Queen City rules

The Queen City reigns supreme over the secondary market world today and may be moving into the primary market universe, as Charlotte becomes a core market for more and more multifamily players.


“From an investor’s standpoint, I think both Charlotte and Raleigh have come of age. They have matured from being viewed as secondary markets by a lot of big institutional sources to being considered core markets now,” said Blake Okland, principal and partner of Apartment Realty Advisors of the Carolinas, which represented Camden Property Trust and Equity Residential in the September and November sales of a couple of portfolios that included Charlotte properties.

Job growth, along with an increasingly diverse employment base, are pushing Charlotte into the limelight. And, with unemployment declining and single-family home prices increasing, buyers appear to have no qualms about pulling the trigger on apartment acquisitions there, said Okland, who saw a mixed bag of co-mingled funds, pension fund advisors with sponsors, REITs and private capital bidding on those recent deals in the Tar Heel State.

“We’re seeing strong population growth and the only way you create that kind of growth is through a very diversified economy,” he said.

The area that was incorporated as a town in 1768 and named for Charlotte of Mecklenburg-Strelitz, the German-born wife of Britain’s King George III, first was settled in 1755, when Thomas Polk, President James K. Polk’s uncle, built his home at the intersection of two Native American trading paths between the Yadkin and Catawba Rivers.

Over the next 250 years, the town grew into a booming city with a population of more than 664,000 within an MSA of 1.5 million residents and has become a huge distribution hub thanks to its Interstate system and the fact that the city is accessible to 55 percent of the country within a day. Charlotte’s Douglas International Airport, the fastest growing airport in the country and among the 30 busiest airports in the world, got underway last spring on a third parallel runway, which is scheduled for completion in January 2010 and will increase air service capacity by 33 percent. Last year, Raleigh/ Durham International Airport began a complete overhaul of its Terminal C, which is expected to reopen in 2010. “So, both tides are rising at the same time,” said Okland.

Charlotte has long been known for its banking industry, which achieved prominence in the 1970s and 1980s under the leadership of Hugh McColl. The financier transformed North Carolina National Bank, through a series of acquisitions, into what now is Bank of America. In a similar fashion, First Union became Wachovia and, measured by control of assets, Charlotte now is the second largest banking headquarters in the country after New York City. “Out of the banking industry comes a lot of wealth spin-off groups,” Okland said.

“But we also have heavy growth in health services and there’s a lot of R&D going on in the Research Triangle Park in Raleigh that’s making its way into Charlotte now with the billion-dollar biotech campus that David Murdock is building in Kannapolis, a northern suburb of Charlotte. Lowe’s has relocated its corporate headquarters here and medical services is really big and obviously works hand-in- glove with the R&D that’s going on in the Triangle between the University of North Carolina at Chapel Hill, North Carolina State University, and Duke University,” he said.

Greensboro, the biggest city in the Triad that also includes Winston- Salem, High Point and Burlington, and long-known as one of the manufacturing and transportation hubs of the Southeast, is improving as well. It doesn’t have the economic diversity of the Triangle (Raleigh, Durham and Chapel Hill) or Charlotte, “but it’s passing more litmus tests with investors every quarter. It’s maturing as an investment market,” said Okland, who, along with Partner and Principal Dean Smith, has led or been involved in more than $3.7 billion in multifamily brokerage sales since he and Smith joined ARA of the Carolinas in 2004.

The condo conversion wave never really hit the Tar Heel State, where only Charlotte has seen any material for-sale multifamily activity. “The vast majority of those are in Uptown and are on the higher end of the pricing scale. Pace of sales, up to this point, has been good and there is not a significant shadow market. As far as other suburban single-family home foreclosures affecting the rental market, its effects are not showing up yet,” he said.

And, unlike most of the country, Charlotte is not seeing the decrease in single-family home prices that plagues markets that were super hot last year, like Southeast Florida and Southern California. In fact, Charlotte tied with Seattle for the top spot in the country for home price increases between September 2006 and September 2007, when single-family home prices rose 4.7 percent in those two cities, while home prices nationally fell 4.5 percent, according to the S&P/Case- Schiller U.S. National Home Price Index that is calculated quarterly.

All of which make the North Carolina, and particularly Charlotte and Raleigh, appealing to a wide variety of investors, although Okland has seen a decrease in the number of bids on properties since the leveraged wedge of the bidder pool dropped out of the game as credit standards tightened following the subprime crisis.

“When the capital markets started dislocating in July and certainly in August, we saw some transactions fall apart, particularly very high-leveraged buyers that were going after conduit debt. Interestingly, that seemed to rebound. Deals came back and we got a lot through. There were maybe five to 10 percent of active transactions at that time that we put on the shelf, but most of them came back and are actually set to close now,” he said.

“So, it was like a 60- to 90-day pause, when transaction volume was interrupted, but it’s not down now. It feels pretty brisk. It’s just not like what it was six months ago,” Okland explained. Due to the loss of the leveraged bidders, his office, which probably was at an all-time high for average number of bidders on deals in the first and second quarters of the year, has seen an impairment to the tune of about 30 to 40 percent in that number. “But, there are still plenty of qualified buyers to get deals done right now,” he said.

Around a dozen bidders were in competition for the two Charlotte assets ARA marketed for Camden–the 220-unit, 22-year-old Camden Eastchase that is located just three miles from South Park Mall in Southwest Charlotte and the 352-unit, 23-year-old Camden Timber Creek that is minutes from the city’s new light rail system. Those two assets sold as part of a five-property, $96.25 million portfolio deal that closed in mid-November. The sale reduced the REIT’s apartment holdings in Charlotte, which definitely is one of Camden’s core markets, to 3,586 units in 15 assets. As of the end of September, Camden’s nationwide portfolio consisted of 64,462 units in properties from coast-to-coast.

The winning bidder was Lightstone Value Plus Real Estate Investment Trust, Inc., a private REIT launched in 2005 by the Lakewood, N.J.- based Lightstone Group to pursue value-add opportunities. The diversified REIT began investing in assets in the spring of 2006, with the acquisition of the 256,000-sq. ft. Belz Outlets at St Augustine, Fla., for $26 million, followed closely by the purchase of four Michigan apartment assets with a total of 1,017 units from Home Properties for $42 million, a price that was considerably less than the appraised value of $54 million at the time.

The acquisition of the five Camden assets that included two in Greensboro–the 304-unit, 27-year-old Camden Glen and the 216-unit, 22- year-old Camden Wendover– and one in Tampa–the 484-unit, 23-year-old Camden Isles–in a deal that involved three different brokerage companies, adds 1,576 apartments to the private REIT’s portfolio and marks Camden’s exit from the Greensboro market. Lightstone subsidiary Beacon Management will oversee day-to-day operations at the REIT’s new assets, which have been re-flagged to reflect the new ownership.

“This was a very strategic purchase for a variety of reasons,” said David Lichtenstein, chairman and CEO of the REIT and of the Lightstone Group that created it. “These properties were originally marketed in three separate efforts, and we believe acquiring them as a single portfolio reflects Lightstone’s creative approach to investing. Our acquisition of stabilized Class B and B+ apartment communities at an in-place capitalization rate of 7.4 percent, combined with our fixed rate mortgage of 5.4 percent, should provide excellent yields to our investors,” he said.

Joshua Kornberg, the REIT’s director of investments, said, “The REIT’s short-term strategy is to acquire properties with well- maintained exteriors, but dated interior finishes and below-market rents. In these three markets, comparable properties that have performed interior and amenity upgrades are receiving monthly rents $40 to $100 per unit higher than those at the properties being acquired by the REIT.” Over the next few years, he expects increases in rents powered by an influx of new renters unable to afford the increased costs of home-ownership.

Camden figured the cap rate a bit differently, coming up with a blended cap rate of 5.3 percent for the deal, based on projected 2007 net operating income for the five communities after a three percent management fee and $650 per unit in capital expenditure reserves for the assets where the average monthly rental rate was $624. Okland estimated the cap rate on the Charlotte portion of the deal at around 5.75 percent.

Ric Campo, Camden’s chairman and CEO, said, “The sale of these assets provides us with capital to re-invest in future opportunities with higher growth potential. In addition, by selling our older assets and recycling capital into development, we are maintaining a high quality portfolio with one of the lowest average age per community in the industry.” Proceeds from the asset sales also will be used to pay down the company’s unsecured line of credit and fund its stock repurchase programs.

During the REIT’s Q3 earnings call, COO Keith Oden, who reported that the company’s assets in the Charlotte and Austin markets tied for best revenue growth for the quarter at 8.9 percent and Raleigh also showed strong growth at 6.9 percent, also explained how the five- asset sale fits into the company’s portfolio management plans.

“Once the non-core markets have been dealt with, and included in this package of transactions were two assets in Greensboro, which really cleans up our non-core markets, our disposition strategy will continue to be looking at the assets that are scheduled to have the lowest year-over-year change in return on invested capital. Those are almost always going to be the assets that tend to be older and have more cap ex requirements,” Oden said.

The Equity Residential (EQR) sale of 2,571 units in seven properties in Charlotte and one in the close-in suburb of Matthews right outside the city limits, which was engineered by Okland and Smith, saw about a dozen qualified bidders. The portfolio that sold for around $205 million to a California-based firm whose equity is comprised primarily of high-net individuals, which, according to EQR CEO David Neithercut was a price that was consistent with the REIT’s expectations earlier in the year.

The REIT, which has been working to reduce its number of markets for the past several years and still has about another year to go before reaching its goal of around 15 primary markets on the two coasts and in the Sunbelt, has effectively exited Charlotte with the sale, leaving behind just three communities that are owned in joint venture. EQR exited Greensboro in early 2004 with the sale of 1,181 units in five communities there.

“What remains in our portfolio today are assets in markets that, while we may be choosing to exit them, currently are and have for a long time been institutional sort of quality markets and we believe we’ve got institutional quality assets in those markets,” Neithercut said in the REIT’s Q3 earnings call.

According to Mecklenburg County records, the California buyers paid $23.9 million for the 384-unit, 20-year-old Creekwood Apartments that is located on the outskirts of the Independence Retail Corridor, close to 11 office buildings in East Office Park and Koger Center and just seven miles from the Uptown Charlotte Business District and just a couple of miles from the growing town of Matthews three miles to the east where the 420-unit, 18-year-old Cross Creek Apartments, for which the buyers paid $32.1 million, is located. The Matthews asset is less than five minutes from five shopping centers anchored by tenants like Target, Costco, Lowe’s and Kohl’s and in close proximity to Family Dollar’s headquarters, which employs 1,700 people.

The 318-unit, 11-year-old The Oaks, which is four miles from the 3,200-acre University Research Park, Charlotte’s version of the Triangle area’s Research Triangle Park and home to more than 40 corporations with more than 45,000 employees, sold for $29.9 million, and the 300-unit Hunt Club, which also is minutes from University Research Park and just one mile north of the University of North Carolina at Charlotte, the fourth largest of the 16 institutions of higher learning within the University of North Carolina system, garnered $25.5 million for EQR.

The 340-unit, 11-year-old The Pointe, which is located in the heart of the Southwest/I-77 Employment Corridor, where more than five million square feet of Class A office space is clustered within a five mile radius, sold for around $32 million and the 178-unit, 21- year-old The Regency, just a 10-minute drive from Charlotte’s CBD, where 80,000 people work, sold for $19.3 million. The 247-unit, 21- year-old Steeplechase, which also is close to East Office Park and Koger Center, went for around $12.9 million and the 384-unit, 21-year- old Winterwood at Sharon, which is located in the South Boulevard corridor that is set to experience a significant economic boost thanks to the $400-million light rail project connecting South Charlotte from I-485 through South End and into Uptown Charlotte that began running last fall, with the Sharon Road West Station planned immediately across South Boulevard near the property’s entrance, garnered $29.3 million for the REIT that plans to redeploy the proceeds into acquisitions in its 15 target markets.