Hanging On: A Look at the Southeast’s Recovery

Job growth in the major markets in the Southeast region continues to rebound, though unemployment remains relatively high in some markets.

Job growth in the major markets in the Southeast region continues to rebound, though unemployment remains relatively high in some markets.

While the unemployment rates for Raleigh, N.C. and Nashville, Tenn. were 8.8 percent and 8.5 percent, respectively, as of August 2011; Atlanta and Memphis, Tenn. were at 10.4 percent and 10.3 percent; respectively, during that same period; and Charlotte , N.C. reported an unemployment rate of 11.1 percent.

Atlanta was particularly hard-hit by the overbuilt single-family market, and industry experts believe it will lag the national economy in a recovery. “[Our] unemployment rate continues to teeter up and down, and that’s very scary,” points out Ashley Monroe, regional vice president of Lane Management in Atlanta, who expects to see a slight dip in the market through the fourth quarter of this year.

Meanwhile, Charlotte has been the focus of some attention while investors watched to see whether  Wells Fargo and Bank of America would relocate.

“Charlotte took a pretty hard hit,” adds Brandon Whitesell, director of Cushman & Wakefield in Atlanta, pointing out that 60,000 jobs were lost in the last two years. While about 20,000 jobs returned to the market, he predicts the market won’t fully recover until 2013. However, during the first part of 2010, “institutions and REITs started getting the green light to go into Charlotte,” he adds.

Overall, there continues to be interest in new apartments in prime locations throughout the region, asserts Brian Natwick, president of multifamily for Charlotte-based Crescent Resources LLC. “In general, the cities in the Southeast are very desirable places for a variety of reasons, including job growth, quality of life and low cost of living.”

The Carolinas

During the downturn, Charlotte’s occupancy dipped to 87 percent, which Whitesell attributes to timing, as the bulk of its new units was delivered in 2008 and 2009. Raleigh, meanwhile, declined just 3 percent during that same time period, as the majority of that city’s units was delivered between 2007 and 2008.

In the past year, though, Charlotte’s occupancies have stabilized, and Whitesell predicts the city will see another 100-bp increase by the end of the year.

“We’ve seen good absorption in the market over the last 18 to 24 months,” agrees Wyatt T. Dixon, III, managing principal of Proffitt-Dixon Partners. This positive absorption, he adds, “is certainly creating a healthier environment in which to examine new development opportunities.”

Charlotte’s effective rents are also on the road to recovery, though they are still down between 6 percent and 8 percent. (According to Whitesell, the market had lost between 12 percent and 15 percent.) Raleigh, however, continues to see some of the highest rents in the Southeast.

At the same time, Raleigh’s construction pipeline is much larger than Charlotte’s, with 23 deals slated for delivery in the near future (though only 1,400 units are currently under construction). Charlotte, which has shifted toward more urban development, has approximately 1,000 units under construction.

In the transaction market, Raleigh is still “the darling,” says Whitesell, having seen more sales per capita than any of the major cities in the region.

Owners in Charlotte tend to sell less frequently, though there have been sales in the metro this year because of the distressed assets that lenders are finally bringing to the market.

Raleigh, though, has seen hardly any distress. “The market never took a big hit,” Whitesell says. “It lost about $20 in rents during the downturn … [which it] already regained.”

While both markets are seeing an ample number of buyers, Raleigh sees more institutional interest than Charlotte.

The metros, however, are seeing similar cap rates; Class A properties see rates between 5.5 percent and 6 percent, Class B assets are trading between 6 percent and 6.5 percent, and Class C assets typically trade at 7 percent and higher. Raleigh is trading at higher prices per unit, though, because of its higher NOIs.

As far as the future, the biggest challenge for Charlotte in the near-term is likely the banks, though Whitesell points out that most of this is perception, as banking jobs only make up about 5 percent of the local economy. Furthermore, diversification of Charlotte’s employment base “has taken root with the growth of the energy sector,” points out Natwick.

The bright spot is that there is an influx of migration into both Charlotte and Raleigh. And, Whitesell points out, the workforce in Raleigh has become better-educated than Charlotte’s; “people used to migrate from Raleigh,” he says, “but now they see opportunity there.”


Nashville, similar to Raleigh, has a very high education rate relative to other southeastern markets, as well as the highest concentration of higher education for any region its size, points out Russell Oldham, vice president, Multi-Housing Group in CB Richard Ellis’ Nashville office. Couple that with the favorable business climate and quality of life, and the outlook for corporate relocation and job growth is optimistic, he adds.

The city is also on the radar screen for a lot of people, since Forbes recently named it No. 3 on its list of the next “boom towns” in the U.S. And the fact that there’s no state income tax certainly draws interest from major corporations.

Nashville has added nearly 12,000 jobs from 1Q 2010 to 1Q 2011, says Oldham. The good news, he points out, is that these jobs are mostly in the professional and business services, education and healthcare sectors.

Memphis, meanwhile, is heavily laden in distribution, as FedEx’s world headquarters are located in the city, “which helps insulate our economy,” notes Tommy Bronson III, vice president-investment properties, Multi-Housing Group, CB Richard Ellis Memphis. The metro added 10,000 jobs during the first half of the year—reportedly the largest influx of jobs since late-2008.

As far as the apartment market, Nashville rents are up 4 percent from 2Q10, with 11 of the 15 submarkets improving.

“Those were led by the West End/Downtown submarket, which is up, on average, almost 10 percent effectively year-over-year through the second quarter,” Oldham reports.

Average effective rents in these markets are $1.44 per square foot, with some of the newer projects seeing over $2.00 per square foot. The B and C markets, meanwhile, are seeing effective rents from $0.70 per square foot to $0.90 per square foot.

In Memphis, top-line rents grew 0.5 percent from year-end 2010 to 2Q11, but, adds Bronson, concessions are burning off.

The overall Nashville market was 93.5 percent occupied as of 2Q11, up 90 bps from 2Q10. At the same time, Memphis was up 70 bps, to 92.1 percent—but if older-construction, distressed properties were removed, occupancy would be closer to 94 percent, notes Bronson.

Most of the supply on the boards in Nashville, “is split between the urban area—the Gulch and the West End, which is the redevelopment center of Nashville, where a lot of the condo development occurred—and Franklin/Cool Springs,” notes Oldham. In the former, about 800 units are “real deals currently getting done,” he says, with another 2,000 speculative units. In the latter submarket, about 1,100 units are under construction or are being financed and there is an additional 500 speculative units in the pipeline.

New construction starts in Memphis, meanwhile, are at the lowest level the CBRE Memphis office has seen in 20 years, notes Bronson. In 2010, the market delivered 250 units, only 92 of which were market-rate. For 2011, 375 units are slated for delivery but only 114 had been completed at press time. Bronson expects the market to resume normal construction starts (between 1,100 units and 1,300 units) in 2012, with most construction concentrated in the suburbs.

Transaction velocity in Nashville is about average, notes Oldham, with his office on track to transact $300 million in deals this year, with most trades occurring in the Class A and Class B space.

Transaction activity in Memphis, however, has occurred in both the Class A space and the Class C, distressed arena. “There has not been a market for the middle ground—the stable Class B property,” notes Bronson. “The marketplace wants either a value-add component or an excellent location driven by potential rent growth and fundamental growth because of the location.”

In this market, A assets are trading in the low- to upper-6 percent range. Price-wise, distressed properties range from the single digits to the mid-teens, reports Bronson, while Class A assets are trading in the $70,000s to the low-$100,000s.


While Atlanta has suffered more than other Southeast metros, its natural growth rate of 100,000 people per year creates housing demand, says Chris Spain of Cushman & Wakefield’s Atlanta office.

And because the unemployment rate is lower in the white-collar arena, Atlanta has seen increased demand for units at the top end of the market. Concessions in Class A locations—Buckhead, Perimeter Center and Midtown, for example—have gone from three months of free rent to no free rent in the last 18 months, reports Spain, contributing to an effective rental rate turnaround of nearly 25 percent.

Lane’s Monroe agrees. “The nicer markets in Atlanta … are very strong. We are able to really push rental rates; we are getting very large increases upon renewal.”

Meanwhile, the recovery of the Class B market has depended on property location, with rental rate recoveries between 5 percent and 10 percent.

Class C properties are still very price-sensitive. This market was hit hard by the slowdown in single-family home construction, points out Spain. “You often hear that Atlanta was a city built on its growth; starting in ’01-’02 we built 30,000 to 40,000 new homes a year so that was a big job generator in itself, and that’s been the hardest sector to be hit,” he notes.

The C market only seems to be getting worse, observes Monroe. “It had been getting better, [but] now we have seen a five-point fallout in occupancy, and it seems to be relative to additional job loss or reduction of hours.”

While the overall occupancy for the metro is in the low-90 percent range, Class A properties are closer to the mid-90s and Class C properties are in the high-80 percent range.

There are currently about 2,000 units getting ready to break ground in Atlanta, which has historically built between 8,000 and 12,000 units a year.

“I think the actual prospect pool is going to get larger and the demand will get larger,” predicts Monroe, who doesn’t expect to see any true new supply until 2013 or 2014. “I believe it will set us up for a decent future, with really strong occupancy rates and the ability to push rents,” she adds.

Spain agrees. “Atlanta really has been flat, until the last 12 months, on rents for the last 10 years. If you picture 2 million housing units in the city and home ownership rates going from 65 percent to 72 percent—that’s 140,000 people that migrated into single-family, so a lot of that is now being reversed.”

On the investment side, “most of our sales on the Class C side are lender sales,” reports Spain. “We have seen enough of a rebound on the Class A and B front that owners have some profits in their deals—but in the Class C there’s been no rental rate recovery.”

There is strong investor appetite for all product types, however; “we are actually now seeing some institutional migration out of the As and the Bs, moving down the quality chain as far as into the Class C category,” Spain adds. “One of the trends we are seeing is institutional capital now looking beyond core and migrating down the quality level some in order to get [a better] yield,” he notes.

But with the cost of capital on the debt side remaining similar, the spread in cap rates remains fairly compressed, with Class A assets trading
between 5 percent and 5.5 percent, Bs trading between 5.75 percent and 6.25 percent, and Class C properties trading between a 6.5-to-8 cap.

While the future of the metro seems bleak, Spain points out that Atlanta’s airport is certainly a bright spot for the city.

However, Monroe believes Atlanta is not out of the woods just yet, particularly, she says, as unemployment continues to teeter up and down. “Overall,” she says, “if we can hang on, I think we’re going to result in a strong rental market at some point. Whether it be 2013, I don’t know; it might be more in the 2014 or 2015 range, but I think we’ll be in a position where we’re maxing rents and doing well.”