RALEIGH – At the inaugural launch event of an annual report that tracks investment opportunity and economic growth in the Triangle, a panel of commercial and residential real estate developers disagreed on whether the region is at risk of a bubble in the real estate markets.
“I don’t see any kind of bubble, I see the exact opposite, for the next ten years,” said Jim Allen, president of the President at The Jim Allen Group, who develops residential real estate in the region.
But Frank Baird, CEO of Capital Associates Management, is concerned that the very same macroeconomic factors and fiscal policy that has pushed the capitalization rates of multifamily commercial properties low enough to attract new buyers at high valuations could result in a sudden increase in interest rates and subsequent bursting of a real estate bubble.
“That’s where our bubble, potentially, is,” said Baird.
Despite disagreeing on this matter, the panelists, which also included Jim Anthony, CEO of APG Capital, and Matt Hohorst, vice president of ARCO Design/Build, agreed on one aspect of the Triangle real estate market: going forward, the best investment opportunities in the Triangle will come outside of Raleigh’s city limits.
Tertiary markets in the Triangle will return value
“Tertiary markets are going to be where the value is going to be,” said Hohorst, defining that as anywhere that is a 40-minute drive away from Raleigh. “I think you’ll see clusters pop up that way.”
Specifically, areas where there will be an increasing need for labor in life science industry, such as regions south, east, and north of Raleigh, said Hohorst, like Holly Springs, Sanford, Wake Forest, and Rocky Mount. Those clusters “will grow out the nucleus of Raleigh,” said Hohorst.
And where people work, leads to increasing demand for where people wish to live, noted Allen.
“There are markets where I swore I would never develop residential uses in, that I’m in now,” said Allen, whose company’s website lists available “JAG New Homes” in Zebulon, Mebane, Wendell, Louisburg, Youngsville, and others.
That’s due to market conditions, said Allen, noting that the housing markets for residential real estate were already tight prior to the pandemic, as North Carolina, and the Triangle, are attracting more households via in-migration than households departing to other states and regions, as economic development and job creation continue regionally.
What the region is facing right now is a housing shortage, said Allen. New construction can’t keep up with the pace of in-migration, not because of the timeline for construction, but because of the time it takes for new residential developments to gain permitting and approval, said Allen.
“It takes 3-4 years to develop a new home neighborhood in the Triangle,” said Allen. “That’s got to stop,” he added, noting that the demand for housing is outpacing the region’s ability to add new lots for potential residential development.
At the current pace, it may take a decade for the Triangle to reach equilibrium in the residential housing market, said Allen. “And we don’t even yet have the impact from Apple.”
“Pricing is just beginning to rise, I think it will take a decade to smooth out,” said Allen. “We are still very affordable, but don’t expect current pricing to slow down any time soon.”
One of the impacts of the increasing prices for residential real estate in the Triangle, despite the market fluctuation in August, when the median home sale price decreased for the first time in 2021, is that buyers are seeking homes farther away from the urban centers in Raleigh and Durham, said Allen.
“What it’s done is created true urban sprawl for the first time in the Triangle,” said Allen. “Because those are the more affordable sectors of our economy.”
“People want to live close to where they work,” said Allen. And there are strong labor markets, and commercial developments, in suburban and exurban areas of the Triangle, particularly in the life sciences and industrial sectors, said Allen. “The great news, and the reason urban sprawl is happening so much, is that so many people are working remotely.”
Delta variant impacted Raleigh, but there’s still interest in urban real estate
“Our community was set back ten years, last year,” said Frank Baird, CEO of Capital Associates Management. “It’s difficult for retailers, restaurants to get back into full swing.”
Baird said he thought that Raleigh would recover, and that foot traffic and spending activity would resume, but then changed his outlook around the first of August, when concerns about the Delta variant meant fewer workers, fewer tourists, and fewer people competing for parking.
“A lot of people are going to have to reinvent how they are going to do things,” noted Baird. But a slowdown of activity in downtown Raleigh doesn’t necessarily mean interest in commercial or residential real estate is waning, or that prices will fall, said Baird.
That’s because how Raleigh compares to other markets, particularly other southeastern ones, Baird explained.
“Our pricing downtown, and this holds true in suburbs and urban, in multifamily, and in office rents, are so much dramatically lower than Austin, Nashville,” he said. “That we still create a really good value for companies relocating or kids renting apartments downtown in more urban-style apartments.”
There’s been a dozen very-high-value transactions in Wake County in the prior 60 days, with multifamily apartments being bought and sold, including many in Raleigh, as July 2021 set a record in this portion of the market with nearly $1 billion in sales volume, with eight Wake County multifamily properties selling for more than $30 million.
That’s put Baird a bit on edge.
“Thing that has most surprised me is the cap rates in the Raleigh market for multifamily in the last 60-90 days,” said Baird. “I don’t think that’s necessarily sustainable right now.”
“We’re going to see interest rates spike like we’ve never seen before,” said Baird, if the U.S. debt increases too much. “When those go up, cap rates really go up.”
And that could be trouble for developers, who rely on access to capital at lower interest rates, who could two or three years down the road, when they’re in need of financing for a construction loan to make capital improvements, no longer have access to interest rates assumed during due diligence prior to a purchase agreement being executed. “That’s where our bubble, potentially, is,” said Baird.