ApartmentResearch

M A R K E T
Charlotte Metro Area

R E P O R T
Second Quarter 2012

Broad-Based Apartment Recovery Shaping Up in Charlotte

The Charlotte apartment market will continue to improve this year as demand for all asset classes gains momentum. As foreclosure activity hampers the single-family housing market in Charlotte, where over 7 percent of the homeowners with mortgages are delinquent, the rental pool will expand further in the coming months. Residents who default on their homes will relocate to newer apartments in prime areas, including the Southern Corridor, Lake Norman and Ballantyne. Additionally, the lack of demand in the for-sale market will prompt developers to reposition condominium towers around Center City into Class A rental units. Operators will market the properties to young professionals who choose to live in a resort-style, urban community with modern amenities and short commutes to work and entertainment. As a result, vacancy in the Class A sector will fall below the benchmark rate of 5 percent this year, which will drive up rents to pre-recession levels. As rent increases for upper-tier units outpace income growth, lower-income residents will be priced out of the sector and lease Class B/C units during the second half of 2012. Muted construction and rm demand will help reduce vacancy in the lower-tier arena to a 15-year low. Transaction velocity will remain steady this year as low price points and attractive yields lure institutional investors to Charlotte. These well-capitalized buyers will target performing Class A properties in sought-after areas, where the median price per unit for institutional-grade products is half that of comparable units in supply constrained coastal markets. Assets with occupancy rates above 90 percent will qualify for non-recourse debt from Fannie Mae and Freddie Mac, which are oering loan-to-value ratios of 80 percent. Investors looking to boost cash-on-cash returns will capitalize on favorable interest rate spreads and use leverage to acquire properties at initial yields around 6 percent. Meanwhile, investors willing to take on more risk will purchase well-occupied Class B complexes located outside the core. Some buyers will make minor improvements to enhance net operating income and hold for seven to 10 years. First-year returns for stabilized mid-tier properties average in the mid-7 to 8 percent range.

2012 Annual Apartment Forecast

0.9% increase in total employment

Employment: Businesses will pick up hiring eorts in 2012, expanding sta counts by 0.9 percent, or 7,500 positions. In 2011, 7,800 jobs were created.

390 units will be completed

Construction: After builders completed 825 apartments in 2011, construction activity will slow this year, with just 390 units expected to come online. The new additions will expand marketwide inventory by 0.4 percent.

100 basis point decrease in vacancy

Vacancy: Modest job growth and elevated foreclosure activity in the single-family market will drive demand for apartments. As such, vacancy will fall 100 basis points this year to 5.0 percent, after plunging 240 basis points in 2011 as tenants absorbed a staggering 3,150 units.

3.1% increase in asking rents

Rents: Rental rates will reach new highs in 2012 as limited new supply mitigates competition and healthy leasing activity reduces available units. Asking rents will rise 3.1 percent to $806 per month, while eective rents spike 3.4 percent to $731 per month.

Economy

Employment Trends
Metro United States

Charlotte employers added an estimated 5,500 workers to the metro during the rst quarter of 2012, while over the past year, payrolls grew by 1.3 percent, or 11,000 jobs. Solid gains of 6,500 new hires in the education and health services and trade, transportation and utilities sectors oset the loss of 2,900 positions in the leisure and hospitality industry in the past year. AT&T Inc. recently announced plans to build a $200 million data center in Kings Mountain business park. Construction on the 1-million-square-foot facility will begin in the coming months, creating 1,000 temporary positions and 100 permanent jobs once complete in 2014. Outlook: Businesses will pick up hiring eorts in 2012, expanding sta counts by 0.9 percent, or 7,500 positions. In 2011, 7,800 jobs were created.

8%
Year-Over-Year Change

4% 0%

-4% -8%

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10

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12*

Housing and Demographics

Home Price Trends

Metro Median Home Price (Y-O-Y Change) United States

Single-family permitting issuance spiked by over 35 percent in the past year as builders pulled 5,200 units. Conversely, activity in the multifamily sector contracted by 13 percent to 1,075 permits in the same stretch. The median price for a single-family residence slid 5 percent in the last 12 months to $201,900 as roughly 30 percent of the sales involved distressed properties. The median household income grew 1.1 percent to $52,300 per year, which is 9 percent higher than minimum qualifying income for a median-priced home. A resurgence in demand for apartments applied a sharp increase to rental rates, while low interest rates reduced the monthly debt service on home loans. As such, the gap between Class A asking rents and the typical mortgage obligation on a median-priced home is $176 per month. Outlook: Approximately 16 percent of the homes with a mortgage in the Charlotte area had negative equity in 2011, which further reduces consumer condence in the housing market. As the economy faces uncertainty, potential homebuyers will be reluctant to purchase in the near term and remain in apartments.

14% 7% 0%

-7% -14%

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09

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Construction
Construction Trends
Completions Multifamily Permits

6.0
Number of Units (thousands)

4.5 3.0 1.5 0.0

The Ashley Court at Pinnacle Point complex delivered 276 units to the Harris Boulevard/Mallard Creek Church Road submarket late last year. Additionally, the 237-unit Metro 808 building came online in the East Charlotte Central Avenue submarket in August of 2011. The new supply boosted metrowide inventory by 0.5 percent. Nearly 1,500 apartments are under construction in the metro, with nishing dates stretching well into 2013. Once all the projects are complete, marketwide stock will increase by 1.5 percent. The planning pipeline is over owing with more than 11,000 units proposed for Charlotte. Strong population growth and above-average incomes in the Harris Boulevard/Mallard Creek Church Road submarket continue to attract developers to the area, where over 1,500 units are planned. Outlook: After builders completed 825 apartments in 2011, just 390 units are expected to come online this year, expanding inventory by 0.4 percent.
Marcus & Millichap

08

09

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12*

* Forecast

page 2

Apartment Research Report

Vacancy

Despite weak job growth, leasing activity remained relatively rm in the rst quarter as tenants absorbed nearly 300 units, while muted construction supported a 50-basis-point decrease in vacancy to 5.5 percent. Year over year, vacancy tumbled 230 basis points. As residents occupied more than 1,500 Class A units in the past year, vacancy in the upper-tier arena dropped 190 basis points to 4.7 percent, the lowest level in 15 years. In the previous 12 months, vacancy tumbled 350 basis points. Rising rents for luxury units and anemic income growth is prompting residents to cut back on living expenses. The typical Class B/C renters that moved up during the recession are now being pushed down the quality scale as rents climb. As such, vacancy in the lower-tier sector plunged 270 basis points last year to 6.4 percent. Outlook: As occupancy levels trend near peak levels, demand growth will slow modestly this year. Vacancy will fall 100 basis points by year end to 5.0 percent.

Vacancy Rate Trends

Metro United States

12.00% 9.75%
Vacancy Rate

7.50% 5.25% 3.00%

08

09

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Rents

Asking rents will rise in step with occupancy gains, with showing a 2.3 percent increase in the year ending in the rst quarter to $790 per month. Meanwhile, eective rents increased 2.9 percent in the same stretch to $717 per month.
8%
Year-Over-Year Change

Rent Trends
Asking Rent Effective Rent

Through the rst quarter, Class A asking rents advanced 1.8 percent from a year ago to a three-year high of $910 per month. Landlords of Class B/C units recaptured pricing power as well, raising rents 3.2 percent to $650 per month, though, rates remain 3.4 percent below pre-recession levels. As vacancy tightened and rents climbed, owners slightly pulled back on leasing incentives, which averaged 34 days of free rent in the rst quarter. The overall improvements to operations allowed revenues to grow 5.4 percent in the past year. Outlook: Rental rates will reach new heights this year as limited new supply mitigates competition and healthy leasing activity reduces existing inventory levels. Asking rents will rise 3.1 percent to $806 per month as eective rents spike 3.4 percent to $731 per month.

4% 0% -4% -8%

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Sales Trends**

The median price contracted over 30 percent year over year to $52,000 per unit. Values for Class A complexes tumbled 33 percent to $102,000 per unit, while the median price for Class B/C assets decreased 30 percent to $36,000 per unit. The average cap rate for all property classes modestly rose in the past year to the low-7 percent range due to an uptick in older buildings changing hands. Initial yields in the top-tier arena ebbed up 30 basis points to the low-6 percent area. Outlook: Debt on properties sold during the height of the market will begin to mature this year. Banks will be hesitant to renance or extend the loans on properties unable to produce sucient cash ow to cover the monthly debt service, forcing overleveraged operators to sell at a discount or default.

Median Price Per Unit (thousands)

Increased nancing capacity, along with record-low interest rates, pulled investors o the sidelines in Charlotte, where transaction velocity surged by threefold in the past year, reaching levels last seen in 2008.

Sales Trends
$100

$75

$50

$25

$0

07

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* Forecast ** Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics page 3

Marcus & Millichap

Apartment Research Report

Capital Markets
By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

Visit www.NationalMultiHousingGroup.com or call:

John Sebree Director, National Multi Housing Group Tel: (317) 218-5300 john.sebree@marcusmillichap.com

The national apartment markets strong performance continued in the rst three months of 2012 as the vacancy rate slipped 30 basis points to 4.9 percent, marking the eighth consecutive quarterly decline. As conditions continue to improve, renancing and disposition options for owners will expand to some owners that were underwater two years ago. Despite a brief increase to approximately 2.3 percent during the period, the interest rate on the 10-year Treasury ended the rst quarter at about 2 percent. Capital continues to ow into safe-haven investments such as U.S. government debt amid lingering uncertainty over the eurozone. Fannie Mae and Freddie Mac will have unlimited nancial support from the federal government through the end of this year. However, Congress will weigh a number of proposals to sunset the GSEs over the next decade and privatize the secondary mortgage market. The entities accounted for 65 percent of apartment mortgage originations last year. Access to acquisition nancing continues to improve. Loans from portfolio lenders are issued at LTVs ranging from 70 percent to 80 percent, while the government agencies will work at the high end of the range on the highest-quality properties. All-in rates on mortgages of $3 million and more start in the mid-3 percent range for terms of ve years, while 10-year debt varies from the low- to mid-4 percent region. Rates for smaller assets can rise up to 30 basis points to 75 basis points higher.

Submarket Overview

As vacancy in the West-Charlotte Airport submarket plunged over 460 basis points in the past year and rents reached historical highs, developers looked to capitalize on the trend and recently broke ground on two projects. Nearly 500 units will be delivered by 2013, which will expand local stock by 9.3 percent. XPO Logistics is in the process of expanding in south Charlotte. The company will hire 200 professionals this year, with plans to double that number by 2015. The new jobs will support demand for apartments in the Carmel submarket, where vacancy dropped 130 basis points in the past year to 4.3 percent. Solid employment gains in the trade, transportation and utilities sector spurred demand for Class B/C apartments in the North Pineville submarket during the last 12 months, reducing lower-tier vacancy 430 basis points to 7.2 percent. As a result, operators raised rents 1.5 percent in that time to $659 per month.

Prepared and edited by

Justin Britto
Research Associate Research Services

For information on national apartment trends, contact

John Chang
Vice President, Research Services Tel: (602) 687-6700 john.chang@marcusmillichap.com Charlotte Oce: Gary R. Lucas Managing Director glucas@marcusmillichap.com 101 South Tryon Street Suite 2460 Charlotte, North Carolina 28280 Tel: (704) 831-4600 Fax: (704) 831-4610

Submarket Vacancy Ranking

Rank
1 2 3 4 5 6 7 8 9 10

Submarket
Fairview North North Pineville Carmel Downtown East Charlotte - Albemarle Corridor Harris Blvd/Mallard Creek Church Rd Gaston County N. Tryon St. - The Plaza West - Charlotte Airport Concord/North Concord

Vacancy Rate
4.1% 4.2% 4.3% 5.0% 5.5% 5.8% 6.6% 7.4% 8.9% 9.7%

Y-O-Y Basis Point Change

-190 -200 -130 -110 -240 -180 -250 -330 -460 -550

Effective Rents
$796 $687 $830 $1,158 $603 $765 $611 $544 $778 $644

Y-O-Y % Change
2.2% 3.1% 3.1% 6.5% 3.7% 1.7% 1.8% 2.2% 2.2% 4.4%

Price: $150

Marcus & Millichap 2012 www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every eort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, National Association of Realtors, Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.