Affordable apartments are disappearing, and people on fixed incomes are feeling it.
When Richard Simmons moved into his one-bedroom apartment in Matthews, the widower assumed he’d be able to afford it for years to come.
Simmons started off paying $650 a month rent to live in Paces Pointe. But that was 2012. Now, the base rent is up to $867, and a raft of new mandatory fees – for cable, package delivery and “valet trash” service – mean Simmons pays $946 a month, or nearly a 50 percent increase over the past few years.
Now 71 and retired, the former general contractor and Army veteran has gone through money he put aside and gets by on Social Security payments. “I don’t know what to do,” said Simmons. “How do you live on a fixed income?”
Simmons is one of thousands of tenants in Charlotte whose rent is rising in part because of a “value add” deal. It’s a term developers use for buying older apartments, spending several thousand dollars to renovate units with improvements such as new floors, granite counters and updated appliances, then raising the rent.
It’s also the latest challenge to housing affordability at a time when the issue is a mounting problem in Charlotte. The average sale price for a home in Charlotte was $281,567 in December, up almost 40 percent in five years. Over the same period, the average rent in Charlotte jumped 33 percent, hitting $1,115 a month last year.
Affordable housing advocates and city officials are starting to take notice of the value add deals sweeping older apartments, which impact lower-priced, non-subsidized, privately owned and operated apartments. They’re generally not affordable to people making the very lowest wages (Someone making minimum wage can’t afford more than about $360 a month in rent, for example), but they are apartments people with modest incomes can afford.
One plan the city is considering involves using public money to help nonprofits buy and renovate older apartment buildings as a way to keep rents affordable.
“The demolition of properties gets more headlines and gets more attention. The value add is the lion’s share of the problem, and it happens on a more prolific basis than the actual, physical demolitions,” said Mark Ethridge, a partner at real estate firm LCRE Capital. He’s a member of the Evergreen Team, a volunteer task force that spent last year studying affordable housing in Charlotte.
Apartment industry advocates say the renovation trend is good for the city’s housing stock and keeps older areas from turning into blight. Improvements paid for by private developers extend the useful life of older buildings and keep them from falling into disrepair. Given Charlotte’s population growth and booming local economy, rents would almost certainly be going up anyway at older apartments, even without value add deals.
“We’re seeing, more and more, what had been declining neighborhoods turn around,” said Ken Szymanski, executive director of the Greater Charlotte Apartment Association.
Driving up rents
Tracking value add deals is tough because there’s no universal standard. But since 2013, developers specializing in those deals have bought almost 13,000 apartments in Charlotte. The number could be higher – that’s just how many such companies have announced they’re buying, according to press releases and media reports.
These developers typically look for apartments that are at least 15 years old, often garden-style buildings with surface parking lots. The idea is to buy functional apartments in popular areas that don’t need a huge amount of repairs. Picture a modest-but-tidy apartment community in University City, not an aging building with a leaky roof and plywood tacked over broken windows.
With apartment vacancy rates at less than 6 percent in Charlotte, such properties offer investors the chance to rapidly increase rents and make a tidy return without sinking tens of millions of dollars worth of repairs into the property. But such modest apartments are often right in the sweet spot for affordability.
A look at individual properties shows how value add deals can drive up rents at existing apartments.
Atlanta-based Cortland Partners bought the Hunt Club apartments in north Charlotte in 2015. The company carried out renovations such as adding granite countertops and new backsplashes in the kitchens, Nest smart thermostats, USB charging outlets and a new clubhouse and pool. Rents have increased an average of 33 percent, from $764 before the deal to $1,017 now.
Ted Collie, executive vice president of investments at Cortland Partners, said the company’s rents at older buildings are still lower than new, luxury apartments, even after renovations. Indeed, rent at Charlotte’s newest apartments averages $1,471 a month, about 40 percent more than the average at Hunt Club, according to Real Data.
“We’re providing a very quality product at a good price,” Collie said. “It’s a much better place, and a much better experience for the families that live there.”
Some firms specializing in value add deals have quietly built up huge portfolios of apartments in Charlotte, including Cortland Partners, which owns about 4,000 units. American Landmark Apartments – the company specializing in value add deals which bought Paces Pointe in 2016 – owns 2,100 apartments in eight developments.
Julie Porter, president of the Charlotte Mecklenburg Housing Partnership, said her group wants to buy and preserve “naturally occurring affordable housing,” as cheaper, older apartments are generally known in the industry.
“We’ve bid on more than one. What we’re running into is very aggressive investors,” said Porter.
Most recently, the partnership tried to buy the 1970s-vintage Arcadian Village apartments at Idlewild Road and Independence Boulevard. But a company affiliated with Monument Real Estate, founded by baseball star Alex Rodriguez, outbid them and bought the property for $24.3 million.
“We’ve been fairly alarmed at the rate which apartments are flipping,” Porter said. “All of a sudden you’ve got an apartment that used to be $700 (for rent) that’s more than $1,000. We’re losing units faster than we can build them.”
Any older apartments bought with subsidies would still likely require renovations, though perhaps not as extensive as those a private investor would implement. Dionne Nelson, president of Charlotte-based mixed-income apartment developer Laurel Street, said there’s a distinction between maintenance needed to keep an apartment safe and livable, and renovations that go beyond that and lead to higher rent.
“New cabinets aren’t a life safety issue. New countertops aren’t necessarily something a family needs to live well,” said Nelson, also a member of the Evergreen task force.
A big payoff
The cost to build new apartments keeps spiraling up, driven by rising prices for land and construction. As a consequence, investors have increasingly looked to older apartments they can rejuvenate for a better return on investment. Paces Pointe, where Simmons lives, shows how those returns can add up.
It’s been sold twice in the past several years. In 2013, Brookfield Asset Management bought the apartments for almost $26 million. At the time, executives said they planned to “selectively upgrade and reposition the apartment communities in order to increase rents and bolster the return on investment.” Three years later, American Landmark Apartments bought Paces Pointe for $37.4 million.
American Landmark Apartments spent $2.2 million on further renovations, including new appliances, new carpet or flooring, new cabinets and more amenities, such as a fire pit by the pool and a renovated gym. Joe Lubeck, president of the company, said such changes are needed to keep pace with competing properties, and improvements make the apartments better for renters who demand a higher level of service.
“We know that a lot of our residents are on fixed incomes, and we’re sensitive to that,” said Lubeck. “On the other hand, the vast majority of renters, based on feedback, want these new services and amenities... And if we don’t provide it, they will go to another apartment property that does. So we have to factor that in.”
The renovations come out to about $6,600 per apartment, Lubeck said.
Keeping older apartments affordable would require investors who don’t want a hefty return. Those investments could take the form of public bond money from the Housing Trust Fund, or from nonprofit or charitable groups, such as funds started by philanthropists or religious organizations for “impact investing.”
One reason this strategy is attractive: It costs less to preserve existing affordable housing than to build new homes.
For example, the investors who bought Arcadian Village apartments paid just under $70,000 per apartment. If they spend $8,000 each on upgrades, the investment cost will total $78,000 per unit. New buildings can cost $150,000 or more per apartment to build, and land in hot neighborhoods is only getting more expensive.
At a City Council retreat this month, Mayor Vi Lyles suggested Charlotte should consider using public money from the Housing Trust Fund to help nonprofit groups buy and renovate older apartment buildings while keeping the rents affordable. Charlotte voters will be asked to approve the city’s housing bonds in November, and leaders are considering substantially increasing the bond amount, from $15 million every two years to as much as $50 million.
Joe Padilla, executive director of the Charlotte-based Real Estate & Building Industry Coalition, said using Housing Trust Fund money to help nonprofits buy and preserve affordable housing is a “bold and ambitious idea.” But he said private investors with deep pockets are willing to spend, and the city and nonprofits could find themselves in bidding wars.
“That gets expensive really quick,” said Padilla. “They’re going into a very competitive market for property.”
Simmons, the Paces Pointe tenant, is considering going back to work, using his skills as a builder to earn some income to help cover rent. But he’s skeptical of getting hired at age 71. To make ends meet, he’s cut back on groceries and shops at discount stores.
He can see acquisitions such as Paces Pointe are good for investors. But even if he can afford to stay at Paces Pointe, he doesn’t know where many of his neighbors, also older and on fixed incomes, will end up.
“It is a tremendous weight,” said Simmons. “There’s nothing to grab a hold of to keep us from drowning.”