Observers have been wondering for many months if the roaring Charlotte multifamily development market would cool down, but its tenacity exceeded expectations. The Charlotte market is slowing, following national trends, but a favorable demographic shift and moderate rents keep Charlotte an attractive city for investment.
Charlotte Apartments Remain Accessible
One of the primary reasons for the longevity of the Charlotte bull market is that it has remained affordable. In June 2017, the average rent there was $1,094, up 2.8% year-on-year, compared with a national average of $1,350. The majority of the new apartments coming onto the Charlotte market are in the luxury segment. This growth has been concentrated in upscale and artsy urban areas, such as South End, Dilworth and Uptown.
The Charlotte metropolitan area had added 33,500 jobs in the year leading up to June 2017, an increase of 2.9%, compared to 2.0% nationwide. Job growth was greatest in the Professional and Business Services and Government categories (up 7.2% and 4.6%, respectively). The Educational and Health Services and Financial Activities categories increased 2.7% and 1.7%, respectively, in that period.
Charlotte Multifamily Market Is Following National Trends
In spite of its overall stability, Charlotte is not opposing national trends. Rather, the positive demographics are counterbalancing them. With so much high-end inventory being delivered, vacancy rates and rent deceleration in Class A are higher than in Classes B and C. That situation will likely improve soon, since apartment construction peaked in Charlotte in 2016, followed by a 31% reduction in permitting for apartment projects by mid-2016. Therefore, not only does 2018 promise a tighter market all around, but also, as population growth is expected to continue, vacancies may go down and prices should rise.
Also mirroring national patterns, apartment construction in Charlotte is shifting from the urban core to the suburbs. While the center of activity remains the high-income areas of the urban hub, development in the city’s suburbs is gaining momentum fast, especially those to the south of the city. In December 2017, there were more than 1,500 apartments under construction in the southern suburbs, compared with just over 2,600 in the South End-Dilworth-SouthPark area. More suburban multifamily construction is expected, however, and it will be spread throughout the Charlotte area.
Much of the new construction in Charlotte has required rezoning by the city council. Rezoning is a common occurrence in Charlotte, but the process isn’t always simple. In fact, a more challenging rezoning process was cited as one of the reasons for the dip in apartment construction permitting in 2016. A new set of zoning ordinances should be approved by early 2019.
Despite the slower pace, development marches on in Charlotte. The Charlotte market is in transition, leading to seemingly contradictory tendencies. As deliveries slump from the construction starts that peaked in 2016, we see a new wave of suburban construction forming. The city’s population growth may increase competition on the market during the recovery period before those suburban units enter the market. This will be a positive factor for investors. The steadily increasing number of white-collar workers in the city should make for a healthy Class A market.
CWS Capital Partners co-owns with investors and manages five properties in Charlotte.
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