“More so than in other regions, we're seeing greater national focus on the Southeast,” says Charles Williams, senior vice president and southeast regional manager at KeyBank Real Estate Capital. “Our clients are continuing to look closely at the Carolinas, Florida and Georgia, in particular. We're seeing more people moving away from the Rust Belt and toward areas like the Sunshine State and Carolinas. This population boom combined with the trend of Millenials postponing home ownership, the multifamily sector remains red hot.”

Multifamily Melts the Thermometer

It's not a new story, but multifamily remains the hottest trend in the Southeast. You can measure the temperature of the multifamily market in the region by drilling into the major metros. According to Marcus & Millichap, metrowide vacancy in Atlanta has improved nearly 500 basis points since 2009 to hit 4.9%. In Miami, vacancy sits at 3.5%. Orlando sits at 6%.

Kevin Finkel, executive vice president of Resource Real Estate, which focuses on the multifamily sector across 21 states, says rent growth is strong for class B and C apartment communities in the Southeast, especially those that serve the US workforce renter. Rent growth, he continues, is slowing a bit for class A properties but the overall multifamily market is still hitting on all cylinders. But he does have one concern.

“The vast majority of new apartment construction is urban and high-end—class A-plus construction—that targets rents at or above $2,000 per month. There is virtually no new apartment supply being built for the workforce,” Finkel says. He expects this to be a long-term trend because there is no market or governmental mechanisms that encourage developers to create new workforce housing with rents at about $1,200 per month given the high cost of land and construction.

“We believe multifamily real estate firms with the experience and capabilities to fully renovate the aged apartment inventory available today into upgraded rental options that are in high demand by today's workforce offer a significant opportunity,” Finkel says.

Meanwhile, there are plenty of new multifamily projects rising from Southeast dirt. The Related Group has been especially active, starting four multifamily projects in South Florida in 30 days. And affordable housing developers are targeting Miami, the nation's least affordable major city, according to the Center for Housing Policy.

Multifamily investors are snapping up opportunities in Southeast markets and lenders are betting on new multifamily developments like Melody Tower, which recently won a $67 million construction loan from TotalBank. RADCO has been one of the most active Southeast multifamily buyers. The firm now owns 26 multifamily communities with over 7,000 units in six Southeast and Midwest cities—and grabbing most of them in the past two years and largely focusing on Georgia.

“We are intimately familiar with the Georgia marketplace and have invested a significant amount of capital into the community,” says Norman J. Radow, CEO of RADCO. “In particular, Metro-Atlanta has enjoyed an improved job market, with recent employment increases in construction, retail and hospitality. We expect to acquire additional properties in Georgia over the coming months.”

Mixed-Use Mixing it Up

Mixed-use and transit-oriented developments are emerging as a staple of new construction across the Southeast, though they are still less visible to the capital markets. It's rare to see a new office or condo building rise without ground floor retail or a hotel component.

Miami is witnessing three game-changing mixed-use and transit-oriented developments coming off the drawing board and out of the dirt: Swire's $1.05 billion Brickell CityCentre with office, residential, retail and hotels; the $2 billion Miami Worldcenter with those same components; and Miami Central's All Aboard Florida, a three-million-square-foot urban mixed-use transit-oriented development.

[IMGCAP(1)]

“MiamiCentral demonstrates that a true passenger rail system and a connected public transportation system can reinvigorate a downtown, as so many world-class cities enjoy,” says Michael Reininger, All Aboard Florida's president and CEO. “This is a rebirth for two ideal areas of Downtown Miami, an opportunity to create an identity for a historic part of the city, and reinvigorate the desire for mass transit. The importance of Downtown Miami is evidenced by the significant investment made not only by All Aboard Florida, but other key developments, and will be a hugely sought after iconic destination, in a newly urbanized neighborhood.”

But it's not just Downtown Miami, although the city has one of the best comeback stories in the Southeast. Traditional Neighborhood Development Partners is planning transit-oriented developments in North Carolina, including Lowe's Grove, on the former site of a farm next to the Research Triangle Park in Durham. And Park Central, a new 17-acre master-planned project in the Perimeter Center area of Dunwoody, GA, recently got underway. State Farm is leasing 585,000 square feet in the transit-oriented development's first office building.

“I see a real resurgence in true urban density, a focus on transportation and stores that are being built to 'human scale' versus mass merchandisers,” says Mike Cohn, regional president and co-founder of Lennar Commercial. “I see a focus on amenities to serve that growing urban density, all of which makes for more walkable and livable communities.”

Alex Carrick, chief economist at Construction Market Data, says new commercial construction projects in the Southeast are largely stuck in neutral—with one exception. He points to a clear move toward mixed-use projects that combine offices, retail space, condo residences and even manufacturing facilities.

“Out of the 40 largest upcoming commercial construction projects in the Southeast, nearly half will be mixed-use facilities,” Carrick says. “Mixed-use projects provide a developer with a more stable source of revenue. A risk in one area, such hotel accommodation, can be offset by activity levels in another, such as retail. Mixed-use projects can also widen the financing base. Lenders are reassured when borrowers have several different sources of earnings. All their eggs aren't being placed in one basket.”

Dealing in Distressed Assets

Distressed assets may be dwindling in the Southeast, but there are still deals to be done and there may be another wave just ahead. Indeed, much of the commercial real estate industry is bracing for the CBMS maturities coming due in 2015 through 2017. Nelwyn Inman, a shareholder at Baker Donelson in Chattanooga, isn't reassured by the decline in delinquencies in 2014 because she's also witnessing many challenged borrowers.

[IMGCAP(2)]

“We continue to see many borrowers who are faced with the inability to reposition aging assets in the face of growing demands of new and renewal tenants in multifamily, office and retail properties,” Inman says. “With maturity defaults increasing as we head into 2015, we expect this issue to hamper what might otherwise be simple transitions into replacement financing on older properties at a time when the demand for updated space crosses paths with competitive pricing pressures in most secondary and tertiary markets in the Southeast.”

Noteworthy is the fact that some distressed condo converters are still relying on CMBS loans to solve the problem. The asset Lantern 22 successfully completed a multi-year turnaround strategy on Lantern Square Apartments, a failed condo conversion project in Jacksonville, FL. Prudential Mortgage Capital Co. loaned Lantern $18.1 million in a CMBS transaction. Lantern 22, which is managed by Vivian Zumot Dimond on behalf of several private investors, initially acquired the property in 2006. Just before the economic crash, the owners converted the apartment complex into a condo and began trying to sell units.

“After it became clear that there was not a market for condos at this property, the owners began re-acquiring units to take advantage of the strong market demand for multifamily properties,” says Greenberg Traurig attorney Steve Bassin, who represented Lantern in the deal. Lantern used the CMBS loan to refinance an existing condo conversion mortgage loan and reacquire units from third parties in the building.

Meanwhile, investors who picked up distressed assets in the downturn are starting to turn them for a profit. A Continental Properties Acquisition Corp. entity in September sold once-distressed 25,000-square-foot shopping center in the Orlando suburb of Clermont, FL. The firm acquired Hancock Village Shopping Center in May of 2011 for $2.1 million and sold it for $4.25 million.

“At the time of the acquisition, the property was only 50% leased coming out of a receivership and a protracted foreclosure process,” says Peter Mekras, a senior vice president of CREC, who brokered the sale on behalf of CPAC. CPAC is also doing distressed asset deals via auction—and has done nine in the last three years.

Despite the potential doom of CMBS loans and delinquencies coming down the pike, Ron Cohn, an attorney at Arnstein & Lehr, sees good signs in the market as more private commercial real estate capitals fund their own projects and more banks are selling problems loans to private investors rather than incur the expense of litigation.

“These private companies often have more flexibility in how they handle such loans, because the regulatory pressure on these investors is much less than on institutional lenders,” says Cohn. “I think this trend is allowing banks to be a bit more aggressive in their real estate lending, knowing they can sell a loan if it becomes a problem.”

Big City Lights

Beyond these three big trends the industry is watching—multifamily, mixed-use and distressed assets—regional trends are worth noting. Namely, some Southeastern cities are preparing for boom times while others are still straggling.

“As more companies continue to operate globally, we're seeing high demand in what we would consider 'international' cities,” says KeyBank's Williams. “Areas such as Atlanta have increased demand for commercial real estate development thanks in part to its proximity to one of the busiest airports in the country.”

Williams also points to major cities like Nashville, Orlando and Tampa as evolving into employment hubs as populations there continue to grow. As he sees it, this has significantly helped to bolster the multifamily development in these areas. All that said, the Southeast isn't all sunshine and peaches. A national trend is affecting the Southeast—the fundamental shift in how the US purchases goods.

[IMGCAP(1)]

“While the rise of e-commerce has assisted in the growth of the industrial sector, it has hurt that of retail,” Williams says. “Despite growing consumer confidence in today's economy, it's likely that we won't again see the same levels of retail demand as traditional shopping malls and brick and mortar stores slowly become obsolete in today's online retail environment.”

Lennar's Cohn also sees retail struggling, though he admits Miami may be the anomaly in the region. According to Marcus & Millichap, retailer expansion will drive Miami's vacancy down to 3.9% this year as more than 1.5 million square feet of space is absorbed. Developers are rushing to build another 1.4 million square feet of retail space this year and rents are rising. But, again, Miami is the anomaly.

“Suburban box retail and non-fortress malls—strip centers—are struggling,” Cohn says. “They lack character and appeal and have fallen out of favor with Millennials who want an experience with their retail and fashion. Retail growth follows real housing growth, not issued permits or approved lots. Exurbia is out.”

Looking Ahead

Where does the Southeast go from here? Expect to see more mixed-use, transit-oriented development and public-private partnerships, says Jim Holleman, a principal with Cushman & Wakefield in Knoxville, TN. “Development focus will move away from public-sector to more private-sector development,” he says. “We expect to see private capital emerge as a dominant player in local development.”

One notable P3 in the Southeast is known as the I-4 Ultimate, a $2.3-billion partnership between Skanska and the Florida Department of Transportation to rebuild the Interstate 4 corridor. It's the largest P3 project underway in the US right now. Fred Hames, general manager and executive vice president of Florida at Skanska, says, “The reconfiguration of I-4 is an effort to improve the quality of life and the safety of residents, while giving Central Florida a competitive edge when it comes to attracting new businesses and economic growth to the region.”

On the multifamily front, the “o” word—overbuilding—is being bandied about more often. Resource Real Estate's Finkel points to a growing abundance of new supply in high-growth cities like Raleigh. Still, he's not overly concerned about the region as a whole.

“The strong markets will continue to be strong and the weak markets will continue to be weak,” Finkel says. “New apartment supply in some urban submarkets may quell class A apartment rent growth a bit, but we do believe that there will be enough absorption for the new supply. The workforce renters continue to be the rental class most in need of product, and we expect renovated class B apartment targeting the workforce to continue to experience relatively high rent growth.”

Finally, on the capital markets front, Key Bank's Williams sees a strong future. And, he says, if interest rates remain low he doesn't expect to see much change to the Southeast commercial real estate climate over the next one or two quarters. Still, he offers a word of warning: If we see a run-up in rates, that is when we may see the market take a hit.

“Despite our own challenges, many international parties still view the US as a safe haven for capital. They know that if they invest in US commercial real estate, they will see a return on investment,” Williams says. “With interest rates still at historic lows, now is the time to lock in rates for the next 10 years. When the inevitable rate rise occurs, it will move very quickly. I keep telling my clients that the best d ay to rate lock is today because you don't know what tomorrow will bring.”