Real estate markets are warming in the sunny Southeast. After several years of little activity, development has significantly increased over the past six months.
“The Southeast, including Florida, Georgia, and the Carolinas, is entering its next growth cycle,” says Pryse Elam, managing director at Orlando-based CNL Commercial Real Estate. “We expect to see increasing demand for real estate across all product types in the Southeast in the coming months, well ahead of the national averages. Population growth and employment growth are two key drivers of the demand for real estate, and the combined Southeast markets are projecting population growth at 2 percent per year, which is nearly double the national average.”
Miami, with Raleigh and Charlotte in North Carolina, have attracted significant early new investment from institutional investors, Elam adds. “We believe this trend will continue, and, as more investors move into these markets, we expect that we will see upward pressure on real estate values in excess of those forces created by current supply and demand trends,” he says.
In Florida, the real estate market has come back to life, says Douglas C. Smith, principal at EDSA, a Fort Lauderdale–based planning, landscape architecture, and urban design firm. “We didn’t expect it to bounce back so quickly,” he says. “At EDSA, we’re seeing strong activity in the college campus and higher education realm, especially student housing. We’re working with our longtime clients including Nova University, Florida International University, Barry University, and the University of Florida on various projects. What’s driving this growth is a lot of people decided to go back to school.”
Among its numerous Florida projects, EDSA is providing master-planning services for Newland Communities’ 795-acre (321 ha) Fishhawk West community in Tampa. “At Fishhawk West, the residential blocks are intermingled with parks and naturalized open spaces,” Smith says. “Our plan embraces new urbanist techniques, incorporates product diversity within blocks, and creates a walkable community that connects to open space preserves, parks, retail, and mixed-use offerings. Both lakes and natural areas collect stormwater and provide aesthetic features that organize the overall development.”
In Orlando, CNL Commercial Real Estate is nearing completion of a new 86,000-square-foot (8,000 sq m) multitenant office building, says Elam. “We also have in our pipeline $100 million in developments and acquisitions, including a mixed-use project, an office tower, and two industrial projects,” he continues. “We view these as examples that would apply across the entire Southeast in the coming months as we see growing need for new office, industrial, and, to a lesser extent, retail.”
On Florida’s Gulf Coast, St. Petersburg is reporting robust activity, having emerged from the recession “with a bang,” says David S. Goodwin, the city’s planning and economic development director, adding that the city is creating a master plan for its downtown waterfront and a revitalization plan for 34th Street South. “Mayor Bill Foster initiated the ‘Greenhouse’—a partnership between the city and the St. Petersburg Area Chamber of Commerce—as a ‘one-stop shop’ economic development resource,” says Goodwin. “It provides business counseling, training, networking, specialized assistance for entrepreneurs, and access to capital and credit for startups.”
In neighboring Tampa, the continued redevelopment of Channelside Bay Plaza, which was purchased by the Tampa Port Authority in September, remains a bright spot, says Darron Kattan, a managing director at Franklin Street’s real estate services division, which specializes in multifamily investment sales. “Once the port gets the entertainment component on the right track, the area will explode with growth,” Kattan says. “Restaurants seem to be busy from a superficial level, and consumer confidence seems to be going strong.”
However, Kattan cautions that the Sunshine State’s real estate industry could face challenges in the future. “The hot buttons today are rising interest rates affecting values and transaction velocity, and flood insurance issues,” he says. “Interest rates have a definite impact on value, but they are only part of the equation. Flood insurance will open the door for private carriers to fill the void and make a profit, but there are going to be some challenging times for owners ahead.”
One word sums up real estate activity in Georgia: multifamily, says Greg Miller, principal of the residential specialty practice group at Cooper Carry, a national firm offering architecture, environmental graphic design, landscape architecture, and other services. “We are seeing more and more interest in the larger mid- and high-rise buildings, especially inside the perimeter of the city,” he says. “There has been some interest in condominium developments since most of the for-sale units have been absorbed through foreclosure or massive markdowns.
“It appears that the millennials are even more intent on living, working, and playing in the urban environment,” Miller says. “As occupancy levels rise and demand for housing increases, new condominiums and apartments are becoming more viable.”
In addition to ongoing work on Emory Point, a mixed-use development adjacent to the Emory University campus that is privately funded on university-owned land (the second phase of Emory Point contains 307 multifamily units and more than 42,000 square feet [3,900 sq m] of retail space), Cooper Carry is working on Post-Alexander II, a 340-unit, 19-story residential building above a seven-level parking structure. “The project will have an eclectic/transitional design aesthetic to complement the adjacent Post-Alexander property,” Miller says. The second phases of Emory Point and Post-Alexander are both under construction.
Equity for multifamily development is plentiful but selective, says Greg Engler, founder and CEO of Alpharetta, Georgia–based Engler Financial Group, a multifamily investment advisory and brokerage firm. “Georgia’s multifamily sector continues to experience strong demand for development, equity, and investment sales,” he says. “Nearly all the markets in the Southeast are seeing development pipelines increase due to the wide spread between return on cost and market cap rates. In most cases, the spread can be as wide as 250 to 300 basis points, especially in suburban locations where very little development is occurring.”
Georgia’s state capital has reported a tremendous increase in investor demand for multifamily investment, Engler adds. “At the peak of the last cycle, Atlanta multifamily developers were building 8,000 to 12,000 units per year,” he says. “By the end of 2013, maybe 6,500 units will be started versus a base inventory of over 400,000. New markets have evolved and emerged such as Midtown and West Midtown, where high-rise rental construction—something never contemplated five years ago—is now the norm.”
South Carolina appears to have awakened from the economic slumber of the last five years with a revived real estate industry, says Richard Gowe, partner at the architecture and design firm LS3P, based in Charleston. Charleston is aggressively building housing, he notes, and the multifamily, student housing, and single-family sectors are all very active.
“Large landowners such as Richmond, Virginia–based MeadWestvaco [MWV] are developing their forestry holdings into model communities just outside Charleston,” says Gowe. “MWV’s Nexton in Summerville is a large community with a mixed-use village, a school, multifamily, hotels, and large-plate offices. Developers of large tracts within the city are also reviving their plans. The Horizon District, a 49-acre [19 ha] tract in Charleston, has recently selected a master developer. We are also working with Clemson University to develop a net-zero-energy building—zero net energy consumption and zero carbon emissions annually—for graduate research on the Charleston Navy Base. We are also helping develop two boutique hotel developments in the city—a 42-room project and a 50-room property.”
As in Florida, Georgia, and South Carolina, multifamily is robust in North Carolina, according to Engler. “The multifamily market in North Carolina is in the third inning and is pitching a perfect game,” he says. “New-construction projects are experiencing absorption ahead of pro forma expectations, and rents are surprising to the upside.”
In the Raleigh-Durham area, Engler Financial Group has closed on two projects: Alexan Garrett Farms, a 308-unit garden project that sold for $49.3 million to a pension fund adviser in June, and Jamison Brier Creek, a new 276-unit garden project purchased by a pension fund adviser for $42.2 million in August.
Thanks to the state’s improving economy, development that was at a standstill for a few years is starting to pick up, with some significant projects slated to break ground by the end of the year, says Dan Warren, the real estate practice leader at the Charlotte office of accounting, tax, and consulting firm Elliott Davis. “There are diminishing vacancy rates in multifamily housing, Class A office, industrial, and retail space, and this trend should continue,” says Warren. “As vacancies go down and rental rates increase, confidence is building in the market.”
The state’s hotel industry and tourism—and retail activity, in certain pockets—have improved, he adds. “Some high-credit-quality retailers are looking to expand now,” Warren says. “The fundamentals and drivers of development activity are more significant than ever. High-quality tenants, positive cash flow from property operations, more reasonable loan-to-value ratios, and better capitalization are all more important now than they were before the downturn.”
North Carolina’s economy, which is based on knowledge, information, and technology, is one of the main drivers of real estate, adds Turan Duda, a partner at Durham-based Duda/Paine Architects. “Durham, Raleigh, and Chapel Hill all have several large universities within proximity to one another,” he says. “It’s a hub of intellectual activity and growth, and the ingredients exist for the region to become an even more dynamic center for innovation and invention. There has been tremendous development in the South’s cities, despite the economy. And it is in these urban centers we see the economy coming to life again.”
The Trent Semans Center for Health Education at Duke University Medical Center in Durham is a prime example of how education and knowledge are driving the future, Duda says. “The project brings together state-of-the-art technology, innovative and flexible learning spaces, and hands-on simulation labs,” he explains. “Duke has been at the forefront of creating a more innovative, team-based approach to medical education, and the design of the new building is a reflection of this new paradigm.”
While North Carolina’s economic recovery appears to be spread across all sectors, some areas are recovering faster than others, says Gordon Grubb, president of Grubb Ventures, based in Raleigh. “In the Raleigh market, we are finally seeing a pickup in job growth, although at a slower pace than during the boom years,” he says. “Much of that job growth is in the technology sector.”
Like many other cities in the Southeast, Raleigh is reporting increased multifamily development, particularly of urban infill projects. “Walkable environments in proximity to retail and jobs are garnering the highest rents,” Grubb says. “Rents on some units are now pushing $2 per square foot—something unheard of a few years ago. Our market effectively went for three years with no new supply, so we are still seeing steady absorption of apartments and pent-up demand, and we believe that infill projects will remain strong performers.”
Grubb Ventures is involved with a number of infill projects in the Raleigh area, including the 401 Oberlin Apartments, a 244-unit multifamily project with 9,000 square feet (836 sq m) of retail space, and the Glenwood Place Apartments, a 292-unit multifamily project. “We are in planning for a new 100,000-square-foot [9,300 sq m] Class A office building at the same Glenwood Place location,” says Grubb.
With real estate development increasing at a healthy pace in Florida, Georgia, and the Carolinas, developers, bankers, and builders remain cautious about the future. Mindful of the bust that followed the earlier boom, they say they are being careful in their development plans.
Mike Sheridan is a freelance writer in Parsippany, New Jersey.