Apartment boom not necessarily a bubble – but get ready for higher vacancy

The title of a slide at last month’s Charlotte Commercial Real Estate Forum asked the question that’s been on a lot of people’s minds: “Too many apartments?”

It’s hard to ignore the high-end apartment complexes seemingly sprouting on every corner in town. Since I started the commercial real estate beat at the Observer last month, people have asked me more about the city’s apartment boom than any other subject.

There’s no question we’re in a boom: Real Data, which tracks apartment construction and vacancies, says Charlotte has more than 10,000 units under construction, and about the same number planned. Many of them are high-end units in and around uptown, while others are planned farther out, in new mixed-use developments.

But is the boom a bubble? That depends on a lot of questions no one can answer yet:

Some people who keep a close eye on the market say if we’re not quite in a bubble, we’re definitely headed toward oversupply.

“We’re in that final stage of the expansion cycle before we get into hypersupply,” said Fitzhugh Stout, Charlotte-based senior managing director for Integra Realty Resources. Plotted on a chart, Stout puts Charlotte on top of a cresting wave, about to hit the peak and look out over the downside. He sees higher vacancy, slowing rent growth and concessions, such as a month’s free rent, on the horizon.

“A year from now the vacancy will be higher and the growth rate will be lower, and you’ll start seeing some rental concessions ,” said Stout. “In two years, it’s going to be a different game.”

Real Data’s latest numbers show a vacancy rate of 5.3 percent in Mecklenburg. That rate could rise to 8 percent next year as more new apartments are finished, Real Data said. By comparison, the vacancy rate was 13.6 percent in early 2010, as the worst of the recession’s effects rolled through the region.

Rent averages $919 a month in Charlotte, and that’s expected to increase 2 to 3 percent next year, Real Data said. But those rates could level off “as new communities compete for renters,” the company noted.

Still, developers are upbeat about the prospects – as they have to be – and they’ve backed up their optimism with their money. Peter Pappas and his Terwilliger Pappas company are building almost 1,000 units worth of Solis-branded upscale apartments throughout Charlotte, including complexes in Ballantyne, Dilworth, SouthPark and South Charlotte. He’s betting that young professionals moving to the city will rent many of those.

“Their propensity to rent will continue,” said Pappas. “The 23- to 35-year-old segment of our market is postponing homeownership.”

Shifting population powers apartments

The huge construction boom going on now would typically spell trouble later on, said Ken Szymanski, executive director of the Greater Charlotte Apartment Association.

“Traditionally, it would be very clear that overbuilding would be the product of this level of construction,” he said. But he said shifting demographics mean this time could be different. “There’s a number of forces in play.”

Chief among those shifts: the huge surge in Charlotte’s population. The city has been the second-fastest growing large metropolitan area since 2000, Census data show, with population up 40 percent. And a recent study by the Urban Institute showed the Charlotte region’s population is expected to increase 47 percent by 2030. That’s an additional 872,000 people.

Even under the most pessimistic forecast scenario from the Urban Institute, the Charlotte region’s population would still grow by 21 percent.

And more of those people are renting, Szymanski said: 42 percent of the population vs. the traditional assumed rate of 33 percent. That’s because of several factors, including the fact that many of the city’s newcomers are young adults (often more concerned with paying off student loans than a mortgage) and fewer households are married people with kids.

Daniel Levine is betting on such demographic shifts to help his new apartment projects succeed. He has more than 500 units under development in and around uptown. On Wednesday, he and Raley Miller Properties filed to rezone 11 acres at Providence and Fairview roads, where they want to tear down the Carmel on Providence apartments and build a new, 225-unit mixed-use complex.

“Everything we can see says we’re going to continue to grow jobs and population for the next 20 years,” said Levine. “They’re going to want to live closer to the center city. The only way to get that population housed is in multifamily housing.”

“As long as we’re generating jobs, we’re going to need to generate housing,” said Levine.

Market changes coming

David Ravin, CEO of Northwood Ravin, said he’s optimistic. His company is building Morningside Village, a 384-unit development in Plaza Midwood, and 400-unit Holly Crest in Huntersville, both set to be completed this year.

“I think it’s coming at a good time,” Ravin said of the apartment boom. The economy is better, and pent-up demand is being met, Ravin said. But he does think the market will change in coming years.

“We do have a bit of a herd mentality,” he said of developers. “One person announces a project on one corner and everyone wants to put projects on the other three corners.”

“This last wave, it’s relatively the same product,” he said. “It looks very similar. It’s the same paint colors, the same sizes, the same unit plans...I think that will be the next piece of the puzzle, a little more diversity of product and diversity of location.”

At the real estate forum last week, DTZ chief economist Kevin Thorpe said Charlotte’s market should be able to absorb all of the new apartments in the short term, though vacancy rates will spike for a bit.

“In two to three years’ time, most of those apartments will be rented,” Thorpe told hundreds of developers and brokers at the Ritz-Carlton. “We will hit 9 percent (vacancy), but will tighten up quickly.”

The real issue, Thorpe said, is what happens when the huge wave of young renters grows a little older and wants to buy their own places.

“My key question is, ‘What will happen when the millennials reach the prime homebuying age?’” Thorpe said. That should happen en masse in about seven years or so. “Will they buy?”

He ended with a warning note for a roomful of optimists: “We encourage you to be very cautious.”

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