Charlotte Multifamily Market Remains a Top Performer as Recovery Continues
- Multifamily rent growth in Charlotte remained positive during the pandemic, recovering faster than the national average, while vacancy rates remained stable.
- Sales volume in the market slowed in 2020, although high investor demand continued to tighten cap rates.
- The area’s economic recovery accelerated, driven by the strong financial services sector.
The Charlotte multifamily market has consistently been one of the nation’s top performers over the last several years. Its strong showing continued in 2021 as the market recovered from the COVID-19 pandemic and subsequent recession.
Rent and Vacancy Remain Stable
According to Moody’s Analytics REIS, Charlotte’s average asking rent finished the first quarter of 2021 at an all-time high of $1,206/unit. The small 1.1% year-over-year positive gain was comparatively lower than the strong 4.5% growth rate measured just prior to the pandemic. However, the increase/gain was significantly higher than the 2.7% decline for the U.S. overall during that time. Rents are forecasted to climb to 2.5% by the end of 2021 and steadily increase to 3.3% over the next three years.
Rent growth was stronger for workforce housing than for luxury rentals in Charlotte for the third straight year, in line with the national trend. Rents in class A buildings increased 0.2% during 2020, while rents in class B/C properties increased 0.8%.
Most Charlotte renters were able to keep up with their payments during the pandemic, resulting in only a slight increase in vacant units returned to the market. The overall vacancy rate finished the first quarter of 2021 at 6.3%, up only slightly from 6.0% prior to the pandemic. Vacancies are forecasted to remain relatively stable over the next three years.
Class A vacancy remained elevated at 7.6% (up from 7.2% one year ago) during the quarter, while class B/C vacancy improved to 3.4% (down from 4.0%).
Apartment demand has been robust over the last 10 years in Charlotte, although it has just barely kept pace with the high volume of new supply. Development activity decelerated significantly during the pandemic and is forecasted to slow further through 2023, which should allow demand to catch up to the newly added units.
Investors Remain Active in Charlotte Multifamily Market
Prior to the COVID-19 pandemic, investor interest in Charlotte had increased steadily for the last 10 years. Investors took a slight pause during 2020, although they remained active. According to Real Capital Analytics, apartment sales volume reached $3.5 billion during 2020, a mere 5.0% decline from 2019’s record high of $3.7 billion. Average sales prices reached record highs, rising 7.9% during the year, to more than $153,400/unit.
Investor demand also drove apartment cap rates lower. The average cap rate improved to 4.8% at the end of 2020, down from 5.1% at the end of 2019 and lower than the U.S. overall rate of 5.0%. Cap rates continued to tighten through the first four months of 2021, falling to 4.7%.
The Freddie Mac Apartment Investment Market Index® also showed that Charlotte continued to remain attractive to investors, rising 5.7% over the last 12 months, compared with the U.S. overall increase of 1.7%. The gains were the result of growth in net operating income (up 2.8%) and lower mortgage rates (down 42 basis points), which offset property price increases (up 2.6%).
Financial Activities Drive Economic Recovery
The logistics and office-using industries have driven Charlotte’s employment recovery. According to the U.S. Bureau of Labor Statistics, total nonfarm employment in the Charlotte-Concord-Gastonia, NC-SC metro area increased 10.0% over the 12 months ending in April, which was slightly lower than the 10.9% increase for the U.S. overall during that time. Employment in the area remained 3.5% below the pre-pandemic peak, representing a loss of 44,000 jobs.
The area’s unemployment rate improved quickly from the pandemic high of 13.9% recorded in May 2020, falling to 4.4% in April 2021. Prior to the pandemic, the rate was running a steady 10-year decline and reached a low of 3.0% at the end of 2019.
The leisure and hospitality sector, which was hit especially hard during the pandemic, accounted for a significant portion of the improvement, growing a whopping 46.7% year-over-year. The financial activities sector, the primary driver of the area’s economy, remained stable throughout the pandemic and was up 1.2% over the last 12 months.
The recovery of the labor market has also added fuel to the already surging housing market. Home prices increased 14.4% year over year in April, according to the Zillow Home Value Index. This was the highest growth rate on record for the market and higher than the growth rate of 11.6% for the U.S. overall. Supply issues remain a drag on affordability, as building activity has slowed.
The Charlotte multifamily market should remain one of the nation’s top performers as its swift recovery continues in 2021. Rent growth is forecasted to accelerate back up to pre-pandemic levels within the next three years, and investment activity has remained strong throughout the pandemic. The area’s relatively affordable cost of living, favorable demographic trends, highly educated workforce and low business costs should ensure the market remains attractive to multifamily investors for years to come.