Market Overview: Charlotte, NC 2Q14

CHARLOTTE, NC
MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
RED Capital Group | 2Q14 | September 2014
2Q14 PAYROLL TRENDS AND FORECAST
PAYROLL JOB SUMMARY
Total Payrolls
894.7m
Annual Change
21.9m (2.5%)
2014 Forecast
23.5m
2015 Forecast
27.6m
2016 Forecast
17.4m
2017 Forecast
17.3m
Unemployment (NSA)
6.8% (July)
OCCUPANCY RATE SUMMARY
Occupancy Rate (Reis)
95.3%
RED 50 Rank
33rd
Annual Chg. (Reis)
+0.1%
RCR YE14 Forecast
94.1%
RCR YE15 Forecast
95.2%
RCR YE16 Forecast
94.5%
RCR YE17 Forecast
94.4%
Mean Rent (Reis)
$805
Annual Change
2.8%
RED 50 Rent Change Rank
31st
RCR YE14 Forecast
3.1%
RCR YE15 Forecast
3.6%
RCR YE16 Forecast
4.0%
RCR YE17 Forecast
3.4%
TRADE & RETURN SUMMARY
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
Seasonally-adjusted data, by contrast, paint a less robust picture.
This series displays stop-and-start job creation with five of the
year’s first eight months generating sequential month job losses.
Net gains for 2H14 totaled only 4,800 jobs, down from 7,300 in the
same period of 2013, while August recorded a -4,900-job retreat.
RCR’s Queen City payroll model employs national payroll, GDP;
metro personal income and lagged payroll growth rates; and 10year Treasury rates to specify a 96.5% A-R2 forecasting model.
The equation forecasts faster job growth in 2H14 and 2015, followed by slower, sub-2% advances in 2016-18. Slower growth in
the forecast out-years is attributable to our expectation that the
U.S. recovery will moderate meaningfully in its 7th and 8th years.
2Q14 ABSORPTION AND OCCUPANCY RATE TRENDS
Tenant demand rebounded from 1Q14’s soft 164-unit absorption
performance, a four-year low, to a net occupied stock gain of 905
units, easily bettering the 830-unit trailing 15-year second quarter
average. But supply of 1,343 units significantly over-balanced
demand, a refrain that likely will be repeated over the next 12
months or so, causing occupancy to decline 30 basis points sequentially to 95.3%, lowest metric recorded since 3Q13.
Axiometrics surveys of stabilized larger properties found a moderately lower average occupancy rate of 94.8%, essentially unchanged y-o-y on a same-store basis. Class-A properties maintained the highest occupancy rate at 95.5% (up 30 bps y-o-y),
followed by class-B (94.8%) and class-C (94.4%) buildings. Supply
pressures began to be manifested in the Downtown and Northwest
submarkets, where average complex occupancy rates plunged 550
and 1090 bps y-o-y, respectively, each into the mid-80s. Conversely, Carmel and Albermarle Corridor assets were high-side outliers.
RCR finds that 92.8% of historical occupied stock growth can be
explained by a simple model using job, supply and home price
growth rates, plus two lags of the dependent variable. This model
projects that renters will absorb nearly 3,500 units in 2H14, and
4,700 units next year. But hefty demand won’t prevent occupancy
from plummeting to the mid-94% area in 2Q15 due to heavy supply.
2Q14 EFFECTIVE RENT TRENDS
EFFECTIVE RENT SUMMARY
$5mm+ Sales
According to not-seasonally adjusted BLS data, the Charlotte labor
market maintained a brisk pace of job creation during 2Q14, adding
new positions at a 21,900-job, 2.5% year-on-year rate, representing the sixth consecutive quarter of 2.4% to 2.6% annual growth.
Consumer-driven sectors were in the forefront as construction,
retail trade and leisure service establishments added workers at
a combined 7,400-job, 3.1% rate, up from 1Q14’s 6,200-job, 2.7%
performance. Conversely, skilled service trends were mixed. The
business services sector remained in the pole position, growing at
an 8,800-job, 6.1% rate; but education and health care headcount
growth advanced at a sluggish 1.1% rate and payrolls in the critical
financial service sector actually declined at a –100-job y-o-y rate,
after a 1,500-job advance during the first quarter.
8
$155mm
7.1%
$88,549
Expected Total Return
7.1%
RED 46 ETR Rank
16th
Risk-adjusted Index
3.10.
RED 46 RAI Rank
36th
Reis report that average Charlotte effective rents surged forward
$7 sequentially (0.8%) to $805, bouncing back after 1Q14’s fouryear low $1 (0.1%) advance. Year-on-year comparisons also improved, rising from 1Q’s 2.7% gain to 2.8%, Axiometrics surveys
were consistent, although characteristically more volatile. This
service found that same-store stabilized properties enjoyed 3.2%
and 3.5% sequential quarter and y-o-y increases, representing the
strongest gains in 2 years for the former and 1 year for the latter.
Continued strength in the class-A sector was principally responsible for the springtime recovery. Class rents surged $55 (4.5%) in
sequential quarters, topping $25 (3.0%) and $10 (1.6%) increases in
classes B and C, respectively. Class-C buildings maintained the y-oy lead, however, rising 4.6% to $642, compared to 3.3% and 2.3%
gains in classes B and A. Carmel and Albermarle properties posted
steady gains and Downtown assets bounced back after some weak
innings, while Fairview and Harris Blvd. rents lagged the average.
Charlotte rents are among the more difficult to model: volatile and
path dependent. But the best model — using income, home price and
vacancy variables — produces an optimistic forecast. The 95.9% AR2 equation generates consistent 3%+ rent growth through 2018.
The resulting 3.5% compound average growth rate ranks 14th
among the R46, trailing only barrier protected and Texas markets.
2Q14 PROPERTY MARKETS AND TOTAL RETURNS
Adjusting for transactions associated with corporate mergers,
sales velocity decelerated for the second consecutive quarter,
declining from 20 transaction valued at more than $5 million during
robust 4Q13 trade to 12 transactions during the winter quarter and
8 during the spring. Proceeds totaled about $155mm during 2Q,
down from $207mm and $516mm during the previous and penultimate quarters, respectively. The average price of traded units was
steady at $88,549, consistent with IQ’s $88,408 metric, although
moderately lower than 4Q13’s $96,199 figure.
Buyers consisted largely of regional investment funds and owner/
managers. Traded assets ran the gamut from early-1970s era
repositioning plays to recent construction suburban garden pro-
jects. Cap rates appeared to be little changed from the first quarter as class-B properties traded to initial yields in the mid– to high5% range, while class-C assets were priced in the 6%-7.5% area..
RCR elected to retain the 5.5% cap rate assumption employed in
the 1Q14 simulation. Using this going-in yield; model derived occupancy, rent and expense forecasts; and a terminal cap rate of
6.36%, we estimate that a Charlotte investor would expect to
generate a 7.1% unlevered 5-year IRR, ranked 16 th among the R46.
This compares to a 6.9% estimate in our last report, the increase
being largely attributable to a more optimistic modeled outcome
for rent growth. But greater forecast uncertainty due to higher
model error still hinders risk-adjusted returns, which rank #36.
MARKET OVERVIEW | 2Q14 | CHARLOTTE, NORTH CAROLINA
Charlotte Occupancy Rate Trends
Average Occupancy
Source: Reis History, RCR Forecasts
97%
97%
RED 46 AVERAGE
96%
CHARLOTTE (REIS/RCR)
96%
95%
95%
94%
94%
93%
93%
92%
92%
91%
91%
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Charlotte Absorption and Supply Trends
Units (T12 Months)
Source: Reis History, RCR Forecasts
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
4Q10
ABSORPTIONS
4Q11
COMPLETIONS
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Charlotte Cap Rate Trends
Average Cap Rate
Source: eFannie.com, RCR Calculations
SOUT H A T LA NT IC R EGION
7.2%
7.2%
6.6%
6.5%
6.7%
6.2%
6.3%
6.1%
6.4%
5.4%
7.4%
CHARLOTTE
7.2%
7.1%
7.1%
6.1%
5.8%
5.7%
5.7%
5.2%
4.7%
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14
NOTABLE TRANSACTIONS
Property Name (Submarket)
Property Class/Type
(Constr.)
Approx. Date of
Transaction
Total Price /
<Appr. Value>
(in millions)
Price /
<Appr. Value>
per unit
Estimated
<Underwritten>
Cap Rate
One Norman Square (Cornelius)
B / GLR (1992)
24-Jun-2014
$20.1
$104,427
5.9%
Arbor Village (Fairview North)
B / GLR (1963)
26-June-2014
$17.5
$79,659
6.0%
C+ / GLR (1986)
10-Jul-2014
$12.2 (Allocated)
$57,010
7.4%
B / GLR (1999)
16-Jul-2014
$33.8
$117,257
5.2%
Colonial Village Charleston Pl (East Charlotte)
Thornberry (Harris Blvd / Mallard Creek)
RED Capital Research | September 2014
MARKET OVERVIEW | 2Q14 | CHARLOTTE, NORTH CAROLINA
Charlotte Effective Rent Trends
Sources: Reis, Inc., Axiometrics and RCR Forecast
YoY Rent Trend
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
2.8%
4Q09
4Q10
4Q11
4Q12
4.1%
3.4%
RED 46 AVERAGE
4.1%
3.5%
CLT (REIS/RCR)
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
6%
5%
3.3% 4%
3%
2%
1%
0%
-1%
-2%
-3%
4Q18f
Charlotte Home Price Trends
Source: FHFA Home Price Indices and RCR Forecasts
YoY Growth Trend
8%
5.9%
5.2%
8%
4.8%
6%
6%
3.3%
3.4%
4%
2.8% 4%
2%
2%
0%
0%
-2%
-2%
-4%
U.S.A.
CLT FHFA HPI
CLT CASE-SHILLER HPI
-6%
-4%
-6%
2011
2012
2013
2014
2015
2016
2017
2018
Charlotte Payroll Employment Trends
Source: BLS, BEA Data, RCR Forecasts
YoY Growth Trend
3.5%
US GDP GROWTH
3.5%
3.0%
US.JOB GROWTH
3.0%
2.5%
CHARLOTTE JOB GROWTH
2.5%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0%
0.5%
0.5%
0.0%
0.0%
2011
2012
2013
2014
2015
2016
2017
2018
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been
independently verified or accepted by RED Capital Group. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information
gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED Capital Research | September 2014
MARKET OVERVIEW | 2Q14 | CHARLOTTE, NORTH CAROLINA
SUBMARKET TRENDS
Effective Rent
Submarket
Physical Vacancy
2Q13
2Q14
Change
2Q13
2Q14
Carmel
$896
$904
0.9%
2.7%
2.2%
-50 bps
Concord / North Concord
$691
$724
4.8%
5.8%
5.9%
10 bps
$1,238
$1,276
3.1%
11.3%
13.5%
220 bps
East / Albemarle Corridor
$647
$656
1.4%
3.9%
3.1%
-80 bps
East Charlotte / Central Ave
$715
$743
3.9%
3.8%
3.4%
-40 bps
Fairview North
$849
$884
4.2%
3.0%
5.0%
200 bps
Gaston County
$666
$677
1.7%
5.5%
4.8%
-70 bps
Harris Blvd
$822
$844
2.7%
5.1%
4.9%
-20 bps
North Tryon Street
$597
$615
3.1%
5.9%
4.9%
-100 bps
North Pineville
$758
$762
0.6%
3.4%
5.0%
160 bps
Northwest Charlotte
$915
$938
2.4%
6.7%
5.0%
-170 bps
West Charlotte / Airport
$853
$911
6.8%
7.4%
7.2%
-20 bps
$783
$805
2.8%
4.8%
4.7%
-10 bps
Downtown
Metro
Change
FOR MORE INFORMATION ABOUT RED’S RESEARCH CAPABILITIES CONTACT:
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James P. Hensley
Director of Research
[email protected]
+1.614.857.1416 oﬃce
+1.800.837.5100 toll free
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Head of Multifamily Originations
[email protected]
+1.770.753.6472 oﬃce
+1.800.837.5100 toll free
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