Development

Why words like ‘cautious’ are popping up in Charlotte real estate forecasts

A welder at work on the roof of the 300 South Tryon 25-story office tower.
A welder at work on the roof of the 300 South Tryon 25-story office tower. dlaird@charlotteobserver.com

It’s commercial real estate forecast season in Charlotte – I’ve been to three in the past week – and the general consensus seems to be that 2017 is shaping up to be sort of an “eh” year.

That’s a very precise business term, of course. Experts and real estate professionals seem agreed that while Charlotte’s white-hot pace of growth in everything from rent to new construction might slow down a bit this year, there aren’t any big, flashing signs warning “Crash ahead!”

Put another way, most professionals don’t think we’re sitting on top of another pre-recession bubble here, a la 2006 and 2007. They point to Charlotte’s strong fundamental metrics: A growing number of jobs, influx of new population and major public investments such as the Blue Line light rail extension set to open this year.

Still, growth is expected to slow a bit from 2015 and 2016, with words such as “selective,” “cautious” and “take a pause” popping up frequently in real estate forecasts. And many unknowns surround new President Donald Trump’s policies, from international trade to tax plans to rules about commercial lending, that could boost or hurt the economy.

But economists were largely sanguine about the picture for Charlotte.

“If you liked 2016, you can have it for 2017,” said UNC Charlotte economics professor John Connaughton, speaking at the CoreNet Carolinas forecast.

Here are four key points to keep an eye on this year in Charlotte:

1. We’re not done with the apartment boom yet

With nearly 24,000 apartment units in development this year throughout the Charlotte region, one of the most frequent questions I get is “When are we going to build too many apartments?” The answer seems to be: Not as long as people keep moving to Charlotte.

“Yes, you all are building a lot, but you’re also absorbing a lot,” said Kevin Thorpe, global chief economist for Cushman & Wakefield, at the GreerWalker/Katten Muchin Rosenman annual forecast. But that doesn’t mean average rents are going to keep shooting up at the current burning pace of 35 percent over the past five years. With the big increase in supply, rents are likely to stop growing as fast, and perhaps even fall a bit.

“I would be anticipating that your apartment sector is going to see a pretty significant softening of rents in the next few years,” said Thorpe.

Erin Amon, Charlotte market analyst for CoStar Group, agreed.

“Each quarter, we’re seeing rent growth slow,” said Amon, speaking at a Bisnow forecast. “That’s following a national trend.”

Thorpe predicted that as new apartment development slows this year, Charlotte could soon find its market tightening up again.

“By 2019, maybe 2020, you’re going to be under-building again,” he said.

2. House Bill 2 is still a drag on the state

The controversial law limiting local protections for LGBT individuals is still deterring some investors and tenants from Charlotte. That’s what a chorus of real estate executives calling for the law’s repeal said at the Bisnow forecast.

“It’s idiotic, and it needs to go away,” said Wyatt Dixon, managing principal at apartment developer Proffitt Dixon. He said an investor in a recent undisclosed deal got as far as giving them a term sheet before declaring “We’re out” after HB2 passed.

Jason LaBonte, senior vice president at Crescent Communities, said a global investment bank Crescent was working with on funding for a deal recently spent five minutes in a meeting talking about the deal and 25 minutes talking about the potential ongoing negative impact of HB2.

“No matter what side you’re on, it’s just got to be repealed,” said LaBonte.

Thorpe said the law’s long-term effect on Charlotte could be to “bend the curve” of possible growth down from its full potential.

“I’m an outsider looking in. The political environment seems really negative here,” said Thorpe. “I do think it’s really important you get the negativity out of the market.”

3. Growth could slow as financing tightens – but that could lead to a “soft landing”

“Hitting pause,” “better to take a break than make a mistake” and “selective” are all phrases Walker Collier of Charlotte-based Trinity Capital Advisors said his firm is hearing more frequently now from institutional investors looking at new projects. Trinity is looking at selling properties that are well-leased or complete.

“Our view is yes, this could continue, but better safe than sorry,” said Collier.

Jonathan Nance, senior vice president of investments at Grubb Properties, said rising land costs and higher construction estimates are making it harder to get new development deals done.

“The trend is, it’s getting more difficult,” said Nance.

LaBonte said he expects developers who have been doing a dozen deals a year would now do six. That’s not necessarily a bad thing – the gradual deceleration could lead to a “soft landing” rather than a hard crash.

4. No one knows what the “Trump effect” will be

The X-factor this year could be the new presidential administration’s policies, which Trump has sketched in some broad outlines but, in many cases, left open-ended.

“I think everyone has their eyes on the first 100 days,” said Quentin Fogan, a director at Bank of America. He said he’ll be watching policies such as taxes and global trade.

“We’re still kind of in a wait-and-see mode,” said Nance.

Thorpe said tax cuts by Trump, combined with increased military and infrastructure spending by the federal government, could act as a massive short-term stimulus to boost U.S. economic growth

“Despite the maturing cycle, growth will accelerate over the next two years, and so will demand for real estate,” said Thorpe.

Ely Portillo: 704-358-5041, @ESPortillo

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