3 reasons Charlotte’s booming apartment market is just fine, and 1 note of caution

It’s the question about Charlotte’s apartment boom that I get most often from readers: “When will the bubble burst?”

That was the title of a forum hosted Thursday by the Greater Charlotte Apartment Association. Jay Parsons, a Dallas-based specialist who tracks apartment data for MPF Research, said that question is being asked in other booming markets throughout the U.S. as well.

“We’re building a lot of apartments across the country, but they remain full,” said Parsons. It’s a cycle – high demand is translating to higher occupancy rates, driving rents higher and spurring more people to develop apartments.

So if you’re waiting for an apartment bubble to burst in Charlotte, don’t hold your breath. Developers and other industry insiders I spoke with are generally optimistic as well, counting on an ongoing influx of millennials and Charlotte’s growing population to fill new units.

Parsons made the case for why Charlotte’s apartment boom isn’t likely to stop anytime soon:

▪ The wave of new construction is building – but it will cool off before too long.

Charlotte ranks fifth nationally in the percentage of new apartment units added to the market (behind Austin, San Antonio, Salt Lake City and Nashville), with 3.3 percent annual growth through the second quarter this year, Parsons said.

“That’s not a crazy number,” he said. “But where it’s going to get crazier is what’s coming.”

Based on upcoming projects, Parsons said that growth rate will increase to 7.6 percent – a supply increase he politely called “aggressive.”

“The next wave is about to hit,” said Parsons. But looking forward, the number of building permits issued for future apartment projects in Charlotte is down almost 31 percent, Parsons said. The reasons for the drop-off: Banks tightening up loan underwriting, difficulty finding prime sites at a good price, a more challenging rezoning process.

The impact won’t be felt immediately, but the permit slowdown means a new wave of supply is going to hit the market over the next several years, then start tapering off to more modest levels in 2018.

▪ The average apartment sits empty for barely more than three weeks in Charlotte.

Despite all the new apartments coming online, they’re not sitting empty. The occupancy rate is 96.1 percent, up from 95 percent a year ago. In some submarkets, the occupancy rate is even higher – 97.2 percent in Huntersville/Cornelius, for example.

“That’s a very high number for Charlotte,” Parsons said. The average vacant apartment is on the market for 24 days in Charlotte, one day less than the national average. A strong local job market is driving the increase, with 2.7 growth rate over the last five years vs. a national rate of 1.8 percent.

That’s why Charlotte added an estimated 17,695 new residents from July 2014 to July 2015. Seen in that light, 5,400 new apartments hitting the market last year doesn’t look so crazy.

“As long as the national economy continues to do well, we’re very bullish Charlotte will be just fine,” Parsons said.

▪ Higher demand means higher rents.

And as long as people keep filling expensive new apartments, rents aren’t going to come down anytime soon.

But as developers complete the next wave of new apartments, Parsons said, some will likely have to offer more concessions such as one-month free rent to lure new tenants.

“The demand should be there, but I think there will be some pricing competition,” said Parsons. That means rent growth could slow down from current annual jumps of 6 percent or 7 percent. Parsons is forecasting a 4 percent average annual increase going forward.

Still, even a more moderate rent growth rate will be appealing to developers and loan underwriters – meaning plenty of people will be interested in building new apartments.

“Four percent is still a very favorable forecast,” said Parsons.

▪ But some areas in Charlotte are seeing way more new apartments than others – and that could be a problem.

A quick drive around certain Charlotte neighborhoods – uptown, South End, Plaza Midwood, Dilworth – makes it apparent that the apartment boom isn’t evenly spread.

The most dramatic increase has been in the uptown/South End submarket, which has seen a 108 percent increase in the number of apartments since 2012. That translates to nearly 9,000 new units, and means that uptown and South End are the fastest-growing submarket in the entire U.S. – yup, the whole nation – out of 1,000 tracked by MPF Research.

When the economy slows – and Parsons reminded the audience that it certainly will at some point – that could leave areas of the city filled with new, similar and expensive apartments in trouble. And the widening difference in rents between so-called “Class A” apartments and older buildings known as “Class B” means it could be harder to fill the luxury units.

The average rent in the Charlotte region now tops $1,000, although the most expensive new apartments rent for significantly more – $2,657 for a two-bedroom unit at 1100 South, on South Boulevard, for example.

Traditionally, Parsons explained, landlords who needed to fill high-end apartments during a slowdown could offer a month or two free rent and entice people to move up from a Class B to a Class A building. “Bing, bang, boom, you’re full again,” he said.

But that was when rents at Class A buildings were 25 to 30 percent higher than Class B buildings. That premium has now widened to about 50 percent, as rents at new, high-end buildings shoot up. And that means that offering small concessions to lure people from older buildings to new buildings is going to be a less effective strategy next time around.

“If there is an issue, that’s going to be a real challenge across the country, including here in the uptown/South End area,” Parsons said. One market where that’s already being felt is Houston, caught in an energy sector crash. There, Parsons said, high-end apartments are having to offer three months free rent to draw tenants, a costly proposition for developers.

“That’s a lot of concessions,” he said.

Ely Portillo: 704-358-5041, @ESPortillo