Industry experts bullish on 2016 housing, office sector

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The strong growth in apartment construction near center city and a subsequent rise in vacancy rates may lead to more apartment development on the outskirts of town in the upcoming year, industry insiders say. And for those in the market to purchase a home, the severe lack of inventory might ease a bit but prices will continue to appreciate.

On the commercial front, the same employment growth leading multifamily development has sparked a boom in uptown office construction. But concerns remain whether there will be enough available space necessary to meet short-term demand.

The last year has certainly been a healthy one for apartment developers in the Queen City area. A fast-growing population and improving unemployment figures have pushed vacancy rates to a healthy 5.7 percent, said Ken Szymanski, executive director of the Greater Charlotte Apartment Association. Demand remains strong with nearly 5,000 units absorbed in 2015, causing rents to grow 4.5 percent over the year to an average of $1,000 per month.

In fact, the share of Charlotte-area renters now registers at an all-time high of 47 percent, suggesting, he said, “that additional absorption is plausible, especially in the context of Charlotte’s net domestic migration of more than 20,000 persons annually.”

Real estate investors have taken note, creating record-setting levels of additional units coming online, with 12,500 under construction and another 13,500 proposed. Much of the activity has occurred in South End, popular with millennials, and SouthPark.

And construction on the Lynx Blue Line extension from uptown to University City has sparked a wave of rezoning petitions for new units, with particular emphasis in the trendy NoDa neighborhood.

Moving toward Outer Loop

Szymanski said the rapid development could soften market conditions in 2016, creating a subsequent rise in vacancies and a slowing of rental increases. “But the dynamics of the marketplace suggest it’s anyone’s guess as to the magnitude of each,” he said.

Charles Dalton, principal at Charlotte-based apartment market analytics firm Real Data, agrees. “Next year won’t be as good as this year,” he said. “All the new construction will probably push vacancy rates higher. Rents will continue to grow, but at a slower pace.”

Real Data says in its latest Charlotte metro report that the average vacancy rate could increase to 8 percent next year, while rental growth might slow to 3 percent as new developments compete for tenants.

That could prompt developers to set their sights elsewhere. Kris Fetter, partner at Middleburg Real Estate Partners, said he remains bullish on the local apartment sector but is concerned about rising land and construction costs. He said that while much recent multifamily construction has focused on South End and Plaza Midwood, it’s important for developers to define projects that make sense.

“There are other areas that need good apartment housing stock,” he said, such as locales near suburban offices and east toward Union and Cabarrus counties.

Fetter also expects rent hikes to slow their pace in 2016, to an average of 2 percent to 3 percent.

John Culbertson, managing partner at Cardinal Real Estate Partners, said he doubts there will be many more major announcements on new multifamily projects until the new units coming online are leased up. But, he said, it “will be interesting to see if apartments make a ‘go’ in suburban areas and around the periphery of Interstate 485.”

Future projects might come to fruition on Wilkinson Boulevard, he said, while Monroe Road between Briar Creek and North Wendover Road is likely to be a new “hotspot.”

More new-home starts expected

For those in the market to purchase a home, an ever-dwindling supply has created a seller’s market. While inventory has been low across the country, in the Charlotte area it slumped to a historic low this year with just a 3.3-month supply available in November, according to the Charlotte Regional Realtor Association.

The average sales price, meanwhile, rose 5.8 percent to $240,663 from a year earlier, while the median sales price in the 12-county region increased 9.4 percent in the same period to $197,000.

Jay Colvin, regional director for the Carolinas at research firm Metrostudy, remains confident on the health of the housing sector in 2016. He cites a 10.3 percent annual increase in new-home construction to nearly 3,000 starts in the third quarter.

“Charlotte continues to make headways – adding more jobs, and increasing housing starts,” he said in Metrostudy’s third-quarter report on the Charlotte housing market. “Tight land and lot inventories have constrained the pace of growth in recent quarters; however there are signs that this trend may be nearing an end, and the pace of growth may once again be primed to accelerate.”

And while townhome development is lower than historical averages, Colvin said the 1,104 annual starts in the latest quarter were up nearly 50 percent over a year ago.

Culbertson expects townhome growth to continue, particularly in the city’s pie-slice shaped areas of low- to medium-density housing that surround high-growth corridors.

“The growth of townhomes in the wedges and new office deliveries will be the stories for 2016,” he said.

As for existing homes, Colvin believes inventory will remain tighter than usual. But, he said, the situation should ease as continued appreciation allows homeowners to recoup the equity they lost during the downturn.

“…Fewer homeowners being underwater should help to lift inventory levels some,” he said in a recent e-mail. “Generally as a seller you want inventories low, but as a buyer they can get too low and become discouraging. So some inventory growth is healthy, and can lead to greater sales down the line.”

CRRA President Maren Brisson-Kuester said she can’t predict how much existing-home prices will rise in 2016, but expects to see “the same amount of healthy appreciation we saw this (past) year.” Higher home prices also should help increase inventory levels, she said, prompting those wishing to move “to get off the sidelines before the prices on the buy side get higher.”

Office outlook strong

On the commercial front, office developers have not been shy about cashing in on the strong employment figures seen over the last several years, with the Charlotte metro netting more than 184,300 jobs since January 2010. They also are playing catch-up following the dearth of new supply over the last few years.

The Charlotte area saw some 2.3 million square feet under construction in the latest quarter, compared with just 25,000 square feet in all of 2012, according to the latest report on the office market by Karnes Research Co. Some 275,000 square feet came on line in 2013, followed by 654,000 square feet in 2014.

Much of the recent construction has taken place uptown, with Spectrum Properties’ launch of 300 South Tryon, a 25-story, 633,000-square-foot high-rise at Third and Tryon streets, and Portman Holdings’ start on a 19-story, 370,000-square-foot tower dubbed 615 South College. In addition, Ark Group broke ground on Uptown Village, a mixed-use project adjacent to the NC Music Factory that will include 230,000 square feet of office space that will be occupied by Charlotte-based software company AvidXchange Inc.

But those projects aren’t expected to be completed until late 2016 or 2017. That’s a problem, said Kati Hynes, the Charlotte Chamber vice president for economic development, who lauds the North Carolina General Assembly’s recent legislative changes that boost incentive programs to lure businesses to the region.

“We’re feeling good about economic activity,” she said. “But in the meantime, depending on the submarket, we might run into a shortage of office space. Large blocks of space may be hard to come by in uptown.”

Culbertson is a bit more pessimistic on the role of incentive programs. “A state without a modern incentive program looks like a state that is not open for business,” he said.

“The Charlotte region has done well despite having real incentives because we have a great airport, a strong real estate development community and a high-quality workforce.”

Culbertson said Charlotte has been handicapped over the last few years by a lack of office space at a time when the city is “more and more on the radar for site-selection firms.”

But the outlook is strong, he said. “There will be more and more office development competition. We are going to see exciting new office design driven by tenants who understand that design matters.”

Culbertson expects that as a result, Charlotte’s office market will look dramatically different a few years from now “in its diversity of tenants, increased rates, burgeoning new submarkets and overall size.”

The area’s falling vacancy rates have already translated into rising rents. According to the latest data available from Karnes, the uptown Class A vacancy rate was at 11.1 percent in the third quarter, down from 14.1 percent in 2011. Average Class A rents increased nearly 13 percent to $30.08 per square foot from $26.65 in the same period. Midtown Class A vacancies, meanwhile, have been dropping since economic growth picked up in 2011 after the Great Recession. Vacancies fell from 8.6 percent that year to 6.3 percent in 2012, followed by rates of 5.2 percent in 2013 and 4.4 percent in 2014. The rate rose slightly to 4.7 percent in the third quarter. Midtown rents, meanwhile, grew to $26.96 in the third quarter from $24.24 in 2011. Recent projects in Midtown include 500 East Morehead, a seven-story, 180,000 square-foot speculative building, and 1616 Center, a 74,080 square-foot office project on Camden Road.

The current scenario looks likely to continue, Culbertson said, with rising construction costs pushing up rental rates.

David Dorsch, senior vice president at Cushman & Wakefield, cites another reason that rents will continue to go up: Since the recession, employees have been working in increasingly tighter spaces. This has led, he said, to companies moving into former industrial and retail buildings that have the huge parking lots needed to accommodate larger employee bases.

The upfitting of these buildings, and increased space efficiencies in general, mean landlords can ask more per square foot.

“It’s a great time to be a landlord,” Dorsch added. In general, he said, depending on the building, tenants should expect to see some landlord concessions diminish. He said he wouldn’t be surprised to see the free-parking amenity at Midtown office space disappear within the next five years.

“Tenants will have to change their mindset to a bull market,” he said. “They’ll have to be more concerned about getting the space and less concerned about asking for concessions.”

OFFICE UPDATE:

According to the latest Karnes Research Co. report, 2.35 million square feet of office space was under construction in the third quarter. Not surprisingly, Uptown accounted for more than 1 million square feet of that, with another 1.6 million square feet proposed. The Interstate 77/Southwest market came in second, with 680,500 square feet under construction in two separate projects: Packaging company Sealed Air’s new headquarters complex at the LakePointe Corporate Center and a new medical complex for the U.S. Department of Veterans Affairs on Tyvola Road.

Coming in third, the Ballantyne/South Charlotte market reported nearly 322,000 square feet under development, with the vast majority of that taking place at Ballantyne Corporate Park, where Bissell Cos. is building a 10-story office building on North Community House Road. SouthPark came in fourth for office construction, with Lincoln Harris’ Capitol Towers project accounting for the entire 240,000 square feet of office space under development in the area.

The submarkets of Park Road, CrownPoint/Matthews, east Charlotte, and northeast Charlotte saw no new office construction in the third quarter.

INDUSTRIAL UPDATE:

Only 379,000 square feet of industrial space was under construction during the third quarter, with the majority of that taking place in the Northwest submarket where Crescent Communities worked on a 208,900-square-foot warehouse at the AirPark West industrial park. The Southwest market took over the remainder of construction at Liberty Property Trust’s 170,000 square foot warehouse at the Shopton Ridge industrial park.

Nearly 4.3 million square feet, or 9.2 percent, of Charlotte’s industrial inventory was vacant during the third quarter, a 0.4 percentage point improvement from the second quarter. Karnes said positive net demand totaled 386,765 square feet in the third quarter, outpacing 205,081 square feet of new supply that came online in one warehouse, West Pointe Business Park 8, in northwest Charlotte.

Area rents per square foot for warehouse space have risen to an average of $4.43 this year from $4.05 in 2011, while the cost of leasing flex space has grown to $9.12 from $8.26 per square foot in the same period.

Scott Hensley, principal at Piedmont Properties, said he expects 2016, compared with 2015, to be “as good or better for industrial real estate,” citing the heavy migration to the area that creates demand for housing and, in turn, a need for industrial space to supply homebuilders. Hensley said there will be continued demand, particularly as one approaches Uptown, because businesses want to set up shop near their clients. In addition, he said the supply of warehouses in SouthEnd has been dropping to make way for multifamily development.

“We’re going to see more demand and less supply,” Hensley said, adding that rental rates and building values will likely continue their rise.