The Opportunity Market
- Nov 06, 2012
A remarkable example of the post-recession expansion in multifamily can be found in the southeastern U.S. Cities such as Charlotte, Nashville and Atlanta have recently become hotspots for young professionals looking for the right blend of amenities and accessibility. And with a considerably rapid pace of demand, rents are beginning to rival many of the keystone markets of the Northeast and West Coast, creating an ideal climate for investors.
“Charlotte is currently third in the nation in terms of annual effective rental rate growth, having experienced a 6.8 increase in net effective rents in the trailing 12 months,” says Terrence Llewellyn, president of Llewellyn Development. “Only San Francisco and San Jose scored higher than that, and Charlotte scored materially higher than many perennial winners on that list like Boston, New York, Denver, Austin, etc.”
Aside from the marked demand that is serving to redefine the region’s dynamics, the other major factor driving up rents in cities like Charlotte and Nashville is the considerable lack of new supply delivered over the last several years. Completions were significantly reduced in 2011 and 2012, this likely due to a delayed reaction to the onset of the recession, and with employment beginning to recover, it’s clear that a few key fundamentals are out of sync.
“On the supply side, we’re still not really seeing a lot of construction activity—it remains pretty muted, so that’s really restraining supply growth,” says Ryan Severino, senior economist at Reis Inc. “At the same time, demand remains pretty strong. It’s not the best economic recovery—that’s certainly an understatement, but the economy has been growing for the last few years.”
Yet as the popularity of renting is expected to be maintained, the current pipeline should generate a healthy amount of deliveries in the next couple of years. While actual construction has not been rampant over the last few quarters, permits have been steadily coming back with new projects on the books across the region.
“Rental demand should continue to drive new multifamily construction over the next two to three years, until supply catches up with demand,” says Roger Watson, director of business development at Hardin Construction Company LLC. “In particular, Atlanta, Nashville and Charlotte are showing strong activity, with a large number of projects currently in various stages of planning.”
In terms of which types of properties are commanding the most occupancies, Severino notes that vacancies have been spread pretty evenly across the three different asset classes. However, due to the nature of the jobs that have come to the region over the past couple of years, the mid- to lower-tier products are in somewhat higher demand at the moment.
“Rent growth has been a little bit stronger in the B and C space,” says Severino. “I think the one thing that actually has helped B and C properties is that a lot of the jobs being created are not always the best-paying jobs, and so the people obtaining those jobs are more likely to rent B and C apartments than the more expensive Class A apartments.”
However, Llewellyn notes that the sheer number of current jobs was not always a sure bet. At the onset of the recession, there were considerable doubts as to whether or not the financial and bank-related jobs that have come to typify Charlotte would remain in the city or be outsourced to other parts of the country.
“There was concern on behalf of institutional investors that a number of jobs would be moved out to California and would not remain in Charlotte,” says Llewellyn. “Time and experience has shown that not to be true. In fact, the Wells/Wachovia head count in Charlotte is actually higher now than it was before the takeover.”
While Charlotte has indeed been one of the more prominent examples of recovery in the Southeast over the last couple of years, investors should be wary of putting all their eggs in one basket. Severino highlights the ubiquitous nature of the positive trends across the region and emphasizes that the big metros do not represent the greatest chance of a sizeable return.
“Just about everywhere we look we’re seeing improvement in fundamentals,” says Llewellyn. “I think if I were looking for opportunities, I would probably train my sights away from the big dominant markets—the Atlantas and Charlottes and Memphises—and maybe in some of the smaller markets. The dynamic is the same there… but you won’t have as many sophisticated investors, and it won’t be as competitive.”
There’s also a considerable distinction to be made in terms of which types of apartments investors should set their sights on, especially in terms of age. Llewellyn thinks that brand new or future properties currently represent the greatest profit opportunity.
“I think investing in the development of new apartments is, at this point, a significantly more compelling opportunity than investing in the acquisition of apartments for several reasons,” says Llewellyn. “First off, just purely from a quantitative-analysis supply standpoint, you could see that there are more apartments being demanded than there are on the ground.”
Also, due to the massive influx of Generation Y renters—who hold considerably different tastes from previous generations—older inventory is likely to be far less appealing and in demand than more contemporary housing.
“If you lay [out] a qualitative analysis, you can see that the apartments that are being demanded by today’s young, affluent white-collar single renters are different from apartments that their parents’ generation might have wanted to live in,” notes Llewellyn. “It’s just an entirely different animal in terms of product, and there’s very little of that product on the ground.”
Watson notes that one of the more effective ways to cater to and invest in the Millennial demographic is through student housing, and that Hardin Construction has been reaping opportunities of the numerous large universities scattered throughout the region, especially in the larger metros.
“Developers with experience in the off-campus student housing sub-market can still take advantage of opportunities in Nashville, Knoxville, Columbia and other cities where there are universities with large enrollments and predicted, sustained enrollment growth,” says Watson.
“The desired product type here mirrors the general trend—amenities-rich apartment communities located within, say, a 10-minute walk of campus,” he adds.
Yet traditional multifamily continues to be a ripe area for new supply, and Watson details a couple of projects his company is working on in key secondary markets.
“In downtown Savannah,the renovation of iconic Drayton Tower is converting a 12-story condominium complex, completed in 1951, into a full-service urban building with 98 luxury rental lofts and apartments, ground-floor retail and 24-hour door staff,” says Watson.
“And in Tampa, Florida, Ella at Encore!, a new-construction project, is kicking off a major public-private redevelopment initiative at the edge of that city’s downtown.”
Regardless of where or what types of investments are made over the next few years, Llewellyn and many others believe that the next decade will be “the most exciting time to work in multifamily that will occur in [a] lifetime,” both in the Southeast and throughout the country, and that a truly “next-generation product” is on the horizon.
“If you look at things like age demographics, population growth and marginal propensity to demand for-rent over for-sale housing, I think we’re actually going to have an even larger apartment development boom and even larger [than the 1970s boom],” says Llewellyn. “I just think it’s going to be a very exciting time to be in the apartment industry.”