Apartment developers: Renting growing as ownership declines

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CHARLOTTE – Whether it’s Class A apartments, value-added properties or workforce housing, the Queen City’s apartment market is expected to remain strong in the foreseeable future.

Five apartment industry leaders said so on a panel Tuesday morning at Bisnow’s third annual Multifamily Summit held in a ballroom at the Omni Hotel in uptown Charlotte. Bisnow is a company that puts on real estate events in 31 markets across the country. The discussion was moderated by Marshall Phillips, a principal at CohnReznick, one of the event’s sponsors.

All the panelists, representing various tiers of multifamily development, see a rosy future in the local apartment industry. The reasons they cited include a preference to rent rather than buy among the Millennial generation; an expanding age-range of typical renters; and a return to renting among some retired couples. But the speakers also spoke on issues in the apartment industry that developers and investors must cope with if the market is to grow as anticipated.

Charlie Henley, the regional vice president of St. Petersburg, Fla.-based WRH Realty Services, said that Charlotte has absorbed 17,000 apartment units in the past four years – one of the things he said made him realize the strength of the market.

Henley said that in the past 10 years, housing units have gone from being 66 percent owned and 34 percent rented to 58 percent owned and 42 percent rented.

“The American dream of eventually owning a home is specific” to the United States, said Phil Payne, CEO of Charlotte-based Ginkgo Residential, and he said the dream is evolving. “We’re going to see, ourselves, a long-term change in home ownership.”

After the housing bubble burst, and during the recession, people moved away from home buying for a variety of reasons, including trouble securing financing or a distaste for having capital tied up in such a large asset.

As the economy has returned and it’s become easier to secure financing, some people have started to buy homes again, but it’s not close to where it was before the bubble burst. And the industry expects people – of all ages – to keep renting.

Payne said traditional renter demographics ranged from early 20s to early 30s. That’s no longer the case.

“22 to 40 is the new age (for renters),” he said, adding that people much older are becoming interested in apartment living.

Based on remarks from the panelists Tuesday, the type of apartment community doesn’t make much of a difference. They still expect a strong market.

Todd Williams, vice president of acquisitions and investments with Charlotte-based Grubb Properties, said half of his company’s strategy is value-added properties – investing in apartment communities that are 10, 20 or even 30 years old and renovating them to compete with modern properties.

“We’re looking for properties that have curb appeal, but may not be at the top of its game,” Williams said. “We’re spending $8,000 to $12,000 per unit on landscaping, on any deferred maintenance and interior unit renovations.”

The other half of Grubb’s strategy is new, Class A product, of which Grubb has a few properties in the area either under construction or in the planning stages.

The near future for Charlotte’s apartment industry – five to seven years was as far as the panelists were willing to speculate – is expected to bring more of the same, with both of Grubb’s strategies being reflected in the market by different development companies

But one thing that has industry insiders slightly concerned is rising construction costs.

John Porter, a partner in Charlotte-based Charter Properties, said he’s seen construction costs rise by 15 percent just this year, and those prices aren’t expected to tail off anytime soon.

“We’ve seen a lot of increases (in construction costs) in the first and second quarter,” said Tom Barker, division executive of Charlotte-based Terwilliger Pappas. “Both electrical costs and insulation costs are up. All those things make it more expensive.”

But – always an innovative bunch – apartment developers have found a way to cope with the rising costs of construction without alienating potential renters: build smaller units.

Barker said he’s built some communities with up to 75 percent studios and one-bedroom units. Williams said Grubb’s recent unit mix has looked something like 20 percent studios, 60 percent one-bedroom units and 20 percent two-bedroom units.

As the panel sees it, Charlotteans new and old will increasingly rent their housing, but the size of that housing may be decreasing, both in size of the unit and in the number of bedrooms.

“People don’t want to pay as much (to match construction costs),” Porter said. “But they still want nice product. So you’ve got to build a smaller unit.”