When reflecting on Charlotte’s multifamily market over the past few years, several major trends drove unprecedented transaction volume — record-level rent growth, positive absorption despite a consistently robust pipeline of deliveries, strong population growth from high in-migration and rapidly increasing homeownership costs pricing residents out of the market.
Charlotte has been a popular relocation destination for individuals and families, particularly from the Northeast, Midwest and other parts of the Southeast who are drawn to the low cost of living, warm climate and strong economy. Zillow ranks Charlotte as the No. 1 housing market for 2023, signaling a continued rise in home values and subsequent increased demand for rental housing from the growing population.
In-migration has made Charlotte experience explosive growth and bolstered the population to over 2.7 million residents by year-end 2022, a 5.6 percent increase since 2018 compared to the national rate of 1.3 percent. Equally impressive is regional job growth, with non-farm payrolls increasing 7.9 percent over the same time frame.
Much of Charlotte’s multifamily growth is attributed to capital investment from new employers across the metro, including Albemarle Corp.’s $180 million investment into a new research campus in University City bringing 200 new jobs, as well as Pallidus relocating its corporate headquarters and manufacturing operations to Rock Hill, a $443 million investment bringing 405 new jobs.
Wake Forest and Atrium Health also broke ground on the city’s first medical school and innovation district in Midtown, with the inaugural class expected in 2024. According to the project’s website, this master-planned development is expected to facilitate over $1.5 billion in investments once completed.
Furthermore, the electric vehicle (EV) industry has announced over $1.85 billion investment and 950 jobs since beginning of 2022. These announcements affirm Charlotte as an increasingly dynamic job market, likely leading to strong multifamily fundamentals moving forward.
Historic growth and repeated market investment have positively impacted multifamily performance and bolstered investor optimism, catalyzing an incredibly competitive market. The past two years were the most active Charlotte has ever seen for multifamily transactions despite recessionary headwinds nationwide. This caused the 10-year Treasury yield to experience dramatic swings throughout 2022, with the first and third quarters experiencing 90 basis point increases. The volatility in financing benchmarks made underwriting fixed-rate debt difficult.
In addition, the SOFR increased nearly 410 basis points over 2022, causing the floating-rate bridge debt market, which propped up record pricing over the previous 18 months, to dry up, leaving buyers no accretive debt options. Lack of favorable debt coupled with rising costs due to inflation led to more cautious optimism heading into the last quarter of 2022 versus 2021.
Charlotte multifamily has persevered and experienced consistent demand, with positive absorption recorded every quarter for more than 15 years. Since the beginning of 2020, nearly 25,000 units have been absorbed, demonstrating persistent demand among renters despite a flood of new supply. Demand remains strong in 2023 as the market saw the second highest first-quarter absorption in the nation. Even with the fast pace of deliveries, rental rates in Charlotte increased substantially in recent years, reaching record highs in 2022. At the close of first quarter of 2023, Charlotte’s average effective rental rate was $1,567 per unit, a 35 percent increase over the past five years.
Seasonality has returned to leasing as well, leading to a return to normalcy within the multifamily market. Unsurprisingly, leasing velocity has slowed and the stabilized occupancy rate has decreased modestly in recent quarters to 93.2 percent after hitting a historic high of 96.1 percent in the third quarter of 2021 when several 2021 deliveries exited their initial lease-up phase.
Nearly 3,700 units delivered in the first quarter of 2023, including Wood Partners’ Alta Filament (352 units), Crow Holdings’ Alexan Research Park (334 units) and Crescent Communities’ Novel University Place (311 units). Roughly 29,000 additional units were also under construction at the close of the quarter.
Similarly, Charlotte multifamily sales volume reached a record high by a hefty margin in 2021, and again recorded historically high transaction volume in 2022. Though economic conditions drove a slowdown in sales in the latter half of the year, the rolling four-quarter total surpassed $6.2 billion, exceeding the average rolling four-quarter volume of the past five years by 40.7 percent. Cushman & Wakefield’s Michael Saclarides brokered the largest multifamily sale in the first quarter of 2023 of Sycamore at Tyvola, a 288-unit community, for $96.3 million.
An emerging trend discussed at National Multifamily Housing Council’s 2023 meeting is fear from institutional capital groups of jumping back into the market too early. These investors were largely relegated to the sidelines in the fourth quarter of 2022, creating opportunity for family offices and long-term capital to push back into the market.
However, institutional capital is slowly re-entering the market, and there is increasing desirability of loan assumption transactions, signaling an increase in transaction volume in the final two quarters of 2023.
— By Alex McDermott, Executive Managing Director, Cushman & Wakefield’s Sunbelt Multifamily Advisory Group. This article was originally published in the June 2023 issue of Southeast Real Estate Business.