Charlotte Surges into the First Rank of U.S. Growth Markets

Charlotte is America’s second-largest commercial banking center, home to one of the country’s biggest financial institutions, Bank of America; soon the headquarters site of another when BB&T and SunTrust merge; and host to more employees of Wells Fargo than call its San Francisco base home. It would be hard to exaggerate the economic benefits the local market secures from this status.

One growing but not widely appreciated benefit is the Queen City’s emergence as one of the world’s hotbeds of innovation in fintech, the space in which digital technology and financial services intersect. With support from local financial services giants, well-funded fintech incubators (like Queen City Fintech, hired by IBM to build and run their Hyper Protect accelerators) and a burgeoning start-up community, Charlotte has hatched a small army of successful fintech firms capitalized with more than $2 billion to date.

Lately, entrepreneurs in other disciplines have come to appreciate Charlotte’s virtues. Nascent disruptors in the healthcare and electric power sectors are setting down roots in the city, attracted by its low operating and living costs, quality of life, deep well of talent and uniquely collaborative style.

The injection of start-up energy into Charlotte’s thriving Fortune 500 business foundation catalyzed strong, sustained economic growth. The metropolitan area added more than 20,000 payroll jobs and employment increased by 2.2 percent or faster for a ninth consecutive year in 2019, a feat equaled only by Austin, Dallas, Nashville and San Francisco. Metro establishments added more than 30,000 new jobs last year, with small operators in finance, computer network design, software, web hosting and cloud computing making outsized contributions. Indeed, the aggregate number of employed residents surged at a 3.4 percent annual rate in the second half of the year: not the sort of numbers typically recorded in the late stages of an exceptionally long business cycle.

Growth of this magnitude necessitates commensurate housing development. The multifamily industry has taken the lead, completing 126 apartment properties incorporating more than 32,000 total units in the past four years, representing an increase in the professionally managed apartment stock of more than 20 percent. In January, another 12,000 units were under construction and as many as 40,000 were proposed or planned.

So far, the market has digested this large helping with ease. Following absorption of nearly 6,500 units last year, December 2019 occupancy among stabilized, same-store properties in the Charlotte metro area surveyed by Yardi averaged 94.90 percent, virtually unchanged over the previous 24 months. Likewise, occupancy among Class A properties — the segment most likely to come under pressure from heavy supply — stood 33 basis points above the December 2017 comparison on 94.50 percent: impressive performance under the circumstances.

Supply also proved no impediment to rent growth. Fourth quarter 2019 rents in the same-store sample increased on a robust 5.18 percent year-on-year pace, comprehensively faster than the 3.35 percent advance recorded in the year-earlier period. Although Class A trends were the slowest among quality grades the segment managed to post a solid 4.32 percent year-on-year fourth quarter gain, reflecting considerable acceleration from respective 0.22 percent and 2.45 percent increases recorded in the comparable periods of 2017 and 2018.

Victory goes to the bold. Intrepid investors were handsomely rewarded last year. Our Reis-based calculations suggest that typical metro properties chalked down an approximate 10 percent NOI increase in 2019. At the same time, cap rates applied to institutional quality properties plunged as many as 30 basis points to sub-5 percent levels, generating total returns approaching 20 percent. Nice work if you can get it.

The market isn’t clear of the supply woods yet but the performance outlook remains favorable. Under the proviso that COVID-19 may have the final say, RED Research’s forecasting equations expect metro occupancy to decay very little under the looming 2020 supply wave (projected to reach 8,000 units). Rents are likely to decelerate, but the models foresee further 3 percent or faster annual gains throughout our 5-year forecast interval under the most-probable economic circumstances.

Expected investment returns are impressive. In our base case, most probable annual unlevered Charlotte multifamily returns are likely to threaten 9 percent, in rarified air along with the nation’s other growth market stars, Dallas and Nashville.

—By Daniel J. Hogan/RED Capital Research. Hogan is ORIX Real Estate Capital’s Managing Director for Research. RED Mortgage Capital, a division of ORIX Real Estate Capital LLC, is a content partner of REBusinessOnline. The views expressed herein are those of the author and do not necessarily reflect the views for RED Capital Group or of the author’s colleagues at RED. For further analysis from RED Capital Group, click here.

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