Charlotte’s apartment developers are optimistic about the future, mostly agreeing that any slowdown in new building is likely to be a gradual easing back from the city’s record-breaking boom rather than a sudden crash.
But at a Bisnow-sponsored development forum Wednesday, some of the city’s most prominent developers said they expect the market to cool a bit in the coming years. Still, they seemed surprised that the market hasn’t slowed already.
“We’re at the end of what would be a normal 10-year cycle,” said Gary Cline, managing principal of Cline Design Associates. “Last year, was the best year we had since ‘07. It was just unbelievable.”
Some 26,000 new units are either planned or under construction in the Charlotte region. The average rent in Charlotte has been rising fast, hitting $1,082 in February. That’s up 7 percent from a year ago, according to Charlotte-based apartment-tracking firm Real Data.
Here are two things that could slow Charlotte’s apartment boom, and why that might not be such a bad thing:
Higher land and construction prices
As more and more apartment sites are snapped up, that drives up the prices for the remaining sites. That’s especially true at prime locations around mass transit stops along the Blue Line light rail. And when land prices shoot up, that makes it harder for a developer to make the numbers work.
“Every time we’re looking at a site, there are five or six other people at the table,” said Cline.
And it’s not just land prices that are rising: The developers Wednesday said labor costs are going up, and it’s getting harder to find workers, with busy contractors competing to hire from the same pool for more jobs. Steve McClure, chief operating office of Spectrum Companies, said an apartment building that cost $95,000 per unit to build in 2010 might cost $150,000 per unit now.
“The construction side is taking longer, which is dragging some things out,” said McClure.
Rents shooting up
Although rapidly rising rent makes apartments attractive for developers to build, some of the developers said the market could be topping out.
“Rents, truthfully, are getting hard to sustain,” said David Ravin, CEO of apartment developer and manager Northwood Ravin. That’s partially a function of higher land and construction costs, especially at the highest-quality sites: To justify their investment to lenders, developers have to demand higher rents from tenants.
Ravin said more lenders are asking questions about whether the “concessions” – an industry term for one- or two-month breaks on rent, commonly used to lure tenants to new buildings – are temporary or here to stay.
McClure said the rents needed to justify the cost of building the luxury apartments that have come to dominate much of Charlotte are pricing out a lot of the city and limiting the pool of potential tenants.
“You have to be at $2 a square foot,” or $2,000 for a 1,000 square foot apartment, to make the numbers work on a lot of those deals, McClure said. “The percentage of the population that can afford that is pretty small.”
“There’s a bigger demand if you can get the rents down to a buck-thirty,” said McClure.
Not so bad
Despite their predictions, the developers weren’t downbeat. Their consensus: It’s better for the apartment market to slow down a bit, gradually, than come to a crashing halt reminiscent of 2008.
“I don’t think it’s necessarily a bad thing for us to catch our breath and absorb what we have,” said Ravin. “The free-for-all we’ve been in for the last few years is going to come under some more scrutiny.”
And McClure emphasized a pretty universal trait among developers, who are accustomed to placing big bets on new projects with the confidence everything will work out.
“I have to be an optimist at all times, or I'd never get a deal done,” said McClure.