Charlotte Metro Area

Third Quarter 2011

SURGING CLASS A SECTOR DRIVING CHARLOTTE MARKET

Employment growth and the migration of former homeowners to Class A rentals continue to sustain strong operations in the Charlotte apartment market. Total employment grew only 0.3 percent in the rst half of the year, but sufcient demand was generated to reduce apartment vacancy to the low-7-percent range. The markets Class A properties remain highly desirable to residents not yet willing to wade back into the for-sale housing market, as nearly 800 additional highend units were occupied in the past six months. As a result, Class A vacancy continues to plunge, with strong demand greatly reducing vacancy in areas such as the North Pineville and Fairview North submarkets. Charlotte also continues to re-establish itself as a primary destination for relocations, with net migration increasing more than 80 percent over the past year. In absolute numbers, the inow of new residents falls short of the levels recorded before the recession, but the increase nonetheless remains sufcient to augment housing demand. Investment activity continues to pick up across the market, although the number of deals still remains below the level that might be expected in a metro of Charlottes size and economic diversity. Institutions remain active, closing deals for several large top-tier properties over the past several months, with cap rates typically in the low- to mid6-percent range. Additional opportunistic purchases of large properties to ll out existing portfolios of high-end rentals will likely occur in the months ahead, as the market has a large stock of recently built Class A complexes. Further stabilization in the nancial services sector and additional job creation in other key industries may also cultivate greater condence in the markets long-term prospects and help elevate Charlotte to status as a targeted investment market. The metros Class B and Class C properties will also garner increased attention in the coming months as lenders further expand access to nancing and interest rates remain low.

2011 ANNUAL APARTMENT FORECAST

1.9% increase in total employment

Employment: Driven by a strengthening private sector, total employment in Charlotte will expand 1.9 percent, or by 15,600 workers, in 2011. Last year, local employers created 5,400 jobs following a loss of 74,400 positions in the preceding two years.

900 units will be completed

Construction: Builders will complete 900 units in 2011, compared with more than 2,200 units last year and an average of 2,500 rentals annually over the past 12 years. The planning pipeline is sizable, with more than 9,200 units, but none of the planned projects has a scheduled start date. Vacancy: The vacancy rate will reach its lowest level in more than three years, as strong demand for upper-tier units will support a 170-basis-point decline to 6.7 percent. In 2010, the rate decreased 190 basis points.

170 basis point decrease in vacancy

2.7% increase in asking rents

Rents: In 2011, asking rents will climb 2.7 percent to $789 per month and effective rents will advance 3.5 percent to $717 per month. Asking rents rose 0.9 percent last year, accompanied by a 2.4 percent jump in effective rents.

ECONOMY

Employment Trends
6%
Year-over-Year Change Metro Area United States

The rate of job growth eased in the second quarter as employers hired only 500 employees. Year to date, 2,800 positions have been created in the metro, an improvement from the 600 jobs eliminated in the second half of last year. Private-sector employers added 5,100 jobs in the rst half of 2011, offsetting the elimination of 2,300 government positions. The education and health services, and leisure and hospitality sectors have added a combined 3,000 jobs so far this year. Smaller gains were also recorded in professional and business services, and retail employment. In the nancial services sector, approximately 200 positions were created in the rst six months of 2011. Modest growth may ensue in the coming months due to the probability of greater government regulation and lower prots. Bank of America, however, recently revealed plans to add 500 nancial advisers by year end, including an unspecied number locally. Outlook: Total employment in Charlotte will expand 1.9 percent, or by 15,600 workers, in 2011. Last year, 5,400 jobs were created.

3% 0% -3% -6%

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11*

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

HOUSING AND DEMOGRAPHICS

Median Existing Home Price (Y-O-Y Chg.)

Home Price Trends

12% 6% 0% -6% -12%
Metro Area United States

In the second quarter, sales of existing single-family homes declined 19 percent from one year earlier, when considerable activity occurred due to a rst-time homebuyers tax credit. The median price was down slightly from the second quarter last year, at $186,200. Builders completed approximately 4,500 single-family residences in the year ending in the second quarter, a 13 percent drop from the preceding 12 months. Home building remains depressed, with completions in the market about 60 percent less than the long-term annual average. Multifamily construction also remains slow, as permits for 1,400 units were issued over the 12 months ending in the second quarter, marking a 33 percent drop from the prior year. Over the long term, an average 3,900 units have been permitted per year. Outlook: The current lull in multifamily permitting marks a unique occurrence in a market prone to cycles of robust development and will restrain completions for several more quarters.

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11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, Economy.com, NAR

Construction Trends
8
Number of Units (thousands) Apartment Completions Multifamily Permits

CONSTRUCTION

6 4 2 0

Developers placed into service a single, 312-unit project during the rst half of 2011. In the preceding half year, developments consisting of 758 rentals were delivered in the market. Projects containing nearly 1,000 units remain under construction in the metro. The total includes an additional 513 units scheduled for delivery in the second half of 2011. The projects slated for completion this year are: the 276-unit Ashley Court at Pinnacle Point in the Harris Boulevard/Mallard Creek Church Road submarket; and 237 rentals at the Metro 808 complex in East Charlotte. More than 9,200 units are planned in the market, representing roughly 9 percent of existing stock. Approximately 2,500 units are planned in the Harris Boulevard/Mallard Creek Church Road submarket. Outlook: Despite a large planning pipeline, builders will complete only 900 units in 2011, down from more than 2,200 units last year.
Marcus & Millichap

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* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

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Apartment Research Report

VACANCY

After plunging 60 basis points in the rst quarter, the vacancy rate in the metro fell an additional 70 basis points in the April-to-June period to 7.1 percent. Since peaking at the end of 2009, the vacancy rate has declined 420 basis points on net absorption of 6,300 units.
Vacancy Rate

Vacancy Rate Trends

13% 11% 9% 7% 5%
Metro Area United States

Class A vacancy was 6.1 percent in the second quarter following a 60-basispoint decline. Year to date, steady demand for upper-end rental housing has driven down the Class A vacancy rate 120 basis points. Also in the second quarter, Class B/C vacancy receded 90 basis points to 8.2 percentthe fourth consecutive quarterly decrease. During that time, more than 1,400 additional units became occupied. Outlook: The vacancy rate will decline 170 basis points in 2011 to 6.7 percentthe lowest rate in more than three years. In 2010, the rate plummeted 190 basis points.

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11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

RENTS

Property owners continue to translate tight vacancy into greater pricing power. After imposing a 0.7 percent increase in the second quarter to $778 per month, asking rents have risen 1.3 percent in the past six months.
Year-over-Year Change

Rent Trends
6% 3% 0% -3% -6%
Asking Rent Effective Rent

Concessions fell 20 basis points in the second quarter to 9.5 percent of asking rents due to a 1 percent rise in effective rents to $704 per month. So far this year, effective rents have climbed 1.6 percent. Despite positive trends, rents remain below recent peaks. Year to date through the second quarter, Class A asking rents have advanced 1.5 percent to $902 per month, but remain 2.2 percent less than the peak level reached three years ago. Class B/C asking rents rose 0.6 percent in the rst half of this year to $635 per month. Outlook: In 2011, asking rents will climb 2.7 percent to $789 per month, and effective rents will advance 3.5 percent to $717 per month.

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11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

SALES TRENDS*

Based on a limited number of transactions, the number of sales increased 69 percent over a recent 12-month span. Several institutional purchases of large properties have occurred so far this year.
Median Price per Unit (thousands)

The median price of the properties sold over the past 12 months was $100,000 per unit. A different mix of properties changed hands in the previous year at a median price of $41,200 per unit. Pricing trends remain difcult to identify in a market with so few transactions, but most stabilized, non-institutional grade assets likely have to be offered from 7 percent to 8 percent to attract interest. REITs and institutions, which typically have lower return requirements, often transact deals at cap rates of around 6 percent. Outlook: Continuing improvements in operations will further stabilize NOIs at many properties in the months ahead, while expanded nancing will bring more leveraged buyers off the sidelines. Niche investors will also continue to weigh student housing complexes in the areaa number of these properties have changed hands in recent deals.

Sales Trends
$100 $75 $50 $25 $0

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* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

** Data reect a full 12-month period, calculated on a trailing 12-month basis by quarter.

Marcus & Millichap

Apartment Research Report

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CAPITAL MARKETS
BY WILLIAM E. HUGHES, SENIOR VICE PRESIDENT, MARCUS & MILLICHAP CAPITAL CORPORATION

Visit www.NationalMultiHousingGroup.com or call:

Hessam Nadji Senior Vice President, Managing Director Tel: (925) 953-1700 hnadji@marcusmillichap.com

Apartment mortgage rates should remain favorable through 2011, enhancing property returns and supporting values. While the 10-year Treasury yield likely will remain in the low- to mid-3 percent range over the next few quarters, the relatively wide spread to all-in lending rates provides some cushion against potential upticks. Encouraged by sustained improvements in occupancy and rents, nearly all lending sources have increased funding for apartment deals. As a result, mortgage debt has become readily available for performing assets across markets and property classes, supporting a 40 percent increase in multifamily origination volume over the past six months when compared to the previous period. The agencies continue to dominate but have lost marketshare as insurance companies, private capital sources and local/regional banks, in particular, compete more aggressively for new business. In the near term, life insurance companies will continue to favor larger, best-of-class assets in primary markets, while local and regional banks focus on lower-quality assets with consistent revenue streams and strong, proven sponsorship. Underwriting requirements eased over the past year as strengthening apartment fundamentals and rming property values restored lenders condence in the market. Debt-service coverage requirements slipped to 1.15 to 1.25, while loan-to-values on new loans generally improved to 70 to 75 percent, and in some limited situations, have pushed to as high as 80 percent. Two projects started construction in the rst half of the year, including the 200-unit rst phase of the City Center Green project in the Downtown submarket. No completion date has been set for the project. The Harris Boulevard/Mallard Creek Church Road submarket remains a target for developers. Several major employers, such as IBM and the University of North Carolina-Charlotte, have large workforces in the area. Planned units represent a substantial 17 percent of existing rental stock in the submarket, but none of the projects has a scheduled start date. An additional 700 units were occupied in the West-Charlotte Airport submarket over the past year, accounting for the signicant drop in its vacancy rate. Concessions fell 30 basis points to 8.7 percent of asking rents during the period.
Vacancy Rate
4.5% 4.7% 4.9% 5.0% 5.1% 6.7% 7.9% 9.5% 12.2%

SUBMARKET OVERVIEW

Prepared and edited by Senior Market Analyst Research Services For information on national apartment trends, contact Vice President, Research Services Tel: (602) 687-6700 ext. 6803 john.chang@marcusmillichap.com Charlotte Ofce: Managing Director glucas@marcusmillichap.com 101 South Tryon St., Suite 2460 Charlotte, North Carolina 28280 Tel: (704) 831-4600 Fax: (704) 831-4610 Price: $150 Marcus & Millichap 2010 www.MarcusMillichap.com

Art Gering

John Chang

SUBMARKET VACANCY RANKING

Rank
1 2 3 4 5 6 7 8 9 10

Gary R. Lucas

Submarket
Carmel Northwest Charlotte Fairview North Downtown North Pineville East Charlotte-Albemarle Corridor Gaston County N. Tryon St.-The Plaza West-Charlotte Airport

Y-O-Y Basis Point Change

-200 -340 -440 -360 -440 -250 -310 -150 -540 -1,010

Effective Rents
$812 $804 $785 $1,097 $672 $758 $586 $605 $536 $767

Y-O-Y % Change
4.2% 1.3% 2.0% 8.1% 1.8% 2.3% 1.7% 2.8% 1.1% 2.4%

Harris Blvd./Mallard Creek Church Rd. 6.4%

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, National Association of Realtors, Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.