As the first quarter of 2014 comes to a close, the biggest question mark facing the Charlotte market is whether or not it can handle the historically high supply levels. Despite nearly 3,500 units delivered over the past 12 months, vacancy has held steady, and rents have continued to grow by 2 to 3 percent. But with another 10,000 units under construction, Charlotte is at a critical juncture. With the pipeline at an all-time high and new projects being announced seemingly every week, will there be enough continued demand to absorb the next wave of deliveries?
The ability to absorb the pending supply is largely based on the area’s favorable demographic trends and potential job growth. Between 2000 and 2010, Mecklenburg County’s population grew by 32 percent, over three times the national average, and that trend has continued with more than 7 percent growth since 2010, including the second-highest growth rate in the state from 2012 to 2013. Moreover, since 2010, Mecklenburg and Wake (Raleigh/Durham) counties have accounted for nearly half of the state’s overall population increase. That pattern mirrors a national trend of a growing desire to live in an urban environment. That paradigm shift is largely based on the surging Millennial, or Generation Y, population that is starting to enter the renter pool and workforce. This generation is the largest in the country’s history, and their lifestyle preferences, including the desire to live near employment and entertainment destinations, are largely driving the current development model.
Despite the country’s sluggish economic recovery, Charlotte’s strong financial services sector and growing energy base have cemented the city as a popular destination for young professionals. Charlotte had the largest year-over-year net gain in employment in the entire state last year, with nearly 23,000 new jobs. Apartments.com recently released a top 10 cities list for recent college graduates, and Charlotte ranked second behind only Denver. The study was based on affordability, median income and unemployment rates.
The development pipeline, with approximately 10,000 units currently under construction and another 10,000 units in the planning stages, represents an all-time high for Charlotte and is one of the largest nationally based on percentage of inventory growth. With more than 50 percent of the new development within a five-mile radius of Uptown (also known as Center City), developers are looking to capitalize on the urban flight.
With a growing array of entertainment options and true walkability, Uptown has become an attractive destination for developers. In the burgeoning Third Ward quadrant of Uptown alone, a number of infill developments are being constructed around the new Triple A Charlotte Knights baseball stadium. One of the most high-profile is Childress Klein’s 22-story, 352-unit high-rise called Element Uptown. This $100 million-plus project overlooks the new Romare Bearden Park and baseball stadium and will start delivering units later this summer.
Southend has also been a favorite for developers that are drawn to the light rail system that links the neighborhood to Uptown. In Southend alone, the population is projected to increase 110 percent during the next two years. This connectivity between Uptown and Southend has created a growing urban core with more than 50 percent of the combined population being between the ages of 20 to 34, the prime rental demographic. There has also been an 82 percent increase in the number of baby boomers living in this combined urban center. With nearly a third of all households earning more than $100,000, there is a surging “renters-by-choice” demographic in Uptown and Southend.
The overall market fundamentals have held steady for the past 12 months. Current vacancy is averaging around 5 percent, but that is expected to increase to 7 or 8 percent during the next couple of years as the new supply enters the market. The robust rent growth experienced during the past few years has started to wane throughout the region, but rents are still projected to grow 2 to 3 percent during the next 24 months.
Any supply concerns have yet to temper investor interest in the Charlotte market. Price per unit records are continuing to be set as a number of institutional quality assets have consistently commanded prices north of $200,000 per unit, with the most recent one being Invesco’s purchase of Junction 1504 in Southend for $210,000 per unit. With interest rates still hovering around an all-time low and lenders continuing to push strong terms, this record pricing will likely continue throughout the remainder of the year.
In the short term, the supply pipeline will cause vacancy to increase slightly and temper the recent record rent growth; however, the long-term prospects for Charlotte are extremely positive. The city has established itself as a top-tier destination for Millennials, who are leading the unprecedented shift toward urban living. These favorable demographic trends and the region’s promising economic growth will continue to fuel the Charlotte market.
— By Jordan McCarley, Managing Director, Multi Housing Advisors. This article originally appeared in the June 2014 issue of Southeast Real Estate Business.