Two heads are better than one

Capitalizing on rental housing's favorable fundamentals with apartment projects in the Carolinas and Virginia is the game plan of Proffitt Dixon Partners, a Charlotte, N.C.-based apartment company formed last year by managing principals Wyatt T. Dixon and Stuart Proffitt.

194
Wyatt Dixon and Stuart Proffitt stand on the platform of New Bern Station in Charlotte's South End, just steps from a future transit lobby that will be a unique feature of the partners' latest apartment project, Fountains South End.

But prior to launching the company, the industry experts found themselves competing with each other in a tough environment where developers battle it out for a limited number of opportunities.

Proffitt served as development executive at both Pappas Properties and Los Angeles-based Champion Development Group before launching Proffitt Capital Group in 2008, where he underwrote and sourced more than 200 multifamily and commercial investment opportunities and purchased three apartment communities totaling 546 units in North Carolina.

Dixon served as the Lane Company’s development partner in the Carolinas and Virginia and as Vice President of Development for Camden Property Trust and its predecessor Summit Properties before founding Hawkins-Dixon in 2009 to develop luxury apartments in the same markets Proffitt Dixon Partners remains focused on today.

After butting heads while negotiating on the same difficult deals, they realized two are better than one when it comes to increasing the odds of beating out the other players.

“As we looked to move forward, we came to the conclusion that we would be a lot better off partnering up and collectively working towards a common end as opposed to competing,” said Proffitt.

“That was really the genesis of the idea,” added Dixon. “Stuart had been in acquisition mode for a few years acquiring three existing communities in the Raleigh, Durham and Chapel Hill markets, but had shifted his focus onto development opportunities. I on the other hand had remained focused on development through the doldrums of 2009 and 2010 and had just begun construction on the 227-unit Fountains at Mooresville Town Square. Combined, we really felt like it was a great platform.

The partners merged their multifamily to form Proffitt Dixon Partners. Shortly after the new enterprise got off the ground, a development opportunity presented itself. With support from investment fund manager Robert Deaton, bid on and won at auction a parcel to develop an apartment project in the historic South End of Charlotte, closing a month later on a 4.78-acre property located directly adjacent to New Bern Station along the Lynx light rail line 1.4 miles from Uptown Charlotte. The partners paid $1.5 million for the property that Broad Street Partners purchased in 2007 for $9.25 million, but subsequently lost to foreclosure.

“The previous owner had demolished the existing buildings and had an approved brownfield agreement for the property. We understood the benefits and risks in the purchase and felt like it was a solid opportunity. We knew we’d have a lot of work in front of us, but we won the auction and closed in 30 days,” said Dixon.

With the zoning already in place and the permitting process initiated, Proffitt Dixon reconceived the development program for the site that will become the $26.1 million Fountains South End.

“Our project was much less aggressive than the previous owner’s. Where they had designed about 285 units for the site and 100 percent structured parking, our project has 208 units and is almost completely surface parking with one third tucked under the four- and five-story buildings,” said Proffitt.

Rental demand still outstrips supply in Charlotte’s South End and the former industrial area that underwent a revival around 20 years ago is bustling with development activity.

The neighborhood became a hub for interior design and boutique furniture stores, but residential interest in the area soared with the arrival of a light rail line in 2007 and apartment development has increased by 58 percent over the past four years.

“The Lynx Blue line is the first of five future lines that will be built in the Charlotte area. Ridership on this line has far exceeded expectations originally outlined by the feds or the city, which has helped make the South End district one of the most attractive places to live for many in Charlotte. Not all of our residents will work in Uptown Charlotte, to which the Lynx provides a direct line. Many work elsewhere and simply enjoy the Uptown nightlife. They live here because this is where their friends are,” said Dixon.

Around seven projects are in various stages of development in the South End district, with developers touting the area’s prime location close to Uptown, its eclectic flavor and rents that are generally more affordable than in the Uptown submarket.

And, although Charlotte’s South End is still a challenging environment because the area does not yet have a central core, business owners, residents, developers and other stakeholders hold regular meetings to carve out plans for the services and amenities needed to create a cohesive and burgeoning neighborhood.

Proffitt Dixon’s $23 million, 227-unit Fountains at Moorseville Town Square just north of Charlotte was financed by Red Capital Mortgage through the FHA’s 221 (d)(4) market-rate apartment financing program

“The new rental housing is helping to bring nightlife to the district where once there was very little,” said Dixon.

And it’s not just apartment developers who are eyeing the South End of Charlotte. Investors also are competing to establish a footprint in the area. Post Properties recently paid Crescent Resources $74 million, or $205,555 per unit, for the 360-unit Circle at South End in a transaction that represents a near-record price for an apartment property in North Carolina.

Charlotte continues to rank among the most rapidly improving apartment markets in the nation, according to MPF Research. Average occupancy metro-wide in August was at 95.1 percent and effective rents for new leases increased 1.6 percent quarterly and 6.8 percent annually. In the Mooresville and Uptown/South End neighborhoods, year-over-year pricing growth reached double digits.

Rapid growth has some industry watchers thinking the area could be at risk of becoming overbuilt, while others believe cautious lenders with conservative financing will help restrain any potential for overbuilding.

And MPF Research points out that the volume of units delivering into the Charlotte metro today are far below historic norms. The 2,600 or so units under construction in metro Charlotte as of mid-2012 translate to inventory growth of about two percent over the next 18 months, considerably below the increases expected in Charlotte’s key regional counterparts of Raleigh and Nashville.

Nevertheless, cautious developers find it ever more important to carve out a niche that will give them the edge and set their projects apart from those of their competitors.

With nearly 25 years of development and investment experience and over 4,000 completed units under their belts from their years with respected national apartment and development firms, Proffitt and Dixon look for a blend of location, rental rate and amenities that will appeal to their target renter groups-Gen X and Gen Y.

“Of course, if you ask a developer, we never overbuild anything,” said Proffitt, “But, candidly, we think there is always a risk of that and that’s the reason we didn’t enter the market thinking we would get the highest rents. We have underwritten what we believe to be a conservative model and that’s really our strategy on all our projects.”

The Fountains South End is scheduled to deliver in early 2013 and three other projects will start leasing around the same time, one ahead and two not too far behind us, said Proffitt.

One of those imminent developments is the 340-unit Colonial Grand at South End by REIT Colonial Properties. That project required extensive negotiations with municipal authorities and private land-owners, including a land swap agreement with the Pepsi Bottling Plant and improvement to the light rail frontage. Another is JLB Partner’s 280-unit Southline Apartments that is rising on 11 acres. JLB paid $4.2 million for the site. And, on nine acres just west of the light rail line, Woodfield Investments is building the 280-unit Woodfield Silos, having paid $3.7 million for the land last year.

“If you look at where we all fit together, we are really creating that second wave of development in the South End and we think long-term the neighborhood will be better off because of these projects. Certainly lease-up will be slower, but we were able to capitalize the deal with the long term in mind and we capitalized it conservatively,” said Proffitt.

He believes rents set below other projects in the submarket also will help during lease-up and counter any downward pressure on demand that a glut of units might trigger. Meanwhile, rents have grown enormously in the South End.

“There are some competitors in South End that are achieving well north of $1.60 rents. We underwrote Fountains South End to be extremely competitive and give ourselves a pricing advantage. We expect our rents to come out of the gate at a 15 to 20 percent discount to the more expensive projects in South End. We think we will have a lot of upside because of our adjacency to New Bern Station and the fact that our amenity package is second to none,” said Dixon.

One such amenity that fits the preferences of both Gen Y and Gen X-transit-oriented housing-is shared by all the projects coming online in South End and is expected to have legs well into the next millennium.

Designed by The Housing Studio, Proffitt Dixon’s Fountains at Mooresville Town Square features a multi-level patio, grilling area, fire pit and courtyard and a saltwater swimming pool——amenities expected to attract Gen X and Gen Y renters.

Another is the location close to downtown without the high rent of city centers. While it is generally believed that the 80 million strong Gen Y cohort between the ages of 20 and 35 prefer the excitement and community of urban living over the quiet and privacy of the suburbs, this demographic, with an average income of $26,000, is hard-pressed to afford the higher rents of city downtowns.

Therefore, it’s likely they will eschew the urban centers for what they see as the next best thing-more affordable neighborhoods in close proximity to downtown areas with direct access to transit that can transport them to work, play and shopping because another preference unique to Gen Y is their ambivalence toward owning a car.

Bearing out the location premise is a study by RCLCO that suggests that, although Gen Y renters and buyers have a strong interest in urban centers, 44 percent prefer close-in areas to actual city centers.

While the projects coming online in the South End all share proximity to the light rail line, Proffitt Dixon’s development offers a unique amenity none of the others have- the first-of-its-kind, residents-only lobby that sits just 50 feet from the boarding ramp of the light rail train.

“Any time we look at urban sites, we are looking for a competitive advantage and a differentiator. How do we differentiate the project from the other options the renter is going to have out there? With this particular site, it was the transit lobby that is immediately adjacent to the open car door on the light rail train, ” said Proffitt.

“A resident can be in the transit lobby watching the news on TV or reading a periodical. There’s a coffee machine and other luxury appointments. The resident will be able to view a live video feed of the light rail to alert them that the train is arriving. They will have plenty of time to collect their belongings and walk across and step on the platform. They will never have to be out in the elements,” said Dixon.

“The Gen X and Gen Y renter today is a high-touch, high-expectation renter, so our project, with its transit lobby, creates a luxury hotel lobby feel and really caters to that demographic,” he added.

Another feature of the Fountains South End likely to score points with Gen X and Y renters is the project’s energy efficiency components, designed to achieve the National Association of Home Builders’ Green certification, which will reduce the property’s impact on the environment and help keep utility costs low.

The community’s studio, one- two- and three-bedroom units and lofts will feature granite counter-tops, stainless steel appliances and built-in microwaves, kitchen islands, linen closets and computer stations, French doors leading to private patios and balconies and controlled access entries.

Social interaction is an integral part of the Gen Y lifestyle and behavior and the property caters to that preference with numerous indoor and outdoor gathering spaces, including a multi-level sun deck by the pool, a fire pit and courtyard and a rooftop Zen deck offering unobstructed views of the Charlotte skyline.

“The rooftop deck has a dining table and fan with a refrigerator and sink. So you can live in a studio, but have your friends over and have a nice meal outside in a fun atmosphere,” said Dixon.

The 6,000 sq. ft. clubhouse will include Wi-Fi, a gourmet demonstration kitchen and entertainment area with billiards, Ping Pong and a fireside indoor lounge. The fitness center will be equipped with cardio and weight stations and a separate yoga room.

The community will also boast a saltwater swimming pool with a lap lane that will be more expensive to construct than a traditional pool. “But, we think, with the life expectancy of the pool, in the long run it will be a savings because you don’t have the same chemical expenses and it is so much nicer on your eyes and clothes,” said Proffitt.

Proffitt Dixon has the capacity to initiate two projects a year. Although competition for land has increased over the past 12 to 18 months, the partners think opportunities still exist.

“But I also think the wave of distressed land that flows through as a result of aggressive underwriting in the last cycle has begun to wane and, as such, the opportunities that are going to be available now are going to be market-driven development opportunities. We will keep our eye on acquisitions, but we don’t feel acquisitions provide enough yield for us to focus on right now,” he said.

Meanwhile, completion of the Fountains at Mooresville Town Square, located on eight acres within the 40-acre mixed-use Mooresville Town Square, is expected by the end of October. The property is anchored by a Lowes Foods and is close to an outstanding mix of restaurants and shops.

Where a transit station and lobby right on the property set apart the Fountains South End, walkability sets apart the Fountains at Mooresville Town Square.

“It is the only property in the area where residents can walk to a grocery store, multiple restaurants and dry cleaner, as well as a day spa,” said Dixon.

Greystar Management will oversee day-to-day operations at both communities.