Development

View from the top of the real estate market: Exciting or scary?

The Ascent apartment tower is under construction at 3rd and Poplar streets in uptown Charlotte.
The Ascent apartment tower is under construction at 3rd and Poplar streets in uptown Charlotte. mhames@charlotteobserver.com

The top of a real estate boom market can be an exciting place, filled with giddy deals and record-setting construction. But somewhere beyond the top lurks the inevitable fall, like the first hill of a roller coaster.

That was the underlying tension at the Urban Land Institute Charlotte’s annual real estate market forecast this week. In a plush event room at Myers Park Country Club, a panel of local real estate experts agreed this was one of the best markets in generations.

Apartment construction is at a record high. The industrial market is strong. Office towers are rising again. And the Urban Land Institute ranked Charlotte the third most attractive market to invest in nationwide for 2016.

“We were thinking we should re-title the panel ‘Charlotte at the top: Exciting or frightening?’” said moderator Mike Ortlip, of Grandbridge Real Estate Capital.

No one knows when the next recession will creep up or when an unforeseen, “black swan” event such as a major terrorist attack will throw the market into chaos. But for next year at least, the forecast from those in the industry is decidedly rosy.

That doesn’t mean there aren’t challenges looming, however. Deals and land are getting harder to find, construction costs are rising and lenders are scrutinizing potential deals closely. Here are four insights from panelists about what to watch for in Charlotte real estate next year:

1. Office construction gathering steam, but won’t overheat. The current boom has spread beyond apartments. Office towers are under construction in uptown, midtown, SouthPark and Ballantyne, following years of little new building. Johno Harris, president of Lincoln Harris, said an influx of money from big out-of-town investors and need for more space is driving the construction. Lincoln Harris is building the Capitol Towers office project in SouthPark.

“Capital is driving the office market today. We went through a period of time where every large investor was in New York, San Francisco, Washington, Boston,” he said. Now, investors are turning to secondary markets such as Charlotte.

“Those large institutions came out of those markets and went into secondary markets, looking for yields,” said Harris. Charlotte’s overall office vacancy rate in the second quarter was 13.5 percent, down from 14.5 percent the same quarter a year ago, and Class A office space was even tighter, at 12.6 percent vacant.

But Harris said development proposals are facing more scrutiny from investors and tight underwriting standards. That means deals are taking longer to do, but Harris said the scrutiny will act to cap the market before it gets too frothy.

“I don’t think we’ll overbuild,” said Harris. He said rising costs for construction materials and land will keep the market from getting overheated. “There needs to be a realization of headwinds in office. Costs have gone up. It’s harder to get the deal done.”

2. E-commerce is bringing more warehouses. You’re probably shopping for holiday gifts online – maybe even while reading this piece. Sherri Chaffin, of Trinity Capital Advisors, said changing consumer behavior is helping drive the market for warehouse space and distribution centers. As people continue to buy more online, businesses need more ways to ship goods to customers.

E-commerce giant Amazon opened a Concord distribution center last year that employs about 360 workers. Charlotte-based developer Crescent Communities broke ground this summer on a new industrial building at Interstate 85 and Sam Wilson Road called AirPark West, and EastGroup is proposing a major new industrial park in Steele Creek.

“Industrial is feeling that,” Chaffin said of e-commerce. “I don’t think that’s going to change.”

Chaffin recalled making calls to investors some years ago, trying to attract them to industrial real estate deals in Charlotte.

“Now, the phone is ringing inbound. People are calling us and saying, ‘Where can I invest?’” she said.

3. Projects are taking longer. If it seems like buildings you pass under construction are taking a really long time to finish, that might not be your imagination. Rising material costs, scarce land and a worker shortage are conspiring to make projects tougher.

Steve McClure of Spectrum Residential said this apartment market is the best he can recall, with millennials and baby boomers both wanting to move to urban areas, driving up rents and powering new growth. But he said that strong market has led to challenges of its own.

Construction materials cost more as demand rises. It’s harder to find qualified workers, with so many builders clamoring for their services. And many of the best sites – close-in, attractive land – are already under development.

“A lot of the great sites have been gobbled up and are getting developed,” said McClure. Finding a good site to build on can require rezoning land, a costly process that takes months. Spectrum had to do that for its plan to tear down and rebuild the Abbey Place apartments off Park Road.

A tight labor market means construction schedules are slipping, McClure said, and delays cost money.

“Every project that set their schedule two years ago isn’t hitting their schedule,” said McClure.

4. Watch for more development around public-sector projects. Although all of the developers on the ULI panel were from the private sector, it was hard to miss how big of an impact public sector spending has on their thinking.

Consider the Lynx Blue Line light rail extension, the streetcar line, new greenways and the Cross Charlotte Trail, a 26-mile path planned from Pineville to Cabarrus County. All of these present attractive opportunities to build nearby, developers said. Such projects – funded with tens of millions of tax dollars – are often controversial, but developers like them because they put infrastructure in place that attracts pedestrians and commuters.

Developers also tend to be fans of tax incentives for companies relocating to the area – another political hot-button. Such incentives help fill new office buildings with tenants. And there’s a sense that if Charlotte and North Carolina are stingy with incentives, other cities and states will snap up interested companies.

Lincoln Harris signed Albemarle Corp. as a tenant at Capitol Towers earlier this month – a Louisiana-based chemical company lured to relocate to Charlotte with $2 million worth of state incentives.

“That’s just the way of the world today,” Harris said. “You have to compete like that.”

Ely Portillo: 704-358-5041, @ESPortillo

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