Developing news: Commercial projects likely to increase

CHARLOTTE – Retail follows rooftops. It’s the old real estate adage explaining how commercial development responds to residential development.

An improving residential market is likely to increase commercial development in 2014. Photo by Payton Guion

But retail-follows-rooftops doesn’t tell the whole story. Sure, when people move into a new area they need places to buy things. They also need places to work and places that can store or make the things they want to buy.

So the recent growth in homebuilding and homebuying in the Charlotte market – which is expected to continue into 2014 – will likely be accompanied by increased commercial development over the next two years, even if developers are still cautious about the overall economy.

Bernard Helm, of Rocky Mount-based Market Opportunity Research Enterprises, said the single-family home market is more robust than it was a year ago, and should continue to be.

In the 12 months that ended June 30, Mecklenburg County saw the sale of 2,432 new, detached single-family homes, with an average price of $245,758. In 2011, 1,753 new homes were sold, with an average price of $226,213, according to Market Opportunity Research numbers. Comparing those two time periods, new home sales increased 38.7 percent.

In Mecklenburg County in the year ending June 30, 9,917 homes were resold for an average price of $276,726. In 2011, 6,311 homes were resold for an average price of $261,135. Resales were up 57.1 percent, based on those numbers.

Helm said based on those increases, he thinks the Charlotte housing market will continue to grow in 2014, but it will likely be conservative growth.

“There are too many uncertainties in the housing market to give you a direct prediction,” Helm said. “But I don’t think it would too ambitious to say we’ll likely see some restrained growth next year.”

Renting is the rage

In the other industry categorized as rooftops, growth has been anything but restrained. Multifamily has been the hottest industry in Charlotte over the past few years, with 17,000 apartment units absorbed in the past four years.

New apartment construction is also red hot, with thousands of units under construction and out-of-town developers with their eyes firmly on Charlotte.

“We’re in a no-hold period (on apartment deals),” said John Porter, partner in Charlotte-based Charter Properties. “There’s so much money chasing product, money from out of town developers, and they want to be here.”

Porter was one of five members of the apartment industry who spoke last week at a multifamily event in Charlotte, and the resounding take away from the event was: The apartment market looks like it will be strong for the next five to seven years.

Helm said he agrees.

“There are a lot of people whose incomes are being restrained who can’t afford to buy, so they rent,” he said, not accounting for people who are renting as a lifestyle choice. “Right now is a good time to be in the multifamily industry.”

The Queen City has, and will continue to gain, the multifamily rooftops, and is steadily, if modestly, gaining single-family rooftops.

But the city in the past couple of years has yet to see much of the commercial development that comes with an improving economy. That may soon change.

Industrial development forecast

Jon Morris, industrial partner with Charlotte-based Beacon Partners, said industrial development has been especially slow as the economy has crept back up. Deals that were considered small and commonplace in the prerecession market have been rare in the last couple of years.

“We built 650,000 square feet (of industrial space) over the last five years,” Morris said of the Charlotte industrial industry. “That was a good quarter or two from 1995-2008. (The industry) would deliver half a million to 1.5 million in a year. That’s a fairly major crimp in the supply hose.”

But with more homes and apartments under construction, Morris said that should mean an increase in demand for industrial space.

“There’s a direct correlation there,” he said. “When people are building homes, they need backflow preventers, they need seed spreaders for their grass, they need cars and trucks, they need washing machines, beds. All those things they’re buying, those things have to be stored someplace and those things have to be made someplace.”

Several local industrial developers have land they’re sitting on, waiting for the right time to move forward, Morris said. Beacon, EastGroup, Liberty, Prologis and Sun Life all have pads ready for development, he said.

“I believe you’ll see more square footage built next year, but I’m fascinated to see who’s doing it,” he said.

If the expected influx of homebuyers and apartment renters increases the need for industrial space, surely it also increases the need for places to sell some of those products.

Retail follows

Darrell Palasciano, of Atlanta-based The Shopping Center Group, said he expects 2014 to be a huge year for Charlotte retail.

The most obvious addition in the area retail market is the joint venture between Simon Property Group and Tanger Factory Outlet Centers to bring an outlet mall to southwest Charlotte. The outlet could be up to 400,000 square feet and could eventually hold 90 retail stores.

“That’s one of the biggest retail announcements since Ikea and might even be the biggest since Northlake (Mall) in 2003,” Palasciano said. “It puts us on a national stage. There are people all over the country looking at Charlotte.”

The emergence of Publix supermarkets in Charlotte also has Palasciano excited for the city’s retail prospects in 2014. The Lakeland, Fla.-based grocery chain has started construction on two stores in Charlotte and has plans for two more in Mecklenburg County. Publix also announced an impending deal to buy seven Bi-Lo grocery stores in the Charlotte area.

The outlet center likely isn’t a direct result of the housing market, Palasciano said, because the mall will draw customers from all over the region and because Charlotte doesn’t have an outdoor outlet-type shopping center.

But the new Publix developments likely are based on residential growth, as grocery-anchored neighborhood shopping centers are usually centered near residential development, Palasciano said.

“Neighborhood centers are the ones that are typically able to build and thrive right on the edge of growth,” he said. “A grocery store might need 20,000 people to be sustainable.

“As that market grows from 20,000 to 100,000 or 150,000 people, you start to see the power centers, the Target-anchored centers.”

While the industrial and retail markets seem poised for a good 2014, one sector of commercial real estate isn’t expected to grow due to the housing recovery, according to David Dorsch.

Office tied to GDP

Dorsch, senior vice president in the Charlotte-office of Cassidy Turley, said the office market doesn’t follow the residential market quite as much. It’s more closely related to the overall economy, he said.

“There may not be a direct parallel between homebuilding and (large-scale) office,” he said. “They’re going to respond to demand in the market that might be more because of GDP than homebuilding. But those are related; it may be a good indicator of how the economy is doing.”

Dorsch did say that smaller, two-to-three story office buildings for dentists or insurance agents typically do go up near residential development.

But just because big office and homebuilding aren’t tied together doesn’t mean the next couple years will be hard on the office market, Dorsch said.

“In 2015 we’re going to see a lot of rent growth,” he said. “The economy has been improving and 2014 will be a landlord’s market.”

The landlord’s market – decreasing vacancy and increasing rents – of 2014 will likely lead to new office development in 2015, Dorsch said. When tenants run out of choices in existing buildings, there’s only one thing to do.

“Build,” Dorsch said.

Homebuilders and multifamily developers have been following that mantra, especially the multifamily companies. But expect other commercial developers to start catching up in 2014 and 2015.

“Interest from developers from outside of N.C. has increased and most numbers will tell you that lending has opened up,” Palasciano said. “Those three components – tenant demand, developers that are ready to take a risk and lenders ready to invest – are all good signs for development.”