In Charlotte, N.C., youth isn’t wasted on the young. Instead, young professionals are viewed as the present and future of Charlotte, the nation’s second-largest financial center outside of New York. What’s more, the city boasts an alluring quality of life, low cost of living, mild weather, steady employment, 36 institutions of higher learning, and a vibrant arts scene.
Charlotte’s population of 2.5 million people reside in 16 different counties, according to the Charlotte Regional Partnership. A popular downtown delivers top-tier restaurants and nightlife, plus major league sports teams such as the NFL’s Carolina Panthers and the NBA’s Charlotte Bobcats. In 2007, the city’s new light rail system, LYNX, officially started its 9-mile route along South Boulevard, and the area is now considered ripe for new development.
Nine Fortune 500 companies call Charlotte home. Wells Fargo/Wachovia and Bank of America rank among the largest area employers and are part of a financial system that generates almost 60,000 professional-level jobs. Despite the recent acquisition of Wachovia by Wells Fargo, few Wachovia jobs have been eliminated. Overall, jobs in the financial, manufacturing, and construction sectors have been the hardest hit. Charlotte’s previous robust employment growth of 20,000 jobs per year has shifted—more than 30,000 jobs were lost in the city in the past 12 months.
Ultimately, Charlotte’s economy is struggling with the rest of the nation. Despite that, though, the city continues to focus on the future, as its young, savvy renters keep the multifamily market on its toes and in search of the latest amenities at the best value.
Unfortunately, unemployment has led to lower apartment occupancy. Charlotte-based Real Data reports that average rents increased for three years until summer 2008, at which time they reached an all-time high of more than $750 per unit. By February 2009, that average had dropped to $725 per unit. Average vacancy rates are up to nearly 12 percent, compared to 9 percent one year ago.
Many owners of Class A properties are offering concessions, as there is pressure to fill units, and Class C properties continue to be hit hard by a lack of jobs in the construction and services sectors. If there is a darling in this scenario, it may be well-located B properties, as these units are performing better than other class types in the market. Many of these properties offer desirable locations and amenities versus Class C properties. And when compared to Class A properties, they’re a better value.
Ripples in the Pipeline
For years, Charlotte has enjoyed a wide-open apartment development market, due to readily available land as well as rent growth that increased 16 percent in three years. The results of that growth are still unfolding—although total units in the planning stages has dropped to 4,500 (representing a decline of about two-thirds compared to pre-recession figures), there are still more than 6,000 units under construction, with more than half scheduled for delivery in 2009, according to RealData.
Charlotte-based Charter Properties, one of the area’s more active developers, is bullish on the market. “Its location at the confluence of two major interstates and an international airport will serve it well, long into the future,” says Charter’s senior vice president John Porter.
In August 2009, Charter completed Long Creek Club, a Class A, 306-unit apartment community 10 minutes from Uptown Charlotte. The community features an outdoor entertaining area, business center, and greenway access. Units range from 720 square feet to 1,215 square feet and rent from $770 to $ 1,085. Charter also recently completed Steelecroft Farm, a Class A, 336-unit apartment community in southwest Charlotte near Lake Wylie, and is developing The Cloisters at Steelecroft, a 270-unit community located across the street from Steelecroft Farm and scheduled to open summer 2010.
For these—and all—new developments, an “A” quality location with good visibility and amenities is more important than ever. Stainless steel appliances, fitness and business centers, hardwood floors, large closets, and two-tone paint are popular among local renters.
One of the best areas to own or build in right now is the Uptown Loop inside I-77 and the John Belk and Brookshire freeways. It is home to about 12,000 people today, but by 2026, the Charlotte Chamber of Commerce expects that figure to rise to 100,000 thanks to nearby employment.
Several of the newest projects by Houston-based Hanover Co. and Charlotte-based Crescent Resources are situated within this area. Just south of Uptown, Hanover recently completed the 310-unit Ashton South End with units averaging 1,185 square feet. On South Boulevard near the Hanover site, Crescent has a joint venture with Dallas-based Sarofim Realty Advisors to develop Circle at South End, a 360-unit, transit-oriented building with 8,000 square feet of ground-floor retail.
Even with a significant amount of condo development in Uptown prior to the nationwide meltdown, Charlotte’s condo market is relatively stable, despite a drop in sales volume and prices. Combined with a considerable amount of new inventory in the Uptown area, some unsold condo units are transitioning back to rentals. Three Uptown high-rises—the five-story, 85-unit Enclave; the three-building, 184-unit Quarterside; and the 27-story Catalyst Condos—have already converted to rentals.
Investing in the Future
Like most of the country, Charlotte’s transaction volume has come to a near halt. Buyers remain cautious as lending criteria continues to tighten. Investors, in the meantime, sit on the sidelines, waiting for a reason to buy.
Those who are active are focusing on core fundamentals and looking for discounted prices. Stabilized assets priced at an 8-plus percent cap rate are finding success, but owners are still reluctant to sell. Unless there is an urgent reason to sell—such as partnerships that need to disband or owners who want to raise equity—most are holding on to assets.
Meanwhile, in the next 12 months, most expect to see more and more distressed assets put on the market by owners with high loan-to-value (LTV) ratios on maturing loans. Others may decide to sell based on the fear that values may deteriorate further. To the benefit of buyers, this will present investment opportunities. It also may soften prices further.
As optimism wages its determined war against the recession, Charlotte prepares for another 12 months of weak economics, high vacancies, and concessions. What’s more, newly-built units will put pressure on occupancy and rents until they are absorbed. The only active players may be investors, who are expected to emerge as distressed properties become more available in this promising market. As they do, they’ll play a fundamental role as Charlotte’s future comes back in to focus.