Boom, and a hint of gloom, at commercial real estate forecast

Despite a thick fog construction work continued at 300 South Tryon on Saturday morning, Dec. 12, 2015.
Despite a thick fog construction work continued at 300 South Tryon on Saturday morning, Dec. 12, 2015.

Charlotte’s building boom is obvious, with cranes and workers putting up everything from new office towers to apartment buildings to shopping centers. But the big question Thursday night was how long the booming commercial real estate market will last.

“It blew up not too long ago,” said Rob Verrone, founder of real estate investment company Iron Hound Management. He was speaking in an elegant conference room at the Ritz-Carlton uptown, to hundreds of developers and real estate professionals.

“You could take out the ‘1’ and now it’s 2006,” he said, pointing to a chart that showed prices surging for real estate assets, as they did in the year before the most recent recession began. Asset prices for many classes of commercial real estate are now at all-time highs.

Other panelists at the annual commercial real estate forecast sponsored by accounting firm GreerWalker and law firm Katten Muchin Rosenman were more optimistic. After all, a record number of apartments are under construction in Charlotte, speculative office towers are being built and demographic experts expect the city’s strong growth to continue, with more new residents and jobs predicted to fuel the boom.

“My new favorite oxymoron when I talk about markets now is as we go into 2016, we’re going with a cautiously bullish perspective,” said Sean Coghlan, director of investor research at brokerage firm JLL. He said macroeconomic indicators, such as job growth, are still strong nationwide. Regional indicators, such as a 4.4 percent year-over-year increase in office rents across Sun Belt states, are also a positive sign for the Charlotte region.

“We’re starting to see the Sun Belt momentum really pick up strength,” said Coghlan. He said big institutional investors and private equity funds are allocating more of their money to real estate as the global stock market gets more volatile. That means there are ready sources of money to buy and develop real estate.

“This is an increased amount of capital that’s looking in the market for real estate,” said Coghlan.

One thing that’s hard to miss in Charlotte is the massive apartment boom. A record 12,300 units are under construction, with more than 13,500 planned after that. Coghlan said apartments are rated as a “peaking market,” but demographic factors such as the surge of millennial renters will help power further growth. He compared the apartment market to the Energizer bunny.

“We keep thinking it’s going to stop and we keep seeing very positive momentum,” said Coghlan.

Panel moderator Frank Arado, a partner in Katten’s real estate practice, remembered moving to Charlotte a decade ago and getting a map from the Charlotte Chamber that showed all of the new condo developments under construction. Many of them never got built, or struggled to sell units and were converted to apartments during the recession.

“It feels like 2006 all over again, except the apartment market has replaced those condos,” said Arado. “There’s a lot of people talking about this being the end of that market.”

Chris Thomas, a retail development partner at Childress Klein, said demographic moves such as a shift towards more urban living and lower rates of homeownership, are powering the apartment boom.

“I think one of the big things we have going for us that we didn’t have in 2005 is the socioeconomic changes,” said Thomas.

Still, one thing is certain: The good times can’t continue forever. With interest rates rising, even slightly, Verrone predicted a squeeze is coming.

“Real estate is a leveraged asset, and everyone who lends money on real estate is under pressure now,” he said. “Something’s going to give. I’m not smart enough to know whether it’s going to happen next week, two months or two years.”

Ely Portillo: 704-358-5041, @ESPortillo