Significant job creation and population growth drive record-level construction

Jessica Rahal Research Coordinator | South Carolina

Key Takeaways

• Charleston, South Carolina’s multifamily market continues to strengthen and grow with record-high construction levels, increasing occupancy, and rising rental rates.
• Significant job creation and growing millennial and retiree populations are driving multifamily development.
• Tight market conditions, job growth and low interest rates create an optimal environment for investment sales opportunities.
• The market is poised for continued growth through 2016 with cautious optimism for late 2016 and beyond.

Record-High Construction Activity

Multifamily development has been booming nationwide, reaching levels that have not been seen in decades.  Activity in Charleston is significant with the greatest number of units under construction in years.  According to AptIndex’s recent report, approximately 4,500 units were under construction in August 2015.  Activity is not slowing down as another 6,000 units are proposed throughout the market.

Recent new construction has been focused in Mount Pleasant and Daniel Island.  However, as the trend of urban core development continues, downtown Charleston will welcome new multifamily and mixed-use developments.  A growing Gen-Y population and desire for a live, work, and play environment is driving downtown residential development across the United States.  A growing tech industry and high quality of life is attracting millennials to downtown Charleston.  Retirees are also contributing to the renter population.  Some retirees are opting for rental housing rather than ownership while others choose to rent units that serve as vacation homes or weekend getaways.

According to ESRI demographics, Charleston’s 20-to-34-year-old age group is growing and is expected to increase by 2,859 individuals from 2015 to 2020.  The 50-to-69-year-old age group is also expanding with an additional 8,222 individuals projected by 2020.  The result is new household formations and apartment demand.

While urban development will gain momentum, construction activity will also increase in the suburbs.  Major announcements from Volvo and Mercedes-Benz are collectively creating 5,300 new direct jobs over the next five years.  The jobs will motivate suburban multifamily development, specifically in Summerville, which until recently has seen limited construction.

According to the Bureau of Labor Statistics, more than 7,500 non-agricultural jobs were created in 2015 resulting in total employment of 335,000 for the Charleston-N. Charleston MSA.  Total non-agricultural employment is at a historically-high level with 10% more jobs than the market’s 2008 pre-recession peak.

Renter preferences are playing a greater role in apartment appearances and amenities.  New developments offer high-end finishes and appliances.  Common areas are becoming increasingly important and multifamily complexes oftentimes offer resort-style swimming pools, billiard tables, fitness facilities, and valet services.

Inventory

According to AptIndex, the Charleston multifamily market is home to 33,322 apartment units in the Central, 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 approximately 8,400 units each.  Despite being the largest submarkets, the two are very different.  West Ashley is located on the city’s southwest and west sides with most of its inventory constructed between 1970 and 2000 while Summerville’s inventory consists mostly of new complexes developed after 2000.

Vacancy Rates

Strong demand for space contributed to a decline in vacancy and positive net absorption over the previous six months despite a new supply of 510 units.  Approximately 911 units were absorbed from February to August 2015.  The vacancy rate was down to 5.4% in August 2015 from 6.7% in February 2015 according to AptIndex’s most recent report.  The market has experienced significant improvement, declining 440 basis points since 2010 when the vacancy rate was 9.8%.

A second source, MPF Research, reported a vacancy rate of 4.2% at year-end 2015, declining slightly from 4.3% the previous year.

Summerville reported the lowest vacancy rate in August at 4.3%, down from 7.0% in February 2015 according to AptIndex.  The submarket experienced strong activity, absorbing 239 units over a six-month period.  Mount Pleasant experienced the greatest activity, absorbing 333 units over the same period.

Rental Rates

Rental rates continue to escalate as land and construction costs increase.  Strong demand is also pushing up rental rates as units are absorbed and renters express a desire to live in high-quality developments.  Average rental rates in the market are 33.8% higher than they were in 2010, largely the result of same-store rental rate increases and new product pushing up average rates.  As of August 2015, monthly rental rates in the market averaged $1,033, up from $976 in February and $959 the previous year.  Mount Pleasant and James Island have the highest rental rates in the market, averaging $1,445 and $1,260, respectively.  New construction in the Central submarket has contributed to the greatest rent hikes in the market, increasing 57.1% since August 2010.  Monthly rent in the Central submarket averaged $1,103 in August 2015, up from $1,076 in February 2015 and $702 in August 2010.

Rental rates for one-bedroom apartment units averaged $955 in August 2015, a gain of 6.0% over the previous year.  Two- and three-bedroom rental rates averaged $1,039 and $1,199 in August 2015, increasing from $961 and $1,094, respectively, in August 2014.

Market Conditions Provide Ideal Investment Sales Environment

The multifamily investment sales market is healthy and will continue to draw attention from investors into 2016 as interest rates remain at historical lows.  Rising prices in primary markets are motivating investors to seek opportunities in secondary and tertiary markets.  The Charleston multifamily market’s high occupancy, strong rental rates and relatively high barrier to entry provide a secure investment environment.  As a result, sales prices are rising with suburban product more frequently exceeding the $200,000 per unit threshold.  Sales were strong through 2015 with a total sales volume of $507 million, up over $376 million in 2014.  The average per unit sales price for the market was $103,681 in 2015.

• Riviera at Seaside in Mount Pleasant traded in October for $60.5 million.  The 252-unit complex was sold for approximately $240,000 per unit, a record-high price for suburban Charleston.
• A 258-unit complex in Mount Pleasant, Windward Long Point, was acquired for $55.5 million, or $216,116 per unit.
• Ansley Commons in North Charleston/Ladson traded for $39.2 million, or $145,122 per unit.

2016 Outlook

Demand for multifamily units is expected to continue through 2016 and beyond.  The region’s growing tech industry and tourism industry will attract millennials and retirees to the area.  New development activity is expected to surge in the downtown, Summerville and Mount Pleasant submarkets in response to recent job announcements and projected strong future demand for rental units.  Investment sales will remain strong given tight market conditions, robust job creation, and low interest rates.

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