Charlotte developers are building apartments as fast as they can, and it seems as though nothing can slow the boom. But at a real estate forum this week, some potential cracks in the apartment-building juggernaut showed.
Although developers were almost universally optimistic – the word “rosy” was used at least twice, as was the phrase “golden age for multifamily” – they also showed they’re keeping their eyes open for trouble down the road.
To be clear: No one is suggesting the city’s record apartment boom is close to over. There are more than 10,400 apartment units under construction in Charlotte, according to Real Data, and about the same number planned. Vacancy rates are low, and developers from some of Charlotte’s biggest apartment firms said at the Bisnow forum that they aren’t having any trouble raising rents. The days of big concessions, like a month or two of free rent to lure tenants, are gone.
“Everything looks rosy from a projection standpoint. There’s nothing to suggest, here’s a cliff we’re all marching toward like lemmings,” said Lou Davis, director of investment for Cortland Partners.
At some point, the old supply and demand numbers have to go back in line.
Grey Poole, co-founder of Selwyn Property Group
But behind the optimism, some possible trouble spots lurk. Here are four factors that could slow the Charlotte apartment boom:
Supply and demand
Factors such as a rapidly falling homeownership rate and the influx of millennials to cities have driven up demand for apartments. But even though the Charlotte market is absorbing new apartments briskly, at some point, the most basic economic laws still have to come into play.
“Whenever you hear the story of there’s been a paradigm shift and the old numbers don’t apply, I just don’t believe that. At some point, the old supply and demand numbers have to go back in line,” said Grey Poole, co-founder of Selwyn Property Group, which develops boutique apartment projects. His firm is starting to focus on for-sale developments, in a shift away from apartments.
Although some of the developers predicted we’re still far away from having too many apartments, others weren’t quite so sanguine. Ben Yorker, of Northwood Ravin, predicted we’ll hit oversupply sooner rather than later.
“I would predict to see some oversupply sooner than a lot of the folks we’ve heard today,” said Yorker. “I hope I’m wrong.... I think we’re in some of the later innings, to be honest.”
Real Data forecasts the vacancy rate could climb from 6.7 percent to 8 percent as more apartments hit the market. That would still be well below the vacancy rate in February 2010, which hit 13.6 percent.
Rising costs for land
Urban, infill development is all the rage right now. Developers are looking to buy and redevelop tracts of land that are close to the city’s core, building dense, mixed-use buildings and apartments meant to lure young, college-educated workers willing to pay a premium.
But with all of those developers vying for the same sites, finding an attractive infill parcel isn’t so easy anymore.
“Those land costs are rapidly escalating,” said Poole. “We’re chasing the same sites, so we’re driving up the costs”
“One has to be willing to work more, work harder to get good sites,” he said. “It’s just not the layup we were all used to maybe three or four years ago.”
As costs rise, developers have to charge tenants higher rents to justify funding a given project. That means the market will likely be pressured to keep rents high, especially for new, infill projects.
Difficulty finding skilled labor
Something else that’s getting harder to find in the building boom: qualified hands to build all those new apartments. Many contractors laid off large numbers of workers during the downturn, and staffing up for the boom has been slow going.
“The number of people that are walking on your property and hanging the first piece of drywall they’ve ever hung is significant,” said Ben Collins, of Crescent Communities. He said the company is having to add more time to construction schedules and plan for more contingencies to deal with the labor shortage.
“There’s just not enough labor to do all the jobs, especially when there’s a crane on every corner,” said Davis. He said competition for skilled subcontractors is increasing. “Someone else will come and say, ‘I’ll give you $5 an hour more to work on our site.’ ”
With less labor available to handle the construction glut, developers will have to either pay more or slow down projects – both costly propositions.
A herd mentality
One feature of the apartment boom that’s not hard to miss: A lot of the new buildings look alike, and development is focused in the same popular neighborhoods, such as South End, Plaza Midwood and NoDa.
“There are a lot of developments that are very similar, in the same location,” said Yorker. The new construction is heavily concentrated in a few areas, targeting upper-end renters with similar apartments, amenities and designs. One reason, Yorker said, is that’s what lenders are funding right now.
But, as Yorker pointed out, demand is not homogenous. There are all kinds of renters out there, seeking apartments at different prices, in different locations and of different designs. If the market gets too concentrated in a few niches, a shift in demand away from those niches could spell trouble.
“We kind of keep getting forced into this box,” said Yorker. “All the capital is flooding in, but it’s chasing a small subset of opportunities...It’s created this funnel where the amount of sites of viable opportunities get whittled down to this small subset of deals that resemble one another.”