Charlotte Returns to Institutions’ Radar Screens

The Queen City's absorptions-to-completions ratio is currently 495 percent. In the trailing 12 months, 4,920 units were absorbed, while only 993 units were completed during the same period.

Charlotte—The Queen City’s absorptions-to-completions ratio is currently 495 percent, according to Terrence Llewellyn of Llewellyn Development.

In the trailing 12 months, 4,920 units were absorbed, while only 993 units were completed during the same period, Llewellyn reports.

Current absorption represents 189 percent of the 10-year average, which, excluding the trailing 12 months’ data, was 2,603 units. At the same time, the 10-year average for completions was 2,735 units.

“Charlotte is not that different from many other parts of the country in that we are seeing a real fundamental shift of significant magnitude in market propensity to buy versus rent,” Llewellyn tells MHN. “That’s affecting both the number of people who come in to lease and the number of people who decide to leave. … Retention numbers have increased dramatically, turnover has decreased dramatically and the back door, the number of people who choose to leave, has been dramatically reduced.”

The overall market vacancy improved 3.9 percent year-over-year, to 7.2 percent, while vacancy at newer communities is 5.2 percent. At the same time, average rents have increased by 7.6 percent, with same-store rents increasing by 5.7 percent.

Of course, the hottest submarkets continue to be downtown, inside the 277 loop. “Much of the critical mass of Charlotte’s employment is driven by banking and energy,” notes Llewellyn. “The employment centers never really decentralized from downtown, so the central business district is going to be the number-one submarket.”

Certain suburban apartment communities in Charlotte are performing better than expected, however, notes Llewellyn. Those first-tier markets directly around the central business district—for example, South End, Dilworth, Myers Park, Eastover and Plaza Midwood—are becoming favorable places to live, as is the submarket known as South Park.

“Once you get further out, you have to be very selective,” says Llewelly, pointing to the Ballantyne submarket as one example that warrants further development, as it is currently experiencing product shortages. “I was out doing a market analysis and I can’t find a three-bedroom [apartment] that’s available before February 2012,” he notes.

What’s truly driving the Ballantyne submarket, though, is the existence of 3.3 million square feet of occupied office space, with additional zoning rights for an additional 3.2 million square feet. As Llewellyn points out, this is “somewhere in excess of 30,000 persons that are going to be working in that submarket.”

As far as the transaction market, cap rates have decreased, which has resulted in an influx of Class A deals—both suburban and urban—hitting the market. Top-tier assets in the city are trading at sub-5 cap rates, while the suburban assets are in the mid-5 percent range, Llewellyn observes.

In terms of distressed product, he adds, “there’s sort of a constant flow of Class C apartment product that continues to come through as foreclosures … and it either doesn’t sell or doesn’t sell for much money because when you get in and crunch the numbers—especially in cases where average rents are below $600 per month—by the time you figure out cap ex and deferred maintenance and reserves, you might come to the conclusion that the net present value of that income stream is zero or negative.” This has resulted in assets trading for less than $20,000 per unit—or not trading at all.

While much of the buyer pool is comprised of “the same players that have been in Charlotte for a long time,” the city has returned to the institutional radar screen. “Institutions hit pause right about the time Wells Fargo bought Wachovia, and Charlotte was redlined from an institutional acquisitions perspective for a little while after that,” recalls Llewellyn, “but there’s been some strong institutional buying for the last year and a half.”

As for the future, while Charlotte continues to attempt to diversify, it’s not as diversified as most people would like to see it,” points out Llewellyn, adding, “I do think Charlotte has done, and continues to do, a good job diversifying into other fields, like energy. Duke Energy just contracted to purchase Progress Energy in Raleigh and that merger, if approved, would create the largest utility provider in the country.”

Additionally, the Democratic National Convention will be held in the city this summer, so that has the potential to bring in much-needed revenue.