nodes,” added Compie Newman, managing director of CBRE. “If they can be live-work-play, that will attract people and will calm infrastructure. Those places will become important for Charlotte.”
— John Nelson