ATLANTA — Executives from some of the most active multifamily firms in the Southeast are honing in on the suburbs of Charlotte and Raleigh as they map out their long-term investment and development strategies. During the Carolinas panel at the eighth annual InterFace Multifamily Southeast conference, the panelists stated they’re preparing for a suburban shift as a large swath of the millennial renting cohort and downsizing baby boomers will be priced out of core submarkets.
“There’s a confluence of different demand drivers that will persist in earnest for the next five to 10 years as we see the millennial migration happening and affordability constraints start to enter the picture more,” said Eddy O’Brien, managing partner and co-founder of Blaze Partners, a boutique multifamily investment firm based in Charleston, S.C.
Ben Yorker, vice president of development at Northwood Ravin, said his firm is also interested in Charlotte and the Triangle area for new development opportunities in 2018.
“Within those markets we’re edging away from infill and exploring more suburban opportunities,” said Yorker. “We’re targeting renters by choice like empty nesters or urban professionals. In 2018, we’ll shift significantly to target millennials looking to the suburbs.”
The Widewaters Group is developing the 350-unit ParkStone at Knightdale in Knightdale, N.C., a suburb of Raleigh.
New development is already trickling its way there as developers position themselves for the potential shift. In October, the Widewaters Group Inc. announced it is developing a 350-unit, garden-style apartment community known as Parkstone at Knightdale in Knightdale, North Carolina, roughly 16 miles east of Raleigh. Canyon Partners Real Estate provided $10.3 million in preferred equity for the development.
“The shift toward suburban opportunities versus infill is a function of surplus of supply in major markets,” explained Palmer McArthur, vice president of development at Pollack Shores Real Estate Group, an Atlanta-based multifamily developer and investment firm. “It makes it less scary for investors if you go to suburban pockets in attractive markets.”
A Holding Pattern
The panelists agreed that multifamily owners across the board are more reluctant to sell in today’s market. One of the reasons given was that overall development is trending downward.
Moderator Andrea Howard of JLL said that multifamily permit activity in the Carolinas in 2017 is down 20 to 30 percent compared to 2016, which should help shore up fundamentals. Howard is the senior vice president of multifamily capital markets and investment sales in JLL’s Charlotte office.
In addition to improving fundamentals stemming from less supply, developers are more reluctant to sell because of rising construction costs associated with new development. According to the Engineering News-Record’s Construction Cost Index, overall construction costs have risen about 2.6 percent annually on average over the past five years.
Yorker said developers are content to hang onto their assets while the market absorbs the new supply coming on line, driving cap rates down so owners can cash in when it’s time to sell.
Seeking Yield
Overall the ability to push rents in suburban markets and older product is the difference maker for investors — and their financial partners — as rent growth is slowing for Class A product in core submarkets.
Effective rents in Raleigh were at $1.08 per square foot in the third quarter of 2017, up 0.56 percent year-over-year, according to a third-quarter market report from Colliers International. In nearby Franklin County, effective rent growth is up 4.58 percent year-over-year, and Chatham County’s rent growth is at 13.8 percent in that same time frame.
“The suburbs are more supply constrained and the rents are more affordable than infill, so it allows for a wider resident pool to attract and gives the opportunity to push rents,” said Yates Dunaway, vice president of TriBridge Residential, a multifamily development and investment firm based in Atlanta. “We’re focused on locations that we want to hold long-term where the investment partnership is more focused on cash yield.”
— John Nelson
InterFace Multifamily Southeast was held on Tuesday, Nov. 28 at the Westin Buckhead in Atlanta. The event drew 402 multifamily professionals. Jennings Glenn, chief financial officer and managing director of Kane Realty Corp., was also a panelist during the Carolinas Market Update panel.