Southeast Steady Performers

By Teresa O’Dea Hein, Managing EditorSince Southeast cities like Charlotte, N.C.; Raleigh, N.C. and Nashville, Tenn. didn’t really follow the condo boom, they’re not likely to experience the same fall-off as cities that did, industry observers agree.In fact, Integra Realty Resources, a real estate valuation and counseling firm, believes a number of key Southeast cities are in an expansion mode. These include Atlanta; Memphis, Tenn.; Nashville; Louisville, Ky.; Charlotte and Greenville, S.C. Integra also places Columbia, S.C. on an upward cycle, starting a bit farther back, from the recovery part of the cycle.The flip side of being singled out, says David Ravin, president of the Charlotte-based Crosland LLC’s residential division, “is that it’s almost the kiss of death to be listed as a good market. So stay away—they’re all bad,” he jokes.On a more serious note, Ravin and other industry veterans point out the dangers of self-fulfilling prophesies about doom and gloom. “We do that to ourselves sometimes—it’s a storm we’re brewing ourselves. Everyone has to remain calm; real estate really depends on a vibrant economy.”A flight to rentalsEric Brock, AIA, director of the housing and mixed-use studio and principal in the Atlanta office of Lord, Aeck & Sargent, does confirm that the project composition in cities like Atlanta has, in round numbers, shifted from 75 percent for-sale and 25 percent for-rent two years ago to 75 percent for-rent and 25 percent for-sale. “We’ve seen for-sale work almost grind to a halt—with much of what we had in the design phase going on hold, though we’re still seeing activity with townhouses.” In a couple of cases, the for-sale projects have been repurposed as apartments, though Brock points out that works best on entry-level projects.While Brock says that business has been very, very busy in the multifamily marketplace, “We’re starting to sense that our clients are struggling with financing due to the larger issues in the financial markets. We’re seeing strong inquiries for new work but overlaid with uncertainties. ” In the recent past, Brock recalls, “We used to be concerned about construction pricing and availability of labor. Now, those problems are moderating,” he reports, “and we’re seeing contractors becoming much more aggressive in pricing and much more responsive in their attention to projects.”Retail is also playing a larger role in mixed-use projects, Brock says. “We’re seeing the retail component becoming less of an accessory and more of a driver of the deal,” he reports. “There seems to be a strong demand for urban retail and urban rental apartments. Clients are no longer reluctantly adding retail because it’s a requirement of zoning and are seeing money to be made there. Plus, with retail being a larger component of the project, there’s less exposure and less risk on the multifamily side.”Lord, Aeck & Sargent, which is most active in Atlanta and Florida, is still doing planning-related and zoning work for future for-sale projects to deliver in a few years. “You can’t ignore the demographics, regardless of what the market is doing,” Brock adds. Marcus & Millichap, a national real estate investment services firm, reports that the Atlanta metro remains one of the fastest-growing large cities in the country.Atlanta’s employers are on pace to add 55,800 new jobs by year’s end, a 2.3 percent increase, according to a third-quarter Apartment Research Report. Asking rents are forecast to finish 2007 up 3.4 percent at $853 per month, while effective rents should gain 3.5 percent to $760 per month.Apartment developers will bring 4,000 new units online by year’s end, a 1.2 percent addition to inventory, the research notes. While multifamily builders will boost the number of deliveries this year, renter demand for apartment properties remains strong, and absorption levels are healthy. John Leonard, regional manager of the Atlanta office of Marcus & Millichap, says, “Over the past 12 months, the median price has continued to push higher, while cap rates have compressed into the low-7 percent range.”Carolina DreamingGreg Willett, vice president of research and analysis at M|PF YieldStar, Carrollton, Texas, reports, “The Carolinas are in great shape.” YieldStar placed them on its Top 10 list for 2007. While Willett expects them to fall off a little this year, Charlotte and Raleigh have two of the most aggressive investment growth paces in the country, Willett says. “Both saw 5 to 6 percent rent growth in 2007, and we expect perhaps 3 percent growth there this year. We think occupancy will come down a little in 2008.”Furthermore, Willett adds, unlike most of the rest of the country, the condo sector is doing all right there in the urban core, such as in Charlotte. With its young professionals, Charlotte has one of the best profiles in the country for that market, he notes. “This is the first wave of that downtown condo development.” Furthermore, the city has added basketball and football arenas downtown, as well as a light rail system.”Charlotte has a downtown that people want to go to,” Ravin adds. “The fundamentals of the Southeast are going to remain attractive,” Ravin says, “but they’re certainly not immune to what’s going on elsewhere.” Job growth remains steady, he notes, though there is some concern about overbuilding in the Carolinas due to popularity of the markets. Plus, Ravin says he remains bullish on the balmy Florida markets of Orlando and Tampa despite the popular sentiments. “There may be short-term hiccups, but the fundamentals are still strong,” he notes.The Raleigh-Durham area was the only Southeast market that made its way onto Sperry Van Ness’ list of the top 10 multifamily markets to watch for 2008. The report noted that area population growth projected for 2008 is substantial. At 2.5 percent, it’s ranked third of all SVN’s measured markets in percentage of growth.Spencer Garfield, managing director of Hudson Realty Capital (HRC) LLC, New York, likes the multifamily demographics in Atlanta. He also thinks that the long-overdue gentrification of downtown Durham, N.C. will ultimately enhance the area. “Rentals still make sense in the Carolinas.”In addition to all the usual suspects facing multifamily developers across the U.S. right now, the Southeast is being challenged by yet another problem—drought.Drought could change the face of growth in Georgia, the Carolinas and Virginia, Ravin says. “It’s something new and I’m hoping it’s temporary. But the water shortfall has woken developers’ eyes up to green issues as well. Already, some municipalities are not accepting pool permits.”Several people interviewed for this article also point out the importance and hard-to-predict effect of continuing bad publicity about the subprime mortgage meltdown, condo bust and other real estate issues.With the Florida markets going through correction and more competitive leasing environments on the way due to spiking construction in the Carolinas, the Nashville market emerged as YieldStar’s top choice in the Southeast for 2008. Vacancy in Music City in late 2007 already was well below the regional norm at only about 3 percent, helped by the fact that there has been comparatively little overbuilding in the metro’s single-family home market, YieldStar says, leaving the apartment sector’s competition from rental single-family units fairly shallow. In turn, Nashville saw effective rents come up at a healthy rate of about 4 percent during the past year. Boosting the outlook for 2008, Nashville will barely add any new multifamily supply. Permits were issued for only about 1,100 units during the past year, with this figure down 15 percent from what was already a fairly conservative construction pace.Nashville owners are seeing vacancy well below the regional norm at about 3 percent. During the past year, Nashville saw effective rents rise at a healthy rate of about 4 percent, YieldStar reports. Boosting that outlook for 2008, Nashville will hardly add any new multifamily supply. Permits were issued for only about 1,100 units during the past year, and this figure is down 15 percent from wha
t was already a fairly conservative construction pace.Farther south and west, Memphis employers are forecast to add 11,000 positions by year’s end, a 1.6 percent increase, according to a third-quarter Apartment Research Report from Marcus & Millichap. Builders will deliver approximately 200 new apartments to the Memphis area by year’s end, reports Marcus & Millichap. Metrowide vacancy should decline 20 basis points to 10.5 percent by year’s end, as modest additions to supply will be met by increased demand related to the metro’s employment growth. Asking rents are forecast to increase 1.9 percent to $650 per month, according to the firm, while effective rents will gain 2.4 percent to $608 per month. Sales velocity has increased approximately 23 percent over the past 12 months, as out-of-state investors have dominated the market, comprising 31 percent of the investor profile.All in all, the Southeast continues to post solid multifamily results. To comment on this article, contact Teresa O’Dea Hein at