When local real estate developers look ahead, they see sunshine and big deals for 2016 – but beyond that, shadows loom that could turn into storm clouds.
Signs of the ongoing real estate boom are all around us: new office towers popping up from uptown to Ballantyne, apartments sprouting by the thousands, new subdivisions carved out of vacant land. The 2008 real estate crash and recession seem very distant next to the tower cranes dotting Charlotte’s skyline.
“It’s been hard over the last three years to make very many mistakes,” said Jim Merrifield, a partner at real estate firm MPV Properties, speaking at a forecast hosted by commercial real estate news site Bisnow.
“Most everyone feels good about ’16. I think it’s going to be good for everyone,” said Brian Leary, president of Crescent Communities’ commercial and mixed-use division.
At two real estate forums I went to this week, almost all the attendees I spoke with agreed with Leary. Farther out, though, the unknowns start to multiply. There’s the presidential race, the nastiest in recent memory and fraught with the possibility of a labor market-disrupting border wall and deportation surge. Oil is still slumping and stocks are bouncing around like a pinball. And global economic signs are mixed at best and outright troubling at worst, with China’s growth slowing and other large countries like Brazil and Argentina struggling.
“There are certainly clouds on the horizon about international and national growth,” said Merrifield. “If the rest of the world has a flu, we’re sure to at least get a cold.”
Attendees at the Charlotte Region Commercial Board of Realtors Deal Maker Awards, held Tuesday at Myers Park Country Club, also said business is strong right now. Commercial real estate is selling for record prices, rents are rising and vacancy rates are down in all major sectors.
A survey during the program asked attendees when they think the Charlotte real estate market will peak. The most popular answer was 2017, indicating a slight majority of those in attendance think we have at least another year left before the market declines. The second-most popular answer was 2018 – even more optimistic – and the possibility that we’re already at the top of the market came in third.
What inning are we in?
At Thursday’s forecast, held at a nearly full Fillmore concert venue with hundreds of attendees, the specter of the last crash was a fresh memory, but not one most attendees think we’ll repeat anytime soon.
“It will be some time before we see another crash like we did in ’08,” said Chris Epstein, president of BECO South, which owns Innovation Park in the University City area. He said there’s no fevered over-building going on right now, and that tighter lending and underwriting standards have kept a lid on development.
The local homebuilding hasn’t reached its pre-recession highs, for example. In 2014, there were 3,896 single-family building permits issued in Mecklenburg County along with 5,365 multifamily building permits, almost all apartments. That’s 9,261 total, according to the U.S. Census.
Compare that with 2006. There were 9,287 single-family building permits issued in Mecklenburg County and 4,213 multifamily permits. That’s a total of 13,500 building permits, a full 46 percent higher than where we are now.
Still, developers are well aware that the good times won’t last forever, and the next part of the economic cycle is coming – someday. By historical standards, we are likely far closer to the next recession than the last one.
“We’re almost eight years from our last recession. We’re way into this cycle,” said George Dewey IV, president of Aston Properties, which is a partner in redeveloping the Sedgefield Shopping Center into a major mixed-use project on South Boulevard.
Given where we might be in the cycle, Merrifield said his firm is going to be cautious when evaluating new projects.
“We’re going to finish up the projects we have as quickly as we can and have our house in order,” said Merrifield.
One unknown hanging over the race is the outcome of this year’s presidential race. Republican front-runner Donald Trump, himself a developer, has made building a wall along the U.S.-Mexico border and deporting an estimated 11 million undocumented immigrants centerpieces of his campaign.
The Pew Center estimates that undocumented immigrants make up about 14 percent of the construction workforce, which is already tight because of the increased demands from the surge of building in recent years.
Teague said it’s not uncommon to see construction prices for a prospective development rise 10 to 15 percent between the time a developer puts a piece of land under contract and obtains financing.
“Labor is certainly what is driving the increase,” said Jensie Teague, a principal at Selwyn Property Group.
A mass deportation campaign could drive labor prices higher. And aside from the immigration debate, the general uncertainty and rancor suffusing the election could spook investors.
“November may freak everyone out,” said Leary, whose firm is building hundreds of new apartments and houses throughout Charlotte, as well as an ambitious mixed-use development anchored by a Whole Foods on Stonewall Street uptown. “Who knows what happens in Washington?”
Still, Teague pointed out that even the problems the real estate industry is seeing are largely symptoms of success. Even higher costs for labor, land and materials are a positive indicator, because they show how much investment there is right now in commercial real estate.
“Rising construction costs overall are a good problem to have,” he said. “It’s not a complaint, but more a reality that has to be dealt with.”