Contact Us

Investors Flock From D.C. To The Carolinas As Markets Become More Competitive

Jim Abdo has been developing in D.C. for over 20 years, but the developer who helped bring Whole Foods to Logan Circle is looking to expand beyond the District for the first time, and his sights are set on North Carolina. 

The Charlotte, N.C., skyline

Abdo wants to bring his Hotel Hive concept to the Tar Heel state, and he said he is actively pursuing deals in the Charlotte and Raleigh markets. While he has yet to finalize a development deal, Abdo continues to push to expand to the market because of the attractive fundamentals he sees in North Carolina. 

"We like the demographics and job growth. We see it as a strong, emerging, second-tier city," Abdo said of Charlotte. "We think it's a very good fit for our brand, so it's a market that we like and want to get into."

Abdo is the latest in a string of D.C.-based developers and investors to expand to the Carolinas who see strong growth in the area that can give them greater returns than they can achieve in the District. But the secret of the booming Carolinas is out.

Hoffman & Associates, the developer behind megaproject The Wharf, announced last month it is opening its first office outside D.C. in Raleigh, where it is working on a $250M mixed-use project and looking for more. 

Akridge three years ago entered the North Carolina market, its first outside of the D.C. area. It has bought two buildings and is now partnering on a 240K SF office project in Durham. 

Blackfin, the Arlington-based firm Andy Buchanan and Doug Root launched in 2016, has acquired five North Carolina apartment properties totaling over 1,800 units. 

Kettler entered the Carolina markets in 2015, its first expansion outside the D.C. region, and the firm has now invested roughly a half-billion dollars in 10 properties across North Carolina and South Carolina. 

FCP expanded to North Carolina in 2011 and opened an office in Raleigh, its first outside of the D.C. area. It has now acquired 41 properties in the Carolinas.

"If you go to Reagan every morning you’ll usually see somebody [in real estate] jumping on a plane to Raleigh or Charlotte on any given day," Buchanan said. 

Why The Carolinas?

A rendering of Hoffman & Associates' Seaboard Station development in Raleigh

D.C.-based developers cited a host of reasons for expanding down to the Carolinas, but the most common answer was the combination of the region's proximity to D.C. and its job growth and population increases. 

The Raleigh Metro area increased its population by 20.5% between 2010 and 2018, the Charlotte Metro area increased by 15.9%, and the Durham-Chapel Hill Metro area increased by 13.6%, according to the U.S. Census Bureau.

These growth trajectories place each of the the North Carolina Metro areas among the 50 fastest-growing in the nation. The D.C. Metro area's population grew by less than 11% over that same time period.

"Population is moving into the Raleigh-Durham area, the traffic has gotten worse and urban living is becoming much more fashionable," Hoffman & Associates CEO Monty Hoffman said. "There is opportunity for the right developments that serve the market. We like the fundamentals long-term."

The presence of several major universities has created a highly educated population in North Carolina that looks similar to the D.C. region, Hoffman said, and technology companies have increasingly grown their presence in the market. 

When planning an expansion, Akridge CEO Chip Akridge said he considered Nashville, Austin and Raleigh-Durham. He ultimately decided on the latter because of the area's job growth. Additionally, it is not struggling with the commercial vacancy challenges he sees in D.C. 

"The biggest difference and the biggest draw right now is their vacancy rate is down near zero," Akridge said of Raleigh-Durham. "Space continues to lease up in residential and commercial ... there is a whole lot less risk down there."

These dynamics have allowed apartment owners to achieve greater rent increases in the Carolinas than they could in D.C. 

Buchanan said it projects 3% rent increases when underwriting deals, and while D.C. has sometimes fallen short of that in recent years, the Carolina markets have had no problem surpassing that mark. 

"On each of our projects we've been surprised on the upside from a rent growth perspective," Buchanan said. "It has been 3% to 6% rent growth in all of those markets for the last seven years, which has really been the driver behind why most people are finding success down there."

FCP Vice President Alex Cathcart, who leads the firm's eight-year-old Raleigh office, said it has succeeded in achieving rent growth at its properties. FCP owns multifamily and office properties in the Charlotte, Raleigh, Durham and Charleston, South Carolina, markets. 

"The markets continue to see growth and create upward pressure on rents," Cathcart said. 

Jim Abdo asking a question at Bisnow's Charlotte Construction & Development event in September

For those looking to amass large portfolios through acquisitions, the Carolina markets have a strong pace of deal flow, Buchanan said. This liquidity has allowed Blackfin to scoop up over 1,800 units in three years. 

The markets also have attractive qualities for those looking to develop ground-up projects. Compared to D.C., where projects have been delayed by lengthy entitlement and permitting processes, court appeals and Tenant Opportunity To Purchase Act claims, Abdo said building in the North Carolina markets appears relatively easy. 

"There is a high level of certainty," Abdo said. "These are issues that continue to plague us here in the District, so it has been very refreshing to hear from people in regulatory positions [in North Carolina] that could guarantee a process that was very much in timelines we could live with."

While every firm analyzes potential expansion markets using economic considerations, personal and logistical factors can also play a role. 

Having an existing network in a city can help a company with its knowledge of the market and with developing business relationships. For example, Blackfin co-founder Doug Root went to high school in South Carolina, attended Duke University in Durham, then lived in Charlotte when he competed as a professional tennis player. 

"I still have relationships that I can kick up in those markets to be able to get smart on supply, because we have former friends and colleagues that are developers down there," Root said. "We can leverage those relationships to understand the market better versus plowing into markets we don't know."

The proximity of the Carolinas has also given it a leg up for D.C. developers looking to expand. 

When Kettler was determining where to expand beyond D.C., it only considered markets with a short enough plane ride that it could make a convenient day trip to and from the city. The company has opened an office in Raleigh with a handful of professionals, but its D.C.-based executives also want to be able to travel there regularly. 

"We wanted to have ability to be in those markets frequently so we can cover them and really know the ins and outs and be able to recognize trends," Kettler Executive Vice President Luke Davis said. 

Kettler and FCP, two of the early movers of the D.C. investor push to the Carolinas, have both concentrated their South Carolina investments around the Charleston market. Several major companies, including Boeing, Volvo, Mercedes and Chrysler, have opened manufacturing plants in the North Charleston area, a trend Davis sees as a major demand driver for apartments. 

"North Charleston, from a workforce perspective, has a great trajectory," Davis said.

From Under-The-Radar To Overcrowded 

A rendering of Akridge's 555 Magnum Street development in Durham

The problem with discovering a growing market where developers can raise rents and achieve high returns on their investments is that, eventually, everyone else finds it too. That has been the case in the Carolinas. 

"A lot of investors have taken note," Davis said. "They're coming from all over the country. There has definitely been an uptick of people from D.C. turning their sights south."

This surge of investors has increased competition and made it more difficult to find the type of high-yield deals that were available when Kettler first entered the market in 2015, Davis said. 

"Back in 2014 and 2015, and even into 2017, the value-add yields were very attractive relative to what we were seeing in D.C.," Davis said. "Since that time, there has been a lot of competition that has entered these markets and pushed the yields to be right on par with major metros."

Cathcart said there has been a significant increase in the number of investors entering the Carolinas and bidding on deals since FCP entered the region in 2011. He also said this competition has reduced the yields investors can achieve. 

"Whatever spread there was perceived to have been in prior cycles has narrowed quite a lot," Cathcart said. "I also think that there is, and will continue to be, an [increasing] amount of capital flowing into these markets, so they behave much more like institutional markets."

A primary reason Abdo has yet to successfully close a deal in North Carolina markets has been the competition, he said. The investor interest has led owners in the city to realize the value their properties hold as development sites and increase their sale price expectations, Abdo said.

Combined with the continued rise in construction costs, he said this has made deals difficult to pencil — a common refrain for deals in D.C.

"In these markets, you have owners of land that have very high expectations in order to sell," Abdo said. "They’re looking at numbers that may not be reflective of today, but looking at tomorrow and feeling that they are entitled to these higher numbers. It is a challenge and frustration for anyone trying to expand their footprint."