Colliers Report: Market Demands More Investment Product

Key Takeaways

• Investors are seeking opportunities for return-on-investment in secondary and tertiary markets, leading to the growing institutionalization of the Charleston investment market.
• Development is increasing across multiple property types. Developers are seeing more liquidity as the market becomes a hotbed for institutional investors.
• While investment velocity remains strong and real estate fundamentals remain favorable, supply of investable product is not growing at the same rate, causing an increase in property prices.

Investment Sales Continue to Trend Upward

Investment sales in Charleston reached $239.3 million for the first half of 2016, considerably lower than the $365.7 million of investment sales in the first two quarters of 2015. Lack of existing investable product is causing slower investment activity; however, interest from institutional and private investors remains strong. Charleston is gaining the attention of more institutional investors looking for steady and secure cash flow investments, due in part to the shift of investors from saturated and competitive primary markets to secondary and tertiary markets.

Driving investments are the strengthening economy, booming population and favorable market conditions. Stable capitalization rates and high occupancy and rental rates are in turn creating a lower-risk environment with higher returns than other comparable secondary and tertiary markets. About 35 people a day are moving to the region, making it one of the fastest-growing metropolitan areas in the nation. Since the turn of the century, nearly 200,000 people have moved to the three-county area. Employment has jumped 28 percent over that same period, driven by tourism, defense contractors, the automotive sector (Daimler-Benz and Volvo) and the construction of Boeing’s first production facility outside of the Seattle area.

Robust Developer Activity

The strengthening local economy and booming population are driving demand and creating high occupancy and rental rates across the retail, multifamily, office and industrial property markets. In turn, developers are showing increased interest in the Charleston markets. Construction in Charleston is at record-high levels, with projects being developed across all property types. Some developers are renovating and repurposing older buildings in the market to quickly deliver investable product to a market that is currently under supplied. Developers are able to find more liquidity in the Charleston market as interest from institutional investors heightens. Institutional investors are looking to Charleston for opportunities to purchase secure cash flows. Charleston offers safe investment opportunities in retail, hotel, multifamily, office and industrial real estate as the population continues to skyrocket and the local economy is thriving, especially the tourism industry.

Low Supply of Investable Product

While investment velocity remains strong and real estate fundamentals remain favorable, investment sales are starting to slow. Developer activity also remains strong, but supply of investable product is not growing at the same rate as investor demand. As real estate becomes more limited, asking prices for the remaining investable products, from land to existing real estate, are escalating. Construction costs are rising as well, as the demand in the construction industry for labor and materials tightens in Charleston. These factors are increasing the level of entry and raising demand amongst investors.

Shopping Center Sales

Job creation, a strong local economy, residential development and population growth are attracting national retailers to the Charleston market, as well as shoppers, tenants and investors. As a result, shopping centers are seeing record-high occupancy and rental rates are exceeding record levels. At the current pace of population expansion, nearly 60,000 new residents will call the region home by 2021. The region continues to be the world’s highest-ranking tourist destination, with millions of visitors a year. Combined, this potent combination will fuel retail growth market-wide. During the first half of 2016, seven shopping centers traded hands and several are expected to turn over to new owners as the renovations on the properties are completed.

• Wheeler Real Estate Investment Trust purchased a 15-property portfolio in April for $71 million. Three of the properties were in Charleston, including the 43,400 square-foot Folly Road Crossing and 52,600 square-foot Ladson Crossing, all former Piggly Wiggly-anchored shopping centers.
• The 141,300 square-foot West Ashley Shoppes, located at 946 Orleans Road, sold to Tabani Group, a Dallas-based commercial investor, for $15.5 million, or $110 per square foot. The shopping center is anchored by Ross, Bed, Bath & Beyond and World Market.
• Daniel Island Town Center is a 68,700 square-foot shopping center located at 162 Seven Farms Road. In February, it was purchased for $13.8 million by Publix Supermarkets Inc.

Hotel Sales

A strong tourism industry coupled with a growing business sector are driving interest in hotel properties.  Hotel occupancy is high and room rates are higher than those of the past. In 2015, eight hotels traded hands, totaling $62.7 million, or approximately $80,000 per room. Since January of 2016, only one hotel has sold, the 10-room King George IV Inn. The hotel is located at 32 George Street and was purchased by the College of Charleston for $3.2 million, or $320,000 per room.

Multifamily Sales

Nine multifamily communities totaling $105.2 million in value traded in the first half of 2016, accounting for a significant portion of the investment sales market. This is due to the strengthening local economy, and a booming population causing rising occupancy and rental rates and a strong demand for quality apartments.

• In June, VTT Management, Inc. out of Boston purchased five multifamily communities totaling 1,049 units for $50 million. The properties included Brentwood Townhomes, Brandywine Townhomes and Pine Harbour Apartments in Goose Creek; Colony Square Apartments in Hanahan; and Moss Creek Apartments in West Ashley.
• 17 South, a 220-unit complex on Marginal Road, sold to New York-based Kaled Management for $8.2 million in May.
• The Abbey, with 19 units located at 231 Coming Street, sold in March to James Towne Village LLC for $5.4 million.
• In February, the 240-unit Arbor Village Apartments sold to Arbor Village Property Owner LLC for $31.8 million.
• AMCS Management purchased James Towne Village, located at 3 Saw Grass Road, for $9.8 million in January.

Office Sales

Landlords and investors are placing capital in office buildings to attract interest from new tenants. Higher occupancy rates and average asking rental rates are encouraging investment as well. Charleston’s office market reached an occupancy rate of 91.2%, and the average asking rental rate was $23.32 per square foot per year at the end of the second quarter of 2016. Seven office investments occurred during the first half of 2016, equaling $40.6 million, and two of those sales were medical office buildings.

• 288 Meeting Street, a 28,400 square-foot class A office building, sold for $11,750,000 to The Turtle Factory Building Corp in June.
• Agracel Inc. purchased 2387 Clements Ferry Road for $6.8 million, or $200.00 per square foot, in February. The 34,000 square-foot, class B office building was built in 2001.
• 4130 Faber Place Drive, a 54,250 square-foot, Class A office building in the North Charleston submarket, sold for $6,475,000 to an out of town investor. The building is now under renovations that will increase the asking rental rate.
• HTA purchased 2575 Elms Center Road, a 22,248 square foot medical office building, for $6,170,000 in February.
• Northwoods Center Business Park, a Class C office park of four buildings totaling 54,000 square feet, sold for $3,525,000 to Thaynes Capital Northwoods LLC.

Industrial Sales

Five industrial properties were acquired as investments since January 2016, totaling $33.5 million in sales volume. The industrial market in Charleston is strengthening and continuously attracting capital investment from companies both new and existing in the market. Capital investments include Viva Holdings Group, Inc., ThyssenKrupp Industrial Services NA and NABAS Group Inc. Viva Holdings, a rubber and plastics products manufacturer, invested $28 million and will create 200 new jobs. Industrial inventory is expanding as 563,000 square feet delivered and 673,000 square feet are under construction and set to deliver over the next 18 months.

• A 131,803 square-foot industrial facility located at 211 Farmington Road in Summerville was acquired by an investor for $4.75 million, or $36 per square foot, early in the first quarter.
• The 171,900 square-foot industrial facility at 2550 Highway 52 and 2486 Highway 52 sold to Buck Management Corporation for $8.8 million.
• CenterPoint Properties purchased the 342,926 square-foot building at 1124 Newton Way in Berkeley County as part of a three-property investment portfolio for $62.1 million. The other two properties were in Georgia and Alabama.

 

 

End of Year Outlook

Investors are finding a lack of investable products in the Charleston market, leading to increased demand for existing and off-market offerings and record breaking sale prices. Developers will continue to be attracted to Charleston due to the rapid population growth, strengthening job market and the demand for new developments. Investable product is not currently meeting the capital market demand of lenders or investors. As the development projects currently under construction are completed, more investors will find opportunities for secure and stable investment in Charleston. A shifting global investment market as well as a thriving local economy and a booming population will continue to attract future investors.

 

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

 

 

To download the complete report: Q2 2016 Charleston Investment Market Report.