Greater Wilmington Business Journal, Aug. 20, 2012: Before the last granite countertop was installed, final piece of carpet laid and new wood framing applied for the next new building, interest in Wilmington’s newest apartment community – Headwaters at Autumn Hall – began gaining traction with perspective tenants.

“Leasing has been very swift,” said Bill Schoettelkotte, director of development services for Wilmington-based Cape Fear Commercial. “There’s been a pent-up demand for class-A apartment development.”

Since going vertical this spring with the more than $25 million development in the mixed-use project off Eastwood Road, more than 20 people have inked leases at the development – which is scheduled to open in phases starting Aug. 24.

“We’re very encouraged by the leasing activity,” Schoettelkotte said of the 286-unit apartment development. “We feel once we open more phases, we’ll be able to fill them quickly if this momentum continues.”

But the Autumn Hall community could soon have company, lots of company.

Headwaters at Autumn Hall joins more than a dozen multifamily developments either under construction, pending construction or being proposed for the Wilmington area.

If city and county officials approve all the projects, metro Wilmington could boast more than 2,000 new units in the coming months.

“Multifamily is the hottest deal going right now,” said Hansen Matthews, principal owner and broker with Wilmington-based Maus Warwick Matthews & Company. “I guarantee that multifamily will be the biggest commercial transaction in the area for the next three years.”

Matthews might be right.

Despite a tepid local economic recovery, greater Wilmington’s apartment market is drawing increased demand from investors and developers after a slowdown in new multifamily development during the past couple of years.

“The two-year lull had to do with a lack of financing,” said Engle Addington, a multifamily analyst with Charlotte-based Apartment Index, a firm that tracks apartment markets in Southeastern U.S. metro markets.

“Banks are lending again because they see the return multifamily developments bring. Also, the number of units currently being built hasn’t caught up because of that two-year lull.”

Addington, who’s been tracking occupancy and rental rates statistics for the Wilmington area since 2003, said before the start of the Great Recession, the Port City was averaging more than 500 new apartment units a year.

But that all came to screeching halt in 2010.

“Obviously, the banks were not lending a dime because of the housing crash, and as an effect of that, new apartment development suffered at the time,” Addington said.

“Now, just to make up for 2010 and 2011, developers would need to build 1,000 new units … right now. Our current figures show just a little over 600 units are currently under construction.”

Overall, Wilmington’s apartment market continues to trump occupancy rates in all of North Carolina’s major cities, including Charlotte, Raleigh and Greensboro.

In a July report released by Apartment Index, Wilmington’s average occupancy rate now sits at 93.8 percent. That’s slightly lower than the 94.3 percent rate reported last quarter.

Wilmington also tied with Orlando, Fla. as having the fourth-highest occupancy rate ranking in the Southeast. Chattanooga, Tenn. reported the highest occupancy rate in the Southeast at 94.4 percent, followed by Savannah, Ga. at 94.1 percent and Roanoke, Va. at 93.9 occupancy.

Rents also remain healthy.

Despite seeing occupancy rates drop slightly, metro Wilmington’s average rents have increased from $715 per month last quarter to $760 per month this quarter. That’s up $90 from $670 per month in 2009, according to the report.

“I do expect over the coming year the occupancy rate may fall to 93 percent, but that’s still a pretty healthy number,” Addington said. “Rents should continue to grow at 3 percent annually in Wilmington.”

Continued growth

Challenges in the housing market, along with a housing shift – particularly with young professionals in their 20s and baby boomer retirees – continue to fuel the need for multifamily growth throughout the region.

“It’s not just Wilmington, but it’s a trend across the country,” Addington said. “Some people have either lost confidence in the for-sale housing market. They’re downsizing because the kids no longer live at home or they cannot qualify for a mortgage to purchase a new condo or house and they are choosing to rent.”

Addington added that a number of the new units going vertical are within the cities, adding that very few developments are being constructed in the suburbs.

“People, particularly younger people, want to live in the city because it’s closer to work and gas prices are too high to commute in from the suburbs,” she said.

“Developers are taking advantage of that demand by building these large-scale developments in desirable locations within the city, and with it, offering a lot of amenities to entice new tenants.”

Being a college town also helps.

With student enrollment growing at University of North Carolina at Wilmington and Cape Fear Community College, developers are taking advantage of student renters – a market that typically yields higher rents per room.

Adam Sosne, a local developer who specializes in multifamily development, recently submitted plans with Wilmington’s development services division for Suites at Camden Forest – a development with a 48-unit garden style apartment building and 56 townhomes geared toward students.

Construction also continues on Roanoke, Va.-based University Housing Group’s 228-unit, $28 million Carolina Cove apartment complex along Randall Parkway.

And Chicago-based Core Campus LLC is under contract to possibly purchase 6.6 acres where the University Arms Apartments currently sit to redevelop the parcel into a four-story, 124-unit development targeting student renters.

“Student housing is a hot thing to build right now, because universities and colleges can’t build enough on-campus housing,” Addington said. “On average, companies can charge about $600 per bedroom, making the rent for a conventional two- or three-bedroom unit worth $1,300-$1,800 a month.”

Too many, too fast?

Despite the announcement of hundreds of new units for the Wilmington area, Brian C. Eckel, partner and principal broker of Cape Fear Commercial, does not foresee a glut in new multifamily units anytime soon.

“I agree that apartments are certainly hot right now,” Eckel said.

“Many projects have been announced, but we will have to see how many actually get built. There are numerous barriers to entry in this area ranging from zoning challenges to off-site [transportation] improvements that can be substantial.”

Eckel added that some funding mechanisms to pay for large-scale, multifamily projects could also stagger rapid apartment development.

“Although lending is currently available, there is typically significant equity required,” he said.  “The projects that are using HUD financing may take more than a year to work through the system and are going to be subject to the future market conditions and will also have rate inflation risks, which may significantly impact some of the proposed projects. I believe we will see lenders grow pretty cautious and will likely become very selective on which project to finance with all of the proposed developments.”

Matthews, whose firm recently sold nearly 20 acres for two future apartment developments slated for the Wilmington area, agreed.

“I think the market can absorb everything so far,” he said. “Everything that’s being proposed or rezoned is going to take a while to develop. Is there a possibility that we could overdevelop the market – yes. Do I think that will happen – no.”

Addington added the region’s staggered approach to apartment development was also prevents the multifamily market from being overbuilt, for now.

“The demand is high, so building is a good idea,” she said.

“Wilmington can absorb those units currently under construction and occupancy rates will maintain their current rate. Conservative forecasts call for supply to slightly exceed demand in the next year because Wilmington is a small market. But based on what we’re seeing in that area, we feel it’ll be longer than a year before supply exceeds demand.”