Several Carolinas markets continue to top national lists for job and population growth, particularly Charlotte and the Triangle. The quality of living and strong fundamentals draw both millennial renters and empty nesters, with no slowdown in demand in sight.
In turn, capital continues to pour into the region’s multifamily sector as investors chase higher yields and lower supply pressure while cap rates linger near historical lows.
With the record-setting pace of single-family pricing in these markets, renting remains a more attractive option. Developers are responding accordingly and now build product squarely aimed at specific renter demographics. Specifically, developers have raised the level of quality and amenities in the suburban product similar to that of the urban infill movement earlier in the cycle.
Strong demographics in these locations produce a renter accustomed to a high level of quality in the unit interiors while also placing value on the convenience and quality of onsite amenities.
That’s because empty-nesters are challenging a singular focus on millennials. To many developers’ surprise, the active-adult demographic has shown up to rent much of the luxury product in both the urban core and suburban locations.
Most data providers that track new supply do not effectively spread out delivery over the appropriate timeline. In the Carolinas, delivery happens at a much more measured pace than the total unit count suggests.
Onerous municipality processes to gain permits/entitlements coupled with a shortage of workforce and/or general contractor availability mean developers face extended timelines for product delivery. The end result is that less units have come on-line in recent months than originally projected, allowing management more time to work through lease-up toward stabilization without having the pressure to make hefty concessions.
Shifts in Investors, Interests
After a tremendous amount of transactions in the value-add space over the past several years, private capital and sponsors are eager to reinvest proceeds upstream into newer, higher quality assets in established locations where they feel comfortable in a long-term hold. Now, capital that typically would not be competitive in the core space is routinely prevailing on these offerings.
While demand remains strong for compelling value-add opportunities, expect renewed activity in the core/core-plus space given that flight-to-quality movement. The Dartmouth in Raleigh and Liberty Warehouse in Durham are prime examples of private capital taking value-add success and rolling into the core space.
Until recently, larger lowest-cost-of-capital and international capital allocators had difficulty finding opportunities to invest in Carolinas multifamily because few assets here fit minimum thresholds of more than $100 million.
With the recent delivery of ultra-luxury product in urban and suburban submarkets, multifamily advisors are delivering opportunities that exceed those thresholds and attracting that capital base to the Carolinas.
Ground-up development will remain attractive, albeit with equity selective on submarkets and micro-market locations.
What’s hot is well-located suburban garden product in true “place-making” locations, as well as non-commodity product that targets heightened demand among certain demographics.
Expect downtown Raleigh and Charlotte’s South End and Plaza Midwood areas to thrive as supply/demand fundamentals strengthen following an initial influx of supporting services and amenities. These transformative retail, restaurants and office assets will continue to build momentum and attract residents.
Woodfield Northlake is a good example of interest in suburban garden product, and Rock Creek at Charlotte’s Ballantyne district and Cary Greens in Cary are good examples of the continued demand for well-located value-add opportunities.
In the short-term, submarkets such as SouthPark or downtown Durham may see some cooling due to simultaneous supply deliveries that have created near-term concessions. That said, long-term prospects for these submarkets remain very attractive given surging demand and higher barriers-to-entry.
Set for Success
The Carolinas multifamily forecast calls for continued high demand across markets and product types.
Charlotte’s top five employers — Wells Fargo, Bank of America, Carolinas HealthCare System and Novant Health — have been on expansion sprees along with AXA, Red Ventures, Dimensional Fund Advisors and CompuCom. The Triangle also remains on the short list with much speculation surrounding the future second headquarters for Amazon, as well as a potential new Apple campus.
Interest among international capital sources could catch up to demand from private 1031 capital as interest rates remain low and rents have room to run compared to peer cities.
— By Dean Smith, Vice Chairman, ARA Newmark. This article was originally published in the June 2018 issue of Southeast Real Estate Business.