High Occupancy and Rent Growth Supports New Construction

 

KEY TAKEAWAYS

• Charleston, SC’s growing economy, thriving with low unemployment rates, a high quality of life, and a growing young population with bachelor’s degrees or higher, is contributing to the recent success of the multifamily market.
• 2014 ended with the market’s second highest occupancy rate since the third quarter of 2007, according to MPF Research.
• Same-store rents up 4.9% since February 2014 according to AptIndex.
• Sales activity was healthy throughout the year with institutional ownership soaring.
• Of the 21 markets tracked by AptIndex in the Southeast, only five cities had lower vacancy rates than Charleston.

 

MARKET OVERVIEW

The Charleston, SC multifamily market remains vibrant and poised for further growth in demand, new construction, monthly rents, and sales velocity.  The market’s diverse and flourishing economy is a significant driver of the multifamily market, which is supported by the Port of Charleston, manufacturing growth, tourism, the military and the growing technology sector.  Boeing, which employs 7,800 individuals locally, recently designated its Charleston plant as the sole producer of the 787-10, the newest and largest member of the Boeing Co.’s Dreamliner family.  In addition to the growing manufacturing sector, Charleston’s technology sector is gaining attention and earned a ranking from Statetech in 2013 naming it one of the top 12 tech hubs in America.  Software companies Blackbaud, Inc. and Benefitfocus each have corporate headquarters located in Charleston and employ 1,300 and 1,000 individuals, respectively.  Earlier this year Benefitfocus announced plans to expand its Daniel Island campus and create 1,200 additional jobs.  Such high-wage jobs attract young professionals to the area, adding to the pool of renters and benefiting the multifamily market.

 

Charleston’s younger population is growing in size, increasing the group of apartment renters.  The 20-34 year old age group increased 24.2% from 2008 to 2013, increasing the demand for apartments in the MSA.  Additionally, the age group is a growing percentage of the entire population accounting for 23.5% of the 2013 Charleston MSA population.  This growing Generation-Y population is attracting developers to create high-end and eco-friendly complexes in locations close to their employers and entertainment districts.  Two examples include new developments Elan Midtown and The Boulevard in Mount Pleasant, which have achieved rents over $3.00 per square foot.  River’s Walk has attained rents well above $2.00 per square foot for its one bedroom suburban units in Mount Pleasant.

Another group that is creating demand locally is the older demographic over 60 years old, empty nesters looking for a low-maintenance, luxury lifestyle.  Similarly, Charleston’s growing dining and entertainment scene is attracting affluent weekenders who are a small but growing demand generator of infill luxury units.

AptIndex tracks approximately 32,350 units in the Charleston market, which consists of Central Charleston, Goose Creek, James Island, Mount Pleasant, North Charleston, Summerville and West Ashley submarkets.  The Summerville and West Ashley submarkets collectively make up half of the market’s inventory with 8,261 units and 8,201 units, respectively.

 

VACANCY RATES

A growth in demand resulted in the absorption of 1,853 units throughout the market over a six-month period in 2014.  The resulting market vacancy rate in August 2014 was down to 5.3% from 8.3% in February 2014, according to AptIndex’s most recent report.  The vacancy rate is slightly higher than the August 2013 vacancy rate of 5.2%, which was the lowest vacancy rate since 2009.  Summerville was the most active submarket with 813 units absorbed, 44% of the market absorption.

According to AptIndex’s August 2014 report, James Island holds the lowest vacancy rate of 3.2% in the market, and the Central Charleston submarket holds the highest vacancy rate of 8.1%.  AptIndex predicts that demand will keep up with the new supply added to the market over the next year, but expects vacancy rates to increase slightly in 2015 as additional apartment complexes deliver.

A second source, MPF Research, confirms AptIndex’s conclusions.  According to MPF Research, fourth quarter 2014 vacancy rate was 4.3%, slightly higher than the third quarter vacancy of 4.0%, but well below the year-end 2013 vacancy rate of 5.6%.  The slight increase in vacancy over the previous quarter is the result of new supply delivering to the market without being fully absorbed.

 

RENTAL RATES

With the ongoing demand for units and resulting decline in vacancy, rental rates have increased considerably.  According to AptIndex, monthly rental rates for the market averaged $959 per unit, or $0.98 per square foot, in August 2014, up from $902 per unit, or $0.92 per square foot, in February 2014.  As of August 2014, same-store rents increased 4.9%, or $45.13, since February 2014.

Mount Pleasant, James Island and Central Charleston submarkets contain communities with the highest average monthly rents.  Average monthly rent increased 12.8% in Mount Pleasant over a six-month period from $1,214 per unit in February 2014 to $1,369 per unit in August 2014.  Rent has been consistently high in James Island and averaged $1,147 per unit in August 2014.  Central Charleston experienced the greatest increase from August 2013 to August 2014 with rental rates spiking from an average of $870 per unit to $1,058 per unit, respectively, a 21.6% gain.  The significant rent growth in Central Charleston is due to the introduction of two new communities, the first new developments since 1984.

According to AptIndex, average monthly rent increased for one, two and three bedroom units throughout the market.   Monthly rent averaged $901 for one bedroom units in the market in August 2014, a 7.5% increase over the previous year.  Two and three bedroom units averaged $961 and $1,094, respectively, increasing 6.2% and 4.8%, respectively, over August 2013.

 

CONSTRUCTION

Multifamily construction is on the rise throughout the market as investors and developers aim to profit from the growing demand for apartment units.  As of August 2014, AptIndex reported 3,140 units under construction throughout the market.  Heightened development activity is expected to linger with 3,971 units proposed throughout Charleston, mostly in Mount Pleasant and Daniel Island.  While not all of the proposed projects will advance into development, investors are taking advantage of current market conditions and seeking rents over $2.00 per square foot for new suburban complexes.

Mount Pleasant has taken the lead with approximately 1,120 units under construction, 35.7% of the total construction throughout the market.  Additionally, 1,617 units are currently proposed for the submarket.  West Ashley is also experiencing significant activity with 726 units under construction in August 2014.  New developments include Parks at Nexton, Bridgeside at Patriots Point, Riviera at Seaside Farms and 35 Folly.

• Parks at Nexton, a multifamily development at Nexton in Summerville, is nearing completion.  Nexton is South Carolina’s first gigabit community and will offer residents a connection over 100 times faster than average internet connection.  The 320-unit complex is being developed by MeadWestvaco and the Beach Company and will be ready for move-in early in 2015.  The complex, anticipated to complete construction in August 2015, is centered towards Generation-Y.  The Parks include walking and biking trails, a dog park, dog wash, clubroom and pool, among other luxury amenities.
• Daniel Corporation broke ground in August on Bridgeside at Patriots Point in Mount Pleasant.  The 324-unit complex will be located near the base of the Ravenel Bridge and Patriots Point Naval and Maritime Museum.  Daniel Corp. is working with MetLife Inc. on the project and expects to complete the apartments by spring 2016.
• Riviera at Seaside Farms welcomed its first residents.  The Beach Company’s complex includes 252 units and is located in Mount Pleasant interspersed within the Shoppes at Seaside Farms Village.
• 35 Folly, a 300-unit multifamily development is under construction on Folly Road Boulevard and Albmarle Road in West Ashley.  The complex is being developed by Flournoy Companies and is expected to complete construction in early 2016.

 

2014 SALES

Sales velocity was strong as investors took advantage of currently low interest rates and high apartment occupancy.  Over 20 multifamily communities comprised of 3,400 units throughout Charleston traded in 2014, valued at approximately $417 million according to Real Capital Analytics.  The average price per unit was $123,000.  Significant sales include 400 Meeting, Campus Center and Elan Midtown.

 

• 400 Meeting is a 41-unit off-campus student housing community that delivered in Fall 2013 with a 100% occupancy rate.  The property was sold in February 2014 for a record-setting price of $18.4 million, or $448,780 per unit.
• Campus Center Apartments is a luxury student housing community in the heart of Charleston’s Historic District and adjacent to the College of Charleston Campus.   Located on 1.06 acres at 50 George Street, the eight-story building consists of 419 beds and 201,268 total square feet.  The complex offers fully furnished two, three and four bedroom apartments.  In April 2014, Campus Center sold for $69 million, or $169,677 per bed.
• Elan Midtown, a 200-unit complex offering studio, one and two bedroom units along Meeting Street, was acquired by JP Morgan in October 2014 for $64.1 million, or $320,300 per unit.

 

Cap rates in the low to mid five range are the norm as lending conditions are favorable.  Such sales and cap rates will continue while interest rates remain low, but with land and construction costs on the rise, an opportunity will exist in the acquisition and renovation of older, well-located assets.

 

IN THE MONTHS AHEAD

The Charleston multifamily rental market is maturing with excellent fundamentals, such as high occupancies, strong absorption in light of new construction, strong rent growth and growing institutional investment.  Occupancies will soften slightly as new inventory delivers to the market, particularly in Mount Pleasant and Daniel Island.  Continued job and residential growth will maintain a strong occupancy level throughout the market as well as growing rental rates.  Many of the quality available sites have been pursued leaving limited options for new development.  Wise developers and investors are seeking redevelopment opportunities and repurposing of older complexes.

 

FOR MORE STATEWIDE COMMERCIAL REAL ESTATE NEWS CHECK OUT OUR MARKET REPORTS HERE.

 

To download the complete report click the link: Q4:2014 Charleston Multifamily Market Report.

The report is also attached for your convenience.