This piece was contributed by Brandon Brice, Economics Instructor, and Edward Graham,
Professor of Finance and Real Estate, within CSB.
At the outset of COVID pandemic, in early 2020, remarks were shared by UNCW’s Cameron School of Business referencing the impacts COVID would have on commercial real estate. Statements were later shared regarding the condition of the residential real estate market in the Cape Fear Region as 2022 ended and 2023 began. As referenced in those statements, mass exits from such places as New York City and San Francisco due to the pandemic were being observed, with some of the wealthier residents evacuating to Long Island or Westchester County outside New York. Others, mainly the digitally inclined and zoom-connected workers, were moving much further away. Families were leaving “vertically dense” communities following commercial tenants who had departed high-rises at the outset of COVID. Commercial occupancies remain tenuous, in larger cities, with vacancies of over 50% being observed in many buildings. The values of these buildings, as evidenced by mortgage delinquencies and resales for even less than half their 2005 values (Wells Fargo recently reported this pattern in San Francisco), have collapsed. However, a far different pattern has been observed in residential markets.
These patterns, and this topic, are considered extensively in regional economics and real estate investment classes in the Cameron School. Since the start of the pandemic, there was little certainty about how communities like Wilmington, and regions like Cape Fear, would be impacted. There is far greater clarity now. Median listing prices in many mid-sized communities across the US fell in the first couple months of shutdowns but recovered in most markets by June or July of 2020. Home prices in Wilmington, and across the country, have been rapidly increasing since then. Even with recent interest rate hikes, home values in southeast North Carolina, and across much of the U.S. east of the Mississippi River, are at all-time highs. Residential rents in larger cities like New York, are at all-time highs (without adjusting for inflation), per remarks shared on June 7th on CNBC.
On May 29, Elon Musk tweeted, “Commercial real estate is melting down fast. Home values next.” In a response on Fox Business, Shark Tank star and real estate mogul Barbara Corcoran responded to Musk’s tweet by confirming commercial real estate markets are struggling but pushed back against the expectation that residential real estate will follow.
Corcoran, in line with statements made by the Cameron School, explained how 50% of her offices in Manhattan are occupied, and how in most major cities there is a 20% vacancy rate. Wilmington’s large neighbor, Raleigh, is experiencing 13% commercial vacancies according to CBRE, one of the largest national real estate firms. This is due to many people continuing to work from home, and few investors wanting to take a chance on commercial real estate. In contrast, CoStar Group reports only a 2% office vacancy rate in Wilmington for the first quarter of 2023. Lindsey Hess, senior vice president of Cape Fear Commercial, explains that this is because Wilmington companies often rely on in-person client interaction and continue to fill limited commercial space. The commercial real estate market in Wilmington is dramatically outperforming national averages, even with rising interest rates affecting commercial sales and falling bank eagerness to lend for commercial properties.
While Corcoran agrees with Musk that commercial real estate markets are faltering, she disagrees with the notion that residential real estate is next to ‘melt down’. Residential markets are experiencing a bottleneck. Sellers are reluctant to purchase homes because of high interest rates, and buyers are afraid to sell and lose their low interest rate mortgages. She predicts when interest rates eventually decline, the housing market will heat up with housing prices increasing by 20%. It will be “COVID all over again”.
In Wilmington, this bottleneck is exacerbated by steady job growth applying pressure on housing demand and a lack of housing supply. According to the Milken Institute, only Austin and Dallas have less affordable housing than the Cape Fear Region in the United States. While steady job growth in tourism, leisure and hospitality, education and health services, and professional and business services over the past decade have led the Institute to rank Wilmington the seventh best-performing city in the country for economic growth and access to opportunities, Wilmington struggles to provide affordable housing for the influx of workers.
This is reflected in Wilmington’s increasing housing prices and rents. According to realtor.com, the median listing price in Wilmington, NC for May 2023 was $499.9K. This is $50K higher than the national average and trending up by 16.5% year-over-year.
Residential markets in Wilmington, and across the US, are not as leveraged or as exposed to financial risk as was the case in the mid 2000s, prior to the bursting of the real estate bubble. That said, homeowner attention should still be paid to the uncertainty that the future always holds. Home prices today are heading upward, especially in markets such as Wilmington, with home purchases as little as a few years ago proving to be great investments. While there is no guarantee that home prices will continue to rise at their current pace, if Cocoran’s prediction is correct we will see large increases when interest rates eventually decline, and when they do Wilmington’s housing shortage will likely push prices even higher.
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