After weathering the 2020 storm relatively well, and after being a full participant in the historic recovery of 2021, Charlotte multifamily suffered something of a return to Earth in 2022. As with many high-growth markets around the country, the new construction pipeline ramped up deliveries precisely as apartment demand went missing in action.
All numbers will refer to conventional properties of at least 50 units.
New Supply and Net Absorption
Around 11,600 new units were delivered across the Greater Charlotte area in 2022. This volume of new supply was more than 30% higher than in 2021, which itself was an above-average year for deliveries. 2022 deliveries were more than 60% higher than the previous three-year average for Charlotte.
The North Charlotte submarket led the way with almost 2,200 new units while areas such as City Center, Gastonia – Mt. Holly, and Concord – Kannapolis each added more than 1,000 new units. Across all submarkets for Charlotte, only the Salisbury region had no new deliveries last year.
Of course, simultaneous to the surge in new supply was the dramatic decline in apartment demand. Net absorption of only about 2,400 units made 2022 the lowest year for Charlotte absorption of the last decade. One positive from the data, at least relative to many other markets, was that none of the four price classes suffered negative annual net absorption. However, Class D was extremely close, with less than 25 net absorbed units in 2022. As for the other price tiers, annual net absorption fell by close to 70% last year compared to 2021 for both Class A and Class C. For Class B, the 75% shortfall was even greater.
The net effect of much higher new supply and much lower multifamily demand was a 5% drop in average occupancy to a hair under 90% to end the year. Although this was the lowest year-end average occupancy for Charlotte of the last five years, it was less than 100 basis points below the 2018 finish.
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Average Effective Rent and Lease Concessions
Rent growth, similar to many parts of the country, cooled considerably from 2021 but was still well above the normal range. An 19% gain in average effective rent for new leases in 2021 was followed up with a 9% rate of appreciation in 2022. Rent growth momentum carried over into 2022 from the previous year, but by the end of summer the wind had come out of the sails and the fourth quarter saw a small decline in each of the three months.
Two submarkets stood out in particular on the rent growth front. One was already mentioned as one of the more active submarkets for new supply: Gastonia – Mt. Holly. That region saw a 20% average effective rent gain for new residents in 2022 – good for second overall. The highest jump in average rent was in the Hickory – Newton – Lenoir region where a 25% increase brought the average unit to $1,205 per month for a new lease. Only North Charlotte, with appreciation of just under 6%, failed to reach a 7% annual gain.
As would be expected, operators reached for the lease concessions lever last year for the first time since 2020. A 90% increase in the availability of discounts for new leases resulted in just more than 10% of conventional properties offering a lease concession by the end of the year. This level of availability was still low relative to recent history, but the increase offset most of the decline in availability that occurred in 2021.
Rent growth notwithstanding, 2022 was certainly a more challenging year for Charlotte multifamily than 2021. However, this dynamic was certainly not unique to Charlotte.
Most markets around the country dealt with significant declines in apartment demand, but high-growth markets like Charlotte also dealt with new supply pressure at the same time. Though there is some cause for cautious optimism in 2023, this year is likely to be another that fits more neatly in the ‘challenging’ column. New supply for Charlotte will not be slowing down this year, and it remains to be seen to what extent the usual spring and summer demand bounce will materialize.
A major factor for multifamily performance this year will be the relationship between inflation and unemployment. If inflation continues to moderate without triggering a major jump in unemployment, this year could shape up fairly well. But layoffs have already been in the headlines for the last couple of months – especially in the tech and finance sectors. Should the “soft landing” by the Fed not be achieved, there is less reason to anticipate apartment demand being substantially improved this year. Keep those seatbelts bucked, this ride isn’t over.
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