The multifamily construction boom in Charlotte has been burning like wildfire in the past few years, but panelists at a Bisnow breakfast Thursday said the smoke may be beginning to clear.
Before an audience of about 200 at Hilton City Center, panelists said supply is currently being outstripped by demand, but that the market should level off around 2018.
Andrea Howard, a senior vice president at Jones Lang LaSalle, said she anticipates that the supply being created now through 2018 will roughly equal the number of renters expected to move to the area during that time.
But right now, there’s still plenty of demand for the supply being created, she said.
“Last Saturday I went to several leasing offices and I had to wait in line for at least 15 minutes to see an agent,” Howard said. “And there were almost zero concessions being offered by the owners. Some people may have been offering half a month free, but that’s it.”
Downward lending pressures
Other panelists talked about an expected slowdown, and possible causes. Chief among them are increasing construction costs and difficulty in getting loans.
“Construction costs are flying right now and so that is going to make borrowing more difficult soon,” said Rachel Russell, vice president of development for Grubb Properties. “You need to have good relationships with lenders right now in order to get a good rate. And it is a tough time to go out there and form new relationships with lenders. If you have people you’ve worked with before, that’s very helpful.”
The speakers agreed, however, that there is still plenty of equity out there.
Brett McGuire, vice president for local finance group Walker and Dunlop, said he continues to see growth in the multifamily field and continues to write loans for new projects at an “unprecedented” rate.
But he said he has seen signs of a cooling off period approaching.
Ben Collins, senior vice president for Crescent Communities, said lenders seem to be becoming more conservative.
“We have seen some of our peers reach their upward borrowing limits with lenders because it has become such a more conservative atmosphere,” he said.
McGuire said that although interest rates have been falling and the Fed declined recently to raise the federal funds rate, borrowers shouldn’t try to time the bottom of the market.
“Catching the actual low point is next to impossible,” he said. “I just suggest when you are looking at financing to try to put yourself in a position where you have many options. Don’t be locked to one choice. It is good to have some kind of borrowing capacity with several organizations.”
McGuire also said that Fannie Mae and Freddie Mac have been pushing developers to aim for affordable housing and green building practices in multifamily projects.
“From the lending side we’ve got kind of a government mandate to push affordable housing and green building,” he said. “ And they are incentivizing it for projects. For example, on a $20 million loan you can save about $40,000 a year in interest if you can get those LEED certification and energy-saving credits or bonuses.”
Standing out in a crowded field
David Ravin, president of Northwood Ravin, said his company was still leasing units faster than they could build them.
“We are targeting the urban dweller who has decided to move out of uptown,” Ravin said. “We offer no concessions, and yet we’re still leasing above our projections.”
Real Data, which provides information on the local multifamily market twice a year, reported in March that the Charlotte market has never before seen so many units under construction. The company said there were 12,782 units under construction in March and another 13,425 proposed. That was up 12 percent and 27 percent, respectively, from a year earlier, when builders were working on 11,376 units and developers were planning another 10,504.
Back in August 2010, as the country was just beginning to emerge from the recession, only 1,227 apartments were under construction in Charlotte, with another 2,105 proposed.
Ravin said he wasn’t worried that Charlotte was going to “build itself off a cliff” any time soon. He was encouraged with the level of demand, especially compared to other markets he’s seen.
“If you’re worried about that, go to Nashville and you’ll feel better about Charlotte,” Ravin said. “You could go to the same projects in Charlotte and Nashville and for some reason the rents are higher in Charlotte and we aren’t sure why yet.”
The Queen City outpaces much of the nation when it comes to rental increases, according to a recent report by Apartment List that placed Charlotte 27th out of 100 metros for the largest percentage increase in rents over the last year.
The median cost of renting in the Charlotte market rose 4.2 percent last month from a year earlier, to $1,040 for a one-bedroom unit and $1,150 for a two-bedroom apartment.
Nationally, rents increased at an annual average rate of 2.7 percent in May.
Even with current demand, Collins said, developers can’t simply put out a sign advertising apartments for rent and expect people to come flocking to sign a lease. The large number of projects being built and opened is adding to an air of competitiveness.
“We have one active project in Charlotte in the lease-up phase,” he said. “And we expect to deliver at the same time as several other projects. That will absolutely put pressure on us in the lease-up period. It is important to have a differentiating position, something to set you apart. You can’t just be another apartment complex. We spend time not selling the fact that we have granite countertops or that kind of amenity, but rather selling the idea of living in that community.”
Squeeze every construction dollar
Architect Gary Cline, managing principal at Cline Design Associates, said that lately he had been feeling the pressure from developers to “squeeze every dollar” when it comes to designing multifamily buildings.
“There is so much pressure on construction costs,” he said. “We’ve heard of construction costs going up 1 percent a month at some projects. We saw a project last month where the concrete costs alone came in $6 million over budget. And this wasn’t materials, that was just the labor.”
Cline said rising costs aren’t all being driven by contractors.
“Municipalities are pushing for better materials,” he said. “They’re asking for more concrete and less wood. Units today are better overall than they were before. Granite countertops are passé. Now it’s about quartz and the finishes are at condo levels. And the projects are getting more and more complex with us designing projects over grocery stores and so on, so that makes it more complicated.”
A wide age range
All developers agreed that working with nearby neighborhoods has been relatively smooth during the multifamily boom, once residents became comfortable with the concept.
“Sometimes homeowners look at what we’re building and they say they don’t like it because it will hurt their property value,” said Timothy Hose, president and CEO of SYNCO Properties, which is developing the Colony multifamily project near SouthPark Mall. “But it is just the opposite. Houses in proximity to walkable neighborhoods appreciate about 40 percent faster, according to our research. The future of SouthPark is urban walkability. We worked with the neighborhood areas and they see that now, so they’re all on board.”
And Hose disputed the misconception that only millennials are interested in moving into rental housing.
“We are focusing on building more two and three-bedroom units for a broad age range,” he said. “The people moving into rental housing in South Park are truly across the age spectrum.”
Marcie Williams, president of Rivergate KW Residential, agreed that the appeal spread across age groups.
“The millennials and the baby boomers, who are also moving into apartments, actually have a lot in common,” Williams said. “A millennial will get on a treadmill in the fitness center and run 5 miles. A boomer will get on that same treadmill. They may only walk 2 miles, but they want the same equipment. It’s the same with the pool. Boomers may be swimming laps while the millennials relax with a craft beer, but they want the same nice pool as an amenity.”
Cline agreed and added, “You know, the design focus has been on millennials for so long, but you see people in their 50s moving into those units. It has become divorce heaven. But the young people are there too and that doesn’t bother the older generation. I had a renter tell me the other day, I’m 54 but I don’t want to live with a bunch of people in their 50s.”
Staff writer Roberta Fuchs contributed to this report