Colliers Report: Development on the Summerville Horizon

Research & Forecast Report: Q4-2016 CHARLESTON | MULTIFAMILY

Key Takeaways

• The population in the Charleston region is expected to grow at a rate of 39 people per day, three times the growth of the U.S.
• Multifamily development continues to reach record levels.
• Labor force is growing at four times the national average.
• The average rental rate in the market increased 7.3% in one year.

For statewide commercial real estate news check out our market reports at: www.colliers.com/southcarolina/insights.

Demand, Meet Supply

Home to 740,000 people, the Charleston – North Charleston MSA, consisting of Berkeley, Charleston and Dorchester counties, is located halfway between Miami and New York along the nation’s eastern seaboard. Charleston is one of the fastest-growing metropolitan areas in the country. Since the turn of the century, nearly 200,000 people have moved to the three-county area. More impressively, the population is expected to grow at a rate of 39 people per day over the next five years to 810,000 people. The growing residential population is driven by the high quality of life and the expansion of employment opportunities, and it in turn drives the development of new multifamily projects across the market.

The region, known for its beaches, hospitality and Southern charm, won several accolades in 2016, such as Number 1 City in the U.S., Number 1 City in the World, Friendliest City and Number 1 Travel Destination in the U.S. Accolades like these are bringing national attention to Charleston and driving population growth. Other evidence of the region’s high quality of life are statistics such as the average household income of $72,334, which is expected to increase by 9.5% to $79,189 by 2021, and the average net worth, which is $500,696 according to an ESRI report. Additionally, 64.6% of residents 25 or older have at least a high school diploma and 42.4% have an associate’s degree or higher.

Charleston’s strong population growth and expanding skilled, educated labor force is attracting major employers to the region such as Volvo, Daimler-Benz and Boeing. Recently, Volvo received 40,000 applications, many from outside of the market, for the 2,000 jobs available at their new facility in Summerville, and Daimler-Benz is set to begin hiring for 1,700 new jobs this summer. Although Charleston has a strong, skilled labor force, their availability is limited due to other large manufacturers in the region, like Boeing and Bosch. As a result, a new wave of residents is expected to move to the area for employment, expanding the labor pool and creating even more housing demand.

There is an estimated 4x multiplier effect on jobs from a large automotive manufacturer, meaning the 2,000 direct jobs from Volvo are expected to create a total of 8,000 jobs in the region, while Daimler-Benz is expected to generate another 6,800 jobs. The multiplier stems from jobs associated with the automotive suppliers that will set up facilities in the region to service these large automotive manufacturers. Several are currently evaluating the market in advance of the Volvo and Daimler-Benz opening dates in 2018.

This wave of employers and new residents moving to Charleston is driving the success of new multifamily developments delivering market-wide. The strength of development is not expected to slow anytime soon, with nearly 4,800 units under construction and another 5,800 units in the pipeline. Historically, developments were focused in the Downtown, North Charleston, Mount Pleasant and West Ashley submarkets. Over the last three years, new developments, although not slowing down in these submarkets, have been spreading out from the city center in submarkets such as Summerville, Ladson and Southwest Charleston. One in three multifamily units built in the last three years has been built in these outlying areas, evident of the growth of the region.

Previously not on most Charleston residents’ radars, Summerville is becoming a coveted area to live in the region. Since 2014, 936 units delivered in the Summerville submarket, and 240 units are expected to deliver this year. New retail development and employers moving into the submarket are supporting the growing population. In the coming year, Summerville is expected to see more activity from multifamily developers as well. Continued influx in residents to the region will support the strong pipeline of development that is expected to deliver by the end of 2019.

Construction

Multifamily construction has reached record levels, with nearly 8,400 units delivered over the last five years and another 4,800 units which will deliver by January 2018. Over half of those units, 53.5%, are located in West Ashley, downtown or Daniel Island. The construction pipeline shows 5,800 units planned, the bulk of which are in the West Ashley and North Charleston submarkets. Once these planned communities deliver, Charleston’s multifamily market will total more than 43,300 units, a 16.3% increase. As a result, there is a shortage of entitled land, construction labor and materials, raising the overall cost of development.

Investment Sales

Conditions remain favorable for multifamily investment sales across the nation, and Charleston is no exception. This is due to the strengthening local economy, rising occupancy and rental rates, low interest rates and a demand for quality apartments. Eight apartment communities sold in the second half of 2016, totaling $267.8 million in sales volume, more than twice the sales volume of the first half of 2016.

Market Statistics

Inventory

Charleston’s multifamily market is composed of more than 37,000 units across 177 properties. YardiMatrix, a research database, classifies these properties as Discretionary, Upper Mid-Range, Low Mid-Range, Workforce-Upper and Workforce Lower. The majority of Charleston’s inventory is classified as the Upper Mid-Range or Low Mid-Range property asset classes. The 4,791 units under construction will fall in these two ranges as well.

North Charleston, Mount Pleasant, Summerville, Goose Creek and West Ashley submarkets comprise 80% of the market inventory and will expand by 2,735 units by next year. West Ashley, a rapidly growing submarket, is expected to attract many new residents as the retail and office markets strengthen. West Ashley has 1,143 units under construction and 1,175 units in the pipeline, mostly outside of the I-526 perimeter.

Occupancy

The growing population has held the market occupancy rate fairly steady, although construction levels continue to rise. The occupancy rate at the end of the fourth quarter of 2016 was 94.5%, a slight dip from 95.0% at the end of the second quarter of 2016. The net absorption for 2016 was 577 units, despite 2,012 units added to the inventory in 2016.

Rental Rates

The average rental rate for multifamily units in Charleston has risen to $1,149 per unit in Q4 2016 from $1,073 per unit a year ago, a 7.1% increase. The average rent per square foot (PSF) increased to $1.18 PSF at the end of 2016 compared to $1.13 PSF at the end of the first half of 2016. For new product, delivered between December 2015 to December 2016, the average rental rate is $1,652 per unit or $1.76 PSF, 49.2% higher than the overall market average. Higher rents will not deter the target renters between 20-34 or 50-69. Millennials are willing to splurge on shelter, especially urban housing, while the 50-69 age group has the disposable income to spend more on luxury apartments near the beach or downtown.

Concessions

The development pipeline has facilitated a tenant-favored market supported by apartment communities offering rent concessions. In December 2016, YardiMatrix surveyed all of Charleston’s apartment communities, of which 6.4%, or only 12 properties, admitted to offering rent concessions. Half of these properties were in the Upper Mid-Range class, with most located in the Mount Pleasant and West Ashley submarkets.

The average monthly rent at properties offering concessions is 8.3% higher than the market average at $1,182 per unit. These properties, offered an annual average of $802 in concessions. The highest offerings were in James Island and North Charleston, averaging $1,220 per unit per year.

Employment

A strengthening economy and growing number of major employers in the Charleston – North Charleston MSA has contributed to a positive upwards trend in Non-Farm employment, increasing by 3.3% over the last year, adding a total of 11,000 new jobs. Employment in the MSA was recorded as 348,400 people in November of 2016.

Market Forecast

With just over 3,700 new units currently planned to begin construction, combined with the 1,800 units set to deliver in the next 18 months, the market appears to be quickly approaching the hyper supply phase of the development cycle. However, demand continues as a result of continued population and household formation. As long as jobs are created and Charleston continues to receive repeated accolades of travel, housing and foodie enthusiasts, we expect the multifamily market will continue to flourish. However, Daniel Island and Mount Pleasant may see temporary fluctuations in rent growth as demand catches up with new product deliveries.

For statewide commercial real estate news check out our market reports at: www.colliers.com/southcarolina/insights.