Will Business As Usual Drive CRE Projects In 2018?

Political issues, industrial and retail supply and demand, pre-lease thresholds and affordable housing may guide Charlotte development deals in 2018.

'Business As Usual' Mentality

Breaking news about North Korea’s nuclear tests, a new U.S. presidential administration and almost weekly bombing or shootings in 2017 have left investors wondering when the business world will catch up with the unstable political and social climate.

Trinity Capital Advisors founding partner Gary Chesson said he was surprised that it has been business as usual.

“The stock market keeps rising. It stays up above 22,000,” he said. “I’ve seen a lot of articles that speculate on how long the business community can ignore this uncertainty and this instability.”

Trinity Capital acquires and develops industrial properties in the Southeast.

It can be difficult to see how national and international events are going to affect business in Charlotte.

“There are significant geopolitical risks out there and it’s hard to know how that might impact the local real estate,” MPV Properties Managing Partner Jim Merrifield said. “We want to make sure that our portfolio is well-balanced and conservative in its exposure so that we can manage any geopolitical shifts that occur.”

MPV Properties offers brokerage, development and property management of industrial, land, medical, mixed-use, office, retail and urban infill investments.

Pre-Lease Threshold Holding Steady

Spec developments, office buildings and warehouses are a thing of the past.

“It’s like the old adage, build it and they will come,” The Spectrum Cos. President of Asset Management and Chief Client Officer John Boylan said. “There’s not a lot of that in our market today where you build an office building that doesn’t have some type of commitment on the front end.”

Capital markets are requiring 30% to 50% pre-leasing before a project gets started, Boylan said.

Although Merrifield has seen thresholds as high as 60% in past years, he agreed with Boylan’s assessment of the current threshold.

“There’s been some downward pressure, and banks have become a little bit more accommodating,” he said. “I don’t think it will go down any more than that.”

Shifts In Industrial And Retail

According to Chesson, most investors thought industrial space fared better than office in the last recession. Industrial success has continued in this cycle.

“There’s been a tremendous amount of capital going into the industrial sector all across the country,” he said. “Lots and lots of capital is chasing industrial deals and as a result pricing is going up.”

Chesson is planning ahead by selling about one-third of Trinity Capital Advisors’ industrial portfolio.

“We try to keep our finger on the pulse of the capital and the property markets and thus far, you can say for sure that it hasn’t been affected,” he said. “But we’re not confident that will stay that way for long. We can’t point to anything that says that we see a recession in the next 12 months. We know the cycle can’t last forever.”

Restaurants and service retail are becoming the focus for shopping centers.

“The question is: How will that hold up?” Merrifield said. “Will there be new solutions by retailers about how to sell to the public? What is the impact on that for real estate? That’s something that’s unfolding.”

Get In The Affordable Housing Game

Building more affordable housing has become a controversial subject in Charlotte. New residential development in neighborhoods close to Uptown often displace residents because of increased rent in the revived area, or they have to leave because their building is being demolished.

“It is a challenge that communities have, without a doubt,” Boylan said. “How to address that is more than a financing issue, it’s a community issue of how you collectively come together and make that work.”

Charlotte Housing Authority and The Fallon Co. are partnering to develop Strawn Cottages, a 16.2-acre mixed-use project that will include 750 apartments with 20% set aside for affordable housing. The Fallon Co. Chief Investment Officer Michael Fallon wants the Strawn Cottages to serve as a new benchmark for the Charlotte market.

“We can do affordable units here, and we can do it to the same level,” he said.

Charlotte CRE may have to see positive results before making the leap to affordable housing.

“Unfortunately, at the end of the day, the numbers still have to pencil,” Boylan said. “You still have to be able to build something that, at a minimum, can cover costs. Then there’s got to be some type of a return that’s involved. To make that happen, it’s got to be outside the traditional platform.”

Intrigued by these trends? Want to learn more? John Boylan, Gary Chesson and Jim Merrifield will be on a Bisnow panel at the Charlotte Construction and Development Conference on Nov. 9 at the Westin Hotel.