Boom to bust? Charlotte's at risk of building too many apartments, new study says

CHARLOTTE, NC (Ely Portillo/The Charlotte Observer) - Charlotte's high-flying apartment market can't ignore the rules of supply and demand, according to a new report that warns developers might be building too many high-end units in the city.

But the building boom that's reshaped whole neighborhoods with thousands of new apartments shows no signs of stopping, and rents are still shooting higher across Charlotte. The wave of construction probably won't stop anytime soon, according to an analysis by apartment-tracking firm Yardi Matrix, even as the supply of new units outstrips demand from renters.

"In the near term, markets at risk of oversupply include Denver, Seattle, Charlotte, Dallas, Phoenix and Miami, where deliveries are expected to outpace demand," the company wrote in its report, released in June.

Over the next two years, the number of apartments in the Charlotte region is expected to grow by about 8 percent, Yardi Matrix found, or just over 13,000 units. At the same time, demand is expected to grow by just 2.7 percent, making the region's apartment market start to look pretty imbalanced.

That's similar to booming cities like Denver and Seattle, Yardi Matrix found, where supply is expected to increase 10 percent or more while demand goes up by less than 5 percent.

For renters, that might not be a bad thing.

Developers could be forced to offer bigger breaks on rent and other incentives, such as reduced security deposits, to lure tenants for the pricey new buildings under construction. And the increase in supply could put a damper on long-term rent growth, which has been going up much faster than wages or inflation in Charlotte for years.

For developers, it could mean more apartments taking longer to rent and less opportunity to raise the rent when tenants renew leases. "The supply/demand imbalance will put a strain on rent growth and occupancy rates," Yardi Matrix concluded.

The longer-term picture is similar over the next five years, the report said. Future supply exceeds forecast demand most in cities including Seattle, Charlotte, Dallas and St. Louis.

"Demand will be healthy, but it is not unlimited," Yardi Matrix wrote.

David Ravin, the CEO of apartment developer and owner Northwood Ravin, said areas in Charlotte with the most apartments under construction could see short-term challenges and lower rent, especially if the economy hits a rough patch. But he said flexibility on rent means apartments won't end up dark and vacant, like the unsold condo towers people might remember from the Great Recession.

"It's not as though a lot of these sit empty. They drop their pricing," he said.

Ravin said demand will balance out supply over the long term in fast-growing cities like Charlotte, as population growth brings more renters. His firm is developing upscale apartments across the city, from apartment towers in uptown to luxury buildings near in SouthPark and near Plaza Midwood.

"Even if we miss the mark in the short term, will it bounce back in the long term?" Ravin said. "Yes."

For every publication that comes out like that, there's another that shows there's robust demand and plenty of new renters on the horizon

The average rent in Charlotte as of February hit $1,142 a month, up almost 6 percent from the same month a year ago. That's $300 higher than it was in 2013, when rent averaged $842. But some areas in Charlotte have already seen higher vacancy rates as thousands of new apartments flood the area. Developers are competing to lure renters to uptown.

Figures from Charlotte-based Real Data show the apartment vacancy rate uptown is 21.8 percent. That's the highest in the city by a wide margin, and more than three times the Charlotte market's average. More than 1,100 uptown apartments are vacant.

For now, however, the boom is still on, with about 27,000 apartments planned or underway.

And developers are optimistic, forging ahead with plans that incorporate ever-more-luxurious amenities like private wine bars, golf simulators, massage rooms and complimentary dog grooming in dedicated pet spas.

Yardi Matrix noted that Charlotte's robust economy means new apartments will be rented eventually, even if it takes longer than developers hope, and that developers can hit pause on future buildings if the market takes a dive.