Charlotte’s booming real estate market doesn’t show any signs of stopping – but experts caution that if this were a baseball game, we’d be much closer to the seventh inning stretch than the national anthem.
That was the conclusion a panel of three real estate experts reached this week at the annual Charlotte Commercial Forecast, hosted Wednesday by the North Carolina Chapter of the CCIM Institute at Carmel Country Club. Still, none of them expect the frenzy of construction to slow this year – as the forest of cranes and record number of new apartments being built indicates.
Here are four key trends that Mark Vitner, Charlotte-based senior economist for Wells Fargo, Louis Stephens, managing director at JLL and Mike Ortlip, senior vice president at Grandbridge Real Estate Capital discussed at the forecast:
‘Densification’ of suburban areas
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As walkable, denser developments continue to gain popularity – think the Whole Foods, apartments and shops on Sharon Road in SouthPark – they won’t be concentrated in areas that are already urban, such as uptown. Instead, the trend will pick up steam in areas that have been traditionally regarded as lower-density.
You can already see greater density popping up across Charlotte in neighborhoods that were once solidly suburban or rural. In SouthPark, two-story garden apartments are being replaced with office towers, grocery stores and much more tightly packed mid-rise apartments. On Providence Road past Interstate 485, developers are redeveloping a former golf course and farmland into thousands of apartments and houses, as well as shops, offices and hotels.
And the trend will go well beyond Charlotte – so called “suburban-urban” development will expand to more outlying areas as well.
“You’ll see what used to be small towns and suburbs around Charlotte densify,” said Vitner. For example, Kannapolis is seeking to draw residents back to its downtown by partnering with a private developer to build apartments and shops in the $37.5 million first phase of a major revitalization.
Uncertainty and risks increasing later in the year
Although all three experts were confident about the market for the rest of 2016, the picture gets murkier the further out they look. This year’s vicious and unsettling presidential election, a possibility the Fed will hike interest rates, economic turmoil in China, Russia, Europe and Latin America – these and other risks could spill over into a real estate slowdown or even a recession.
“I think 2016 will be good, but we’re peaking,” said Stephens. Sales of commercial properties were down sharply in February, and Stephens said brokers are starting to see some deals to buy properties that are under contract fall through.
Vitner said growing uncertainty means it makes sense to get started financing and building projects as soon as possible.
“If you’ve got something that can get done in the first half of the year, I’d encourage you to do it,” said Vitner.
Still, some cooling down before things get too overheated might not be a bad thing.
“I think it’s going to pull back some of the multifamily, which was looking like it could get out of control in some of the markets,” said Ortlip.
Stephens agreed: “Maybe a little bit of pull-back on the lending front is probably what’s needed in order to make it have a soft landing.”
Even more mixed-use development
It seems like every new development that’s announced these days is “mixed-use” – apartments and shops in the same building, self-storage and retail, offices, restaurants all blended on the same site.
“We’ve seen more successful mixed use projects this cycle than we’ve ever seen in every previous cycle put together,” said Vitner.
But there’s still plenty of room for more creative and far-reaching mixed-use developments. Most apartment projects underway now include only a small amount of retail, for example.
“I think the mixed-use is something that’s still new to Charlotte...There’s only a few places that are truly successful mixed-use,” said Stephens.
One reason is that it’s harder to get financing for a project with a mix of uses than just one, because each use has different financing requirements.
“Mixed-use has been the product type that’s always been the most difficult for long-term lenders to understand,” said Ortlip. Figuring out how to underwrite apartments, offices and shops on the same site is more complicated – but the market will push more aggressively towards mixed-use, the panel predicted.
“Every one of those animals is different...It’s not like putting up a simple, 100,000 square-foot office building,” Stephens said of the financing requirements for different uses. “But it’s what everybody wants. It’s what the city wants, what the millennials want. That’s why you’re seeing uptown and South End so strong.”
Malls and shopping centers struggle adapting to an e-commerce world
One big question mark is what the future of brick-and-mortar retail looks like. With Amazon expanding aggressively and other retailers devoting ever more resources to online sales, the future of malls, shopping centers and other physical stores is in flux. In Charlotte, the former Eastland Mall site sits empty, awaiting a viable redevelopment plan, while Northlake Mall is investing $50 million in a renovation and expansion plan to stay abreast of the competition.
“As far as retail goes, it’s an e-commerce world. When you see a (company like) Belk sell their business, we’ve probably reached the top,” said Stephens, referring to Belk’s $3 billion sale last year to a private equity firm. “Who knows what (stores) are going to look like going forward? I think it’s going to be more of a showplace...They’re still figuring it out.”
Vitner – who said he’s a prolific online shopper for everything but groceries – predicted that will drive retail space to be occupied more and more by experiential tenants, such as restaurants, than shops.
“I don’t need to go to the store, everything’s brought to me...That’s a real challenge for retailers,” said Vitner. “If you look at what owners of retail space are having to do, you go to a shopping center now and it might be all restaurants, maybe some sort of a karate studio or nail salon. But there are very few things that face Internet competition that are in grocery stores anymore.”
That trend will only accelerate, Vitner said: “We’re going to see more consolidation of the department stores, and there’s going to be a big push to remake a lot of the struggling malls around the country...There’s a lot more change coming on that front.”