Institutional investor interest was high when the 269-unit Millennium South End, built in 2010, was being sold by The Dinerstein Cos. last year. The winning bidder, a collective trust fund advised by JPMorgan Asset Management, paid $43.5 million.
Zach Rolen (Rolen Image) Institutional investor interest was high when the 269-unit Millennium South End, built in 2010, was being sold by The Dinerstein Cos. last year. The winning bidder, a collective trust fund advised by JPMorgan Asset Management, paid $43.5 million.

During the downturn, the apartment market in Charlotte faced the possibility of a bad situation getting much worse. While the economy staggered, a record number of units came on line in this market of 1.8 million people known as the Queen City, and local owners braced for the worst. Annual apartment completions hit a historic peak in 2010, with more than 6,000 new units delivered from the third quarter of 2009 to the third quarter of 2010, according to Carrollton, Texas–based market research firm MPF Research.

But a funny thing happened on the road to ruin. Despite the surge in new units and sluggish job growth, absorption rates eclipsed expectations, as a rapidly growing population of young renters streamed into the market. In fact, the market has now experienced nine consecutive quarters of positive demand—which translates into about 12,000 units absorbed during that time. And the strong rent growth that followed, combined with a limited new supply in the pipeline, means Charlotte's apartment market hasn't only recovered; it's entering a new expansion phase.

Occupancy rates climbed to 94.2 percent in the third quarter of 2011, the third-highest level in the nation in terms of annual occupancy growth. Uptown/Dilworth, the metro's leading submarket for occupancy, is at 96.3 percent, a great sign considering that the area has struggled with significant new supply brought on line over the past five years. The submarket is at the top of the list for annual rent increases, as well, at 14.7 percent, followed by Southeast Charlotte, at 7.7 percent. Indicators point to continued strong rent growth in the metro for the foreseeable future. Annual rent growth has far exceeded the national average of 4.3 percent, and, notably, the city has seen significant rent growth across all product age categories.

The pipeline for new construction has declined significantly since the high-water mark in 2010, with Charlotte's annual completions totaling 2,046 units from September 2010 to September 2011—just a third of the deliveries of the previous 12-month period. New supply is forecasted to average 2,358 units per year through 2016. And the good news is, net absorption is expected to outpace that figure, averaging 2,619 over the same period, according to Boston-based CBRE Econometric Advisors.

In the past year, Charlotte has also enjoyed growth in apartment revenues, which have increased by 7.7 percent—the Queen City's best performance in more than a decade, according to MPF. Indeed, the fundamentals are promising.

Thriving Transactions

Total transaction volume in Charlotte has been on the rise too. In 2010, about $211.3 million in apartment trades were recorded, a figure that will be left in the dust when the final 2011 figures are tallied. Through the end of October, already $445.1 million in transactions had been recorded in the region, a 111 percent increase with two months left to go, according to New York–based market research firm Real Capital Analytics.

Seven Class A properties were sold in 2011 as of the end of October, compared with eight Class A properties for all of 2010. And more importantly, the average Class A per-unit sales price has increased to $138,712, up from $117,570 in 2010, though this is partly due to the sale of the 462-unit Catalyst for $223,000 per unit.

Institutional interest remains high for infill submarkets, including Uptown, South End, Dilworth, and SouthPark. Millennium South End, located in the heart of South End and within walking distance of Uptown, was purchased by an institutional investor in July 2011 after opening its doors in 2010. The 269-unit property, featurinvestors across the country.

Economic Diversity

All of this good news has to be tempered with what, by all accounts, has been a somewhat sluggish employment market. The Charlotte area remains about 55,000 jobs below pre-recession levels. However, job growth averaging 2.6 percent annually is expected here over the next five years, which ranks 11th nationwide.

As alluded to above, Charlotte's economy has been strengthening after bottoming out in 2009. Notably, the area is diversifying its economy and focusing on the energy sector. Since 2007, Charlotte has announced about 5,600 new energyrelated jobs, bringing the total to roughly 27,000 positions at 250 energy-oriented firms. In fact, Duke Energy's $13.7 billion acquisition of Progress Energy in 2011 created the country's largest electric utility company.

Charlotte will also be hosting the 2012 Democratic National Convention this September, which is expected to generate as much as $200 million in economic activity for the region. Chiquita, a Fortune 1000 company, is moving its global headquarters from Cincinnati to Charlotte, which will create more than 400 jobs. Time Warner Cable plans to add a new data center and office building to its existing campus, creating 225 jobs and capital investment of $101 million. Other firms announcing expansions in the region include Siemens Energy, Capgemini, Celgard, and Electrolux.

With anticipated employment growth on the horizon, a strong population of renter households, very low new supply in the pipeline, and skyrocketing rental rates, Charlotte's multifamily market is positioned for further gains in the year ahead.

Phil Brosseau is a vice president of the CBRE Southeast Multi-Housing Group, based in Charlotte.