Regional Spotlight: U.S. Southeast

With a relatively low cost of living, above-average population growth, a mild climate, and abundant land for development, the Southeast continues to be one of the most popular areas for real estate development in the United States.

The region, including Florida, Georgia, North and South Carolina, Alabama, Mississippi, Virginia, West Virginia, and Kentucky, boasts 21 percent of the total U.S. population and accounts for 28 percent of total housing starts.

“Broadly speaking, the states in the Southeast are in relatively good shape in terms of state finances, with few exceptions,” says Ed Friedman, a director at economic forecaster Moody’s Analytics in West Chester, Pennsylvania. “Some states have made big efforts to boost manufacturing, especially in the auto industry, including Kentucky, Alabama, and South Carolina—and, in South Carolina’s case, aircraft.”

“Tourism is a major economic engine all over Florida and in South Carolina,” he says. “Defense spending is an above-average source of support, with the Southeast having five of the top six states with the largest populations of active-duty military personnel—Virginia, Georgia, North Carolina, South Carolina, and Florida.”

Hurricane Florence, though leaving extensive damage and disruption in the Carolinas, especially North Carolina, is not expected to have a lasting economic impact on the state.

“Although flooded areas along the coast and inland will need time to rebuild, the Carolinas’ largest economies were spared, and the most significant tourist destinations—Myrtle Beach [South Carolina] and the Outer Banks [North Carolina]—came away mostly unscathed,” says Adam Kamins, also a director at Moody’s Analytics. “Rebuilding will be a tall task in places like Wilmington [North Carolina], but those efforts will provide a short-term economic lift, and the region’s positive long-term trajectory is unchanged as the Carolinas’ structural advantages remain intact.”

Florida

Florida continues to be a standout in the region. Southeast Florida’s economy is strong and will continue its impressive growth in the coming months, says Greg West, president and chief executive officer of Orlando-based multifamily developer ZOM Living.

“While the strengthening dollar will continue to curb foreign demand for Miami housing, local demand is growing as the economy becomes stronger,” West says. “Office markets across South Florida are improving, and new construction of space has begun selectively. The supply of apartments has curbed rent growth, but absorption and demand remain healthy.”

On the northern side of downtown Miami, $5 billion in development is taking place, including Miami Worldcenter, one of the largest private mixed-use real estate developments in the country, led by master developers Miami Worldcenter Associates and partner CIM Group, a real estate investment firm based in Los Angeles.

The $4 billion, 27-acre (11 ha) development will have a mix of retail, hospitality, commercial, office, and residential uses with access to transportation in the center of Miami’s urban core. The project’s first phase, which includes the 60-story Paramount luxury condominium, the 444-unit Caoba class A apartment tower, and over 300,000 square feet (28,000 sq m) of high-street retail space, is slated to begin opening in stages in 2019.

Adjacent to the project is MiamiCentral, a mixed-use rail station development that provides access to Brightline high-speed rail and connects to the adjacent Government Center station providing links to Metrorail, Metromover, and TriRail transit. “[MiamiCenter] is transforming public transportation by revolutionizing rail service into downtown Miami and providing the area the best public transportation system in the Southeast U.S.,” West boasts.

“The adjacent Miami Worldcenter will bring retail, a convention hotel, condos, offices, and apartments. All of this, combined with the world-class cultural venues such as the Frost Museum of Science and Pérez Art Museum Miami, means the north side of downtown will be one of the most complete and vibrant neighborhoods in all of Miami.”

Another of the state’s largest cities, Orlando, is experiencing strong expansion and development as well.

“Orlando continues to experience one of the fastest job growth rates in the nation,” says Lisa Dilts, principal at independent real estate advisory firm Compspring of Orlando. “While tourism was one of the leading economic drivers in the past, our economy has diversified tremendously.

“Over the past year, manufacturing, construction, and financial services employment saw the fastest rate of growth. The story of Orlando’s growth has spread, and we are seeing Orlando at the top of the list for institutional investors who are taking note of the growth and economic diversification,” she says. “Tech, health care/life sciences, and advanced manufacturing are seeing tremendous growth in central Florida and the Space Coast” (the Atlantic Coast area near the Kennedy Space Center).

The expansion of Orlando International Airport and the Orange County Convention Center, as well as enhancement and addition of tourist attractions will continue to draw people to the Orlando metro area, she predicts.

Development is under way for Creative Village, a 68-acre (28 ha) innovation district in downtown Orlando, Dilts adds. It will be anchored by the University of Central Florida/Valencia downtown campus, which is expected to open in August 2019 with 8,000 students, faculty, and staff. The first phase is under construction with $550 million in development, including a mix of residential, education, and retail uses.

In addition, Florida’s labor market is breaking loose of its shackles. After holding steady for three straight quarters, the state’s unemployment rate slipped in the third quarter of 2018 to its lowest point in more than a decade, reports Kwame Donaldson, senior economist at Moody’s Analytics. The rate for the 2018 third quarter was 3.63 percent, down from 3.83 percent in the second quarter and 3.9 percent in the first quarter of 2018.

“More crucially, wages are beginning to blossom,” he says. “At the end of 2017, wage growth was about one percentage point slower than the nationwide rate. The nationwide rate of growth in average hourly earnings has hovered between 2.5 and 3 percent for most of that period, but today’s pace is nearly one percentage point faster. The galloping job market has yet to unleash Florida’s housing market, as house prices and permits have risen at a constant pace for nearly two years.”

The costs of construction—both labor and materials—as well impact fees and land costs are making it increasingly difficult to find development opportunities that carry the returns investors are seeking, says Dilts. “As a result of increasing land costs, we are seeing more and more residential activity at the edges in C locations, which hit a price point that cannot otherwise be accommodated,” she says.

Georgia

After slowing over the past two years, Georgia’s job growth has stabilized at around 2 percent over the past year. Construction jobs, especially in nonresidential projects, are abundant, and office-using industries are bouncing back.

“With the jobless rate at an 18-year low of 3.7 percent, the year-ago growth in average hourly earnings has moderated but remains ahead of the U.S. rate, aiding consumer industries and housing,” says Moody’s senior economist Ilir Hysa. “For Atlanta, as for much of the country, a good portion of the rapid house price increase seen recently reflects an imbalanced market with limited supply of affordable homes in which a growing pool of buyers bid the price up as they compete.”

Atlanta is experiencing steady, continued development growth across most product types, though multifamily construction is slowing in in-town areas as market rates are starting to drop in response to concessions and significant new supply. “Multifamily developers, however, fueled by a seemingly unending supply of capital, continue to push into the outer suburbs where higher-return opportunities are available, due to a lack of available zoned sites. This is caused by barriers to entry resulting from suburban-community animosity toward multifamily generally,” says Robert P. Voyles, principal at Atlanta-based real estate firm Seven Oaks Company.

In the office arena, a significant number of adaptive use projects have been announced in the burgeoning West Midtown area, along with new construction projects primarily in Midtown totaling over 2.5 million square feet (232,000 sq m), Voyles says. “This is all in addition to the several Tech Square projects under way, including a major build-to-suit for Fortune 500 health insurer Anthem,” he adds.

Though he notes that overall market absorption was “somewhat modest” last year in the office sector, Voyles expected some large deals to be announced by the end of 2018. “Constraints on the supply for new capital coupled with prudent construction lending discipline by the lending community continue to hold new office construction in balance,” he says.

Projects recently announced or under development in Midtown include Hines’s T3 West Midtown, a 205,000-square-foot (19,000 sq m) office development in Atlantic Station in the flourishing Midtown submarket, and Coda, a mixed-use office, computing center, and retail complex that is a joint venture of the Georgia Institute of Technology and John Portman and Associates. In the east Midtown market adjacent to the Atlanta Beltline, 725 Ponce is expected to be completed early in 2019, Voyles says.

In the Cumberland market, the Seven Oaks/Highwoods Riverwood 200 tower is now 93 percent leased, and new speculative construction has been announced by the development arm of Liberty Media, which is building a new U.S. headquarters for ThyssenKrupp at the Battery Atlanta development, Voyles says. Also, Trammell Crow is joining Seven Oaks and State Street Global Advisors to develop a speculative office tower in the Perimeter marketplace.

Rising construction costs, however, are pushing the office market toward additional adaptive-use space, where rents can be between 25 to 35 percent lower than those for new construction. “The lack of supply of certain trades within the construction industry is likewise pushing construction pricing to a premium as Atlanta is competing with its sister cities around the Southeast, which are also experiencing major growth,” Voyles says.

Barring a major global disruption, the demand for real estate will continue in Atlanta, says Kevin Cantley, president and chief executive officer of international design firm Cooper Carry.

“Tourism is doing quite well,” he says. “Atlanta is a very diverse economy, and companies are creating jobs at many levels. Porsche and Mercedes-Benz are headquartered here, along with Delta Airlines, Coca-Cola, Chick-fil-A, and UPS. Higher education is a job machine, with Georgia State, Emory, and Georgia Tech generating a lot of employment opportunities with their spinoff business. The city has become a movie and TV production center and is home to Tyler Perry Studios.”

At Park Center in Dunwoody, real estate developer KDC of McKinney, Texas, is constructing a second 22-story, 670,000-square-foot (62,000 sq m) building for insurance giant State Farm, which uses the campus as one of its three regional U.S. hubs, Cantley notes. The first phase of the development, a 602,000-square-foot (56,000 sq m) tower, was completed in 2016. Cooper Carry is the designer of the development.

North Carolina

North Carolina’s economy is heating up—again. Year-over-year employment growth has accelerated, moving above 2 percent and easily outpacing the national average of 1.7 percent growth.
“Growth has been especially strong in tech, logistics, and housing,” says Dante DeAntonio, economist at Moody’s Analytics. “Strong demographic trends and a tightening labor market are increasing the pressure on an already hot housing market as builders struggle to keep up. The influx of workers to the dynamic labor markets in Charlotte and Raleigh is straining the already limited capacity of multifamily housing and driving rents higher.”

Thanks to a resilient economy, 2019 is forecast to be another year of growth.

“While there is a lot of construction across all product types, we are seeing continued strong demand, so we don’t expect any major imbalances to tip the real estate market one way or the other,” says Rob Cochran, managing director in Cushman & Wakefield’s Charlotte office. “Population growth in the major metro areas has remained consistently strong and is expected to continue.”

The Research Triangle—with North Carolina State University, Duke University, and the University of North Carolina at Chapel Hill—is heavily dependent on the education and medical sectors and high tech, while Charlotte is focused on financial services but is becoming much more diverse with strong growth in technology firms, he notes.

In the Charlotte central business district, two major projects are under way, Cochran notes: the first phase of Lincoln Harris and Goldman Sachs’s Legacy Union, which includes a 33-story 853,000-square-foot (79,000 sq m) tower scheduled for completion in 2019, and Crescent Communities’ Ally Charlotte Center, a 26-story, 742,000-square-foot (69,000 sq m) office tower expected to be completed in 2021 and house the Charlotte operations of Ally Financial.

While real estate development continues, infrastructure to accommodate the growing population and business activity remains the biggest issue all major metro areas face, Cochran notes.

South Carolina

A thriving tourism industry in South Carolina and strong in-migration are powering gains in leisure/hospitality and health care, which accounted for two-thirds of the state’s net job gains through the first half of 2018.

“The state’s housing market is on fire,” says Moody’s Analytics economist Michael Ferlez. “Strong household formation and rising incomes are fueling demand for housing, with house price appreciation clocking in at 6.8 percent in the second quarter of 2018.”

Though the economy of South Carolina, led by growth in private services, will outperform the national economy in the coming quarters, an escalating trade war between the United States and its trading partners poses a serious threat to state’s export-oriented manufacturing base, Ferlez says.

With healthy growth in all major metro markets, developers in the state are optimistic about the future, says Miller M. Harper, managing partner of East West Partners in Charleston.

“South Carolina tends to be on everyone’s radar, and we are seeing growth across the board, from tourism to manufacturing,” he says. “We also have a tremendous amount of people moving here. Our state’s population has doubled since 1970, and [South Carolina] is one of the fastest-growing states in the country due to people relocating from other states for jobs and for retirement.”

“Tourism is strong; manufacturing, specifically aerospace and automotive, remains robust,” says Harper. “We are also seeing significant growth in the technology sector, all of which is helping to fuel real estate activity, including East West Partners’ waterfront development on Daniel Island in Charleston.” The mixed-use coastal community on the Wando waterfront—River Landing Village—will include parks, for-sale residential property, retail space, and boat docks, he says. It will be one of the final developments on Daniel Island, a master-planned community that won the ULI Award for Excellence in 2007.

Another upcoming development is the Magnolia site that Highland Resources is developing along the banks of the Ashley River in Charleston. In addition, the city of Charleston is partnering with a local not-for-profit organization to acquire, design, and construct the Low Line, a linear public corridor for biking and walking on the Charleston Peninsula. “The Low Line will be an incredible public amenity and will help reconnect neighborhoods throughout the peninsula,” says Harper.

Infrastructure challenges and affordability are two of the biggest issues across the state. “The current land prices coupled with rising construction costs are making it more and more difficult to make real estate development projects pencil,” he says. “This is also leading to a lack of affordable housing for our labor force. Additionally, we are seeing indicators that the current tariff situation could potentially dampen growth in both our construction and manufacturing sectors.”

Virginia

Richmond’s population grew 0.9 percent in 2017, compared with 0.7 percent nationally, and net in-migration will underpin favorable demographics in coming years, thanks to the area’s high living standards, relative affordability compared with the Washington, D.C., area, and broad-based job market expansion. In neighboring suburban Henrico County, HHHunt Homes is leading the residential development of River Mill, which will include 450 single-family units, says Moody’s economist Bernard Yaros.

“Single-family homebuilding will remain an asset for Richmond,” he says. “The torrid pace in multifamily permitting will also pay dividends to the single-family market. The rental vacancy rate, which was 5 percent in the second quarter of 2018, has struggled to rise above the national average, which was nearly 7 percent in that same quarter. This puts upward pressure on rents, which, if too burdensome, can make it hard for households to save a downpayment necessary to buy a home.” An increased supply of multifamily housing will help bring down rents, allowing renters to save money to invest in a home.

Richmond benefits from a diverse economy, which tends to help level out specific market peaks and valleys, adds Andrew B. Moore, principal and director of Urban Architecture at Richmond’s Glavé & Holmes Architecture.

“We have a healthy tourist economy and benefit economically from the state government,” he says. “Richmond and Virginia have been a hot spot for redevelopment of historic buildings, driven by the federal and state historic tax credit programs. Although these programs have been recently questioned by our legislators, the economic benefits are clear.”

Virginia Commonwealth University, which has grown aggressively in the past two decades at both its Monroe Park and Medical College of Virginia campuses in Richmond, is also driving real estate activity.

“We have seen a tremendous amount of growth in urban multifamily and mixed-use projects,” Moore says. “Although we continue to see growth in the outer suburban areas, there is a greater interest in compact, walkable developments. Richmond has a reputation for being a great place to live—full of culture, arts, great food, and craft beer—while being more affordable than many other metropolitan regions, such as D.C.”

Richmond is grappling with the redevelopment of its inner-ring suburbs, particularly as retail and land development trends have made much of current uses of the suburban landscape obsolete. “Our regional malls from the 1970s through the 1990s are suffering, and our suburban counties are struggling to work with the private sector to find solutions for the future of these large tracts of languishing real estate,” Moore says.

The Virginia Beach/Norfolk/Newport News region has broken free from a year of sluggishness but remains a regional and national underachiever. Leisure/hospitality is leading the charge because of a buoyant U.S. consumer, and manufacturers are playing a key support role thanks to the federal defense stimulus that is under way after passage of the fiscal 2018 omnibus spending bill.

West Virginia

West Virginia is making economic headway, and its near-term prospects appear bright. After five years of contraction, nonfarm payrolls have resumed growth, Moody’s Analytics says, with hiring in professional/business services and trade bolstering top-line employment.

“Payrolls will continue on their upward trajectory through the end of the decade,” predicts Moody’s economist Matthew Walsh. “Construction will be a bright spot due to massive infrastructure investment. The integral natural resources industry will also make modest improvement thanks to stronger foreign demand for coal and investment in natural gas. However, the industry’s recovery will fall short of its prior peak.”

Alabama

Thanks to the expanding tech industry and in-migration of young people, Alabama is experiencing expansion in its urban areas.

“The technology industry provides a tremendous amount of opportunity to continue this growth,” says Catherine Sloss Jones, president of Sloss Real Estate Company. “We have a lot of smart, young people who are choosing to stay in the state or to return home after college, and we have organized to train the workforce around technology. Alabama offers an appealing quality of life that is more attractive than paying premiums to operate in other cities.”

Among the recent developments in the Birmingham area is Sloss Docks, a major project adjacent to Sloss Furnaces, an iconic Birmingham landmark started by Sloss Jones’s great-great-grandfather. The previously vacant 122,000-square-foot (11,000 sq m) warehouse space, located in an area of Birmingham that has not been developed in decades, is now being used for food and beverage businesses, light manufacturing, and office space, Sloss Jones says. The Back 40 Microbrewery and Pub recently opened there as an anchor tenant. “The change in use shows demand for creative repurposing of warehouse [space] in central locations,” she says.

As is the case in other Southeast states, construction and land costs in Alabama, along with rising interest rates, are major challenges for real estate entrepreneurs trying to get projects off the ground. “There is also a critical need to build stronger public/private partnerships in order to help with infrastructure requirements,” Sloss Jones says.

A surge in hiring among Tuscaloosa and Birmingham manufacturers through the first half of 2018 helped buoy the state’s labor market, says Jeremy Cohn, a Moody’s economist. But he says health care and private/business services have lagged behind the nation in growth.

“In Birmingham, a lack of demand is the culprit behind below-average house price appreciation, with the local vacancy rate roughly four points above the national average of 7 percent,” says Cohn. “In Huntsville, where job growth and housing construction remain strong, rapid expansion in single-family housing has kept a damper on price appreciation for the time being.”

Mississippi

Unlike most of the Southeast states, Mississippi remains an underperformer, with the state’s economy losing some of the steam it had generated early in 2018. “Manufacturing has not kicked into gear as it has in the broader Southeast and U.S.,” says Moody’s economist Chris Velarides.

In 2018, more shipbuilding and auto factory activity were not leading to meaningful job creation. “Mississippi’s job growth will struggle to narrow its job and income gaps with state and national averages, as continued poor population trends make it tough to nurture high value-added investment that could move the needle,” says Velarides.

Kentucky

The transportation sector is single-handedly driving growth in Kentucky: if not for new shipping jobs, payrolls would have fallen over the past year, says Tom Nichols, an associate economist at Moody’s Analytics.

“The industry will be the predominant driver moving forward,” says Nichols. “A new Amazon facility in Hebron will push up employment, along with support from UPS and smaller online firms such as Zappos. Increasingly, consumers are making purchases online, driving up demand for shipping services.”

Home prices have risen in all metro areas during the past year, with Owensboro the standout. “More recently, Louisville, Elizabethtown, and Lexington have seen healthy house price appreciation,” Nichols notes.

For the Southeast as a whole, alhough most states appear to be on an economic upswing, the region still reports below-average per-capita income and educational attainment. “This limits the ability to draw new employers to the region,” says Friedman.

“Also, the region has below-average concentration in high tech, outside of a few centers like Raleigh-Durham and Atlanta. There are only a few major corporate centers, like Atlanta, Charlotte, and Richmond, and the Southeast does not have the natural resources found in the oil patch and the Mountain West.”