Multifamily Boom Comes with Drawbacks
There's no such thing as a free lunch (unless you sneak into a topping out party). At our Charlotte Multifamily Summit at the Omni, we learned rents and occupancies are up, but so are construction costs and competition for good sites.
Newer properties are receiving the lion's share of the boom. For apartments going through lease up since 2007, average rents have spiked 47%, but for properties built in the '90s and early 2000s, the increase in the last six years has been 14%. (Still, those buildings got to watch Charles in Charge in first run. So it evens out.) Since middle-income households tend to occupy older properties, the difference probably reflects the stagnation of middle-income wages since the recession. Over 175 real estate pros got up early and came out to the event, which was moderated by CohnReznick principal Marshall Phillips, a real estate finance expert whose specialties include historic tax credits, affordable housing tax credits, solar/renewable energy tax credits, and New Markets tax credits.
WRH Realty Services regional VP Charlie Henley says that there's a shift toward renting in metro Charlotte. In 2006, according to the Census Bureau's American Community Survey, 34% of the households in the market rented. By 2012, it was 42%. That probably represents a permanent change because of economics and attitudes. It also means a larger pool of rents for owners and managers such as WRH, which came to North Carolina about two years ago, and now manages 2,800 in the state. The panel also said that Charlotte renters and investors are now comfortable with smaller unit sizes and fewer three-bedroom units.
Terwilliger Pappas Multifamily Partners division executive Tom Barker says construction costs have been rising, especially during the first and second quarters of the year. Part of it is the rising cost of labor, while the price of some materials, such as insulation, are also increasing. Those costs aren't necessarily driving the trend toward smaller properties, however--that seems to be happening anyway. "Our studio units have been renting like crazy," he says, noting that the percentage in urban product of one-bedroom and studios is about 70% to 30%. (People will go to great lengths to avoid Breaking Bad spoilers, including living alone.)
Charter Properties partner John Porter agreed that rising construction costs are a challenge--about 15% since last year, in his estimation--though not an insurmountable one for multifamily developers active in greater Charlotte. "You have to stay focused on the process, understand the costs, and be disciplined about our decisions," he explains. Renters still want high-end product, and one way to make that work is to build smaller units. But not everyone wants smaller units: Charter has townhouse units that are renting well, too.
Grubb Properties EVP Todd Williams says some of his company's more recent urban infill developments have been 20% studios, 60% one bedroom, and 20% two bedrooms, without any three-bedroom units. Grubb also looks for value-add assets throughout the Southeast. The company finds properties that need curb-appeal improvements but also have strong traffic counts. Grubb then invests in improving curb appeal and dealing with deferred maintenance. Later, it rehabs individual units as warranted, ideally from cash flow. This approach has been working, he says.
Ginkgo Residential CEO Phil Payne says that his company's approach to "value-add" is better described as deep rehab of derelict properties to make them vital again by creating workforce housing. The challenge with this kind of redevelopment is to produce apartments that households at 80% to 120% of median income in greater Charlotte--around $50k--can pay for. Ginkgo is shooting for $940 to $1,160 per month in total occupancy costs. The demand for workforce housing is very strong, considering the pressures that household income have been under in recent years.