MARKET SNAPSHOT: Apartment Absorption Reaches All-Time High in Charlotte, N.C.

Charlotte, N.C.—After having its employment peak at 816,249 persons employed in October 2007 and trough at 739,160 in December 2009, the Charlotte MSA is now creating jobs at an annual rate of 3.79 percent, according to Terrence Llewellyn of Llewellyn Development.

Two years ago, “there had been a scare, when Wells Fargo first purchased Wachovia, that some of the jobs, especially some of the higher-paying jobs, would be moved to the West Coast,” Llewellyn tells MHN, adding that Wachovia’s Charlotte employment numbers are actually greater than they were when Wells Fargo purchased it.

“The energy industry is really stepping up and filling the void of the financial industry … There’s a lot of nuclear and solar and wind energy research and manufacturing that’s now being done in the Charlotte region. It really is becoming an energy center in addition to being a financial center,” he adds. For example, Duke Energy’s recent multi-billion dollar acquisition of Progress Energy, which will form the country’s largest utility, will certainly bring more jobs to Charlotte, and Duke Energy’s CEO Jim Rogers is credited with helping to bring the Democratic National Convention to Charlotte in 2012.

Despite the job creation seen here, Llewellyn points out that “the absorption of apartments in the Charlotte area dramatically outstrips the job creation.”

Approximately 5,700 units were absorbed in the last 12 months, which, says Llewellyn, is “an all-time record,” 266 percent of the 10-year average. At the same time, there are fewer than 1,400 units under construction in the Charlotte metro area, compared to a delivery of 4,318 units 12 months ago and 5,602 units 24 months ago. (The 10-year average, Llewellyn adds, is 4,000 units per year.)

Vacancy in institutionally owned, professionally managed apartment communities decreased from 9.5 percent at the end of 2009 to 7.9 percent at the end of 2010. And this is predicted to reach 5.7 percent by the end of 2011. However, in a survey that includes all communities, including what Llewellyn calls “mom-and-pop communities,” vacancy stands at 11.1 percent and is forecast to dip below 10 percent before the end of this year.

Rental rate growth was just over 4 percent year-over-year, “and that’s broadly anticipated to accelerate because operators were afraid to pull in concessions until they went above what they perceived as the magic number,” says Llewellyn. “The increases in net effective rental rates are broadly anticipated to accelerate to some number higher than 4 percent in the short term, but that won’t be sustainable because it will be driven by the retraction of concessions; once the concessions are fully retracted, you’ll see a more normal rental rate growth outlook.”

Overall, submarket favorites tend to include those that focus on urban living, including the CBD and first-tier suburbs. Llewellyn points to South Park, Ballantyne and Lake Norman as some of the best-performing submarkets and areas that would be best bets for investment.

Speaking of the investment market, the last two Class A transactions traded at sub-5 percent cap rates, Llewellyn reports. “The stuff that’s truly stabilized is selling for 5 flat cap; the B stuff is in the upper-6s—6.5 to 7 percent—and the C stuff is all over the map because there’s not much standardization with respect to the underwriting … but if you had to nail it down, it would probably be in the 8s to 9 [percent range].”

Overall Charlotte’s future is bright due to its diversification of its employment base, though a hyper-dependence on financial services still poses some risk. (“If there were a big problem with financial services, Charlotte would suffer disproportionately,” Llewellyn points out.)

The metro continues, however, to attract a number of Fortune 500 corporate relocations, including Lowe’s Home Improvement’s national headquarters move to Mooresville, N.C., which, Llewellyn notes, created 25,000 jobs.

“The pro-business attitude that the government has, the high quality of life and the low cost of living continue to attract corporate relocations,” he says. “It’s avoiding some of the growing pains that slightly larger cities have had … with some of the traffic problems, and it’s a city that’s investing in mass transit and thinking about the future.”