Strong market fundamentals in the Lowcountry support continued investment

Colliers International, South Carolina
Research & Forecast Report, Charleston, Investment Q2 2015

Key Takeaways

• Charleston, South Carolina welcomed significant sales activity throughout the first half of 2015 with a total sales volume of $365 million from January to June 2015.
• Charleston’s high quality of life, robust job creation and major announcements from Mercedes Benz and Volvo create an ideal environment for investors.
• Interest in U.S. commercial real estate is strong and increasing over recent years.  Primary markets are becoming saturated and competitive, driving investors to secondary markets such as Charleston.
• Low interest rates and continued economic recovery offer a positive outlook for the remainder of 2015 and into 2016.

To download the complete report: Q2 2015 Charleston Investment Market Report.

Current Conditions

Improving economies, as well as volatile equity and commodity markets across the globe are driving investment sales in the United States as investors seek stable and secure investments.  2014 was a record year for sales in the U.S. with a total transaction volume of $424 billion, a 17% increase over 2013, according to Real Capital Analytics.  Robust sales activity was also seen in the Charleston, SC market, which ended 2014 with a total sales volume of $866 million.  The strong momentum continued in Charleston through the first half of 2015 with $365.7 million worth of sales at mid-year, a 23% increase over the same time last year.

Various factors are contributing to growing interest in U.S. commercial real estate such as an improving U.S. economy, increased availability of capital and emerging commercial real estate markets.  Additionally, the U.S. offers lower risk than other markets, securing a return of capital for investors.  While primary markets continue to be the focus of a majority of investors, a growing number of institutional and private investors are showing interest in secondary and even tertiary markets.

 

Growing Interest in Secondary and Tertiary Markets

Both foreign and domestic investors are increasing capital flow in markets across the United States, generating significant competition and contributing to inflated sales prices.  Primary markets, such as New York City and Chicago, are home to some of the most expensive commercial real estate in the country.  As prices are increasing in such primary markets, yields are becoming compressed and returns on capital are declining.  Consequently, some investors are opting out of primary markets and looking to invest in secondary and tertiary markets, which offer higher returns, less competition and lower sales prices.

Secondary markets such as Charleston offer above average job growth, growing populations with a strong Millennial presence, and stable rental markets, appealing to a wide range of investors.

 

Multifamily Sales

Charleston’s growing Millennial and retiree population is benefiting the area’s multifamily market, which was 93.3% occupied at mid-year 2015.  National interest in residential development is strong and evident in Charleston, where multifamily sales accounted for 60% of total sales volume for the first six months of 2015.  Ten multifamily communities traded during the first half of 2015 totaling $221.6 million.  Two additional communities are under contract for a combined $80 million.   The average price per unit of the sales to date was approximately $103,000.  The three most expensive multifamily sales are highlighted below.

• Edgewater Plantation, a 360-unit complex in Mount Pleasant, was acquired in March for $58 million, or $161,111 per unit.  LivCor, a portfolio company of The Blackstone Group, acquired the complex.
• Institutional advisor Sentinel Real Estate purchased Woodfield Long Point, a 258-unit complex in Mount Pleasant, early in 2015 for $55.3 million, or $214,438 per unit, the highest price ever paid for a suburban community in Charleston, SC.
• Ansley Commons, a new, 270-unit complex in Ladson, sold in June for $39.2 million, or $145,185 per unit, at a 5.5% CAP rate.  The buyer was New York-based The Praedium Group.

 

Hotel Sales

Charleston’s tourism industry coupled with a growing business presence are driving high hotel occupancy at strong room rates, making the property type attractive to investors.  As of mid-year 2015, 4 hotels were acquired for approximately $28.4 million.  The sales include two Red Roof Inns purchased by Bestford Capital JV for $70,000 per room.  Additionally, ARC Hospitality Trust purchased the Hampton Inn in North Charleston and the Holiday Inn in Mount Pleasant.

 

Retail Sales

Nine retail assets traded during the first half of 2015, totaling almost $34.0 million.

• The 54,029 square-foot BI-LO Plaza Shopping Center at 1200 Sam Rittenberg Boulevard was acquired in March for $6.5 million.
• The 12,000 square-foot Shoppes at Azalea in Summerville, SC sold in April for $5.2 million, or roughly $435 per square foot (PSF), at a 6.7% CAP rate.
• A single-tenant Rite Aid at 600 St. James Avenue in Goose Creek traded in May for $4.3 million, or approximately $308 PSF, at a 6.6% CAP rate.

 

Office Sales

Office sales totaled $50.2 million as of June 30, 2015.  The office market ended the second quarter of 2015 with record-high rental rates, ranking among the highest in the Southeast.  Office sales were led by the June purchase of Parkshore Centre, a 116,000 square-foot office building in the West Ashley submarket.  MUSC, the building’s anchor tenant, purchased the building for $28.4 million, or $244 PSF. A significant downtown sale was that of 5 Exchange Street, a 14,100 square-foot building, which sold for $8.5 million, or approximately $600 PSF, in June.

 

Industrial Sales

Charleston’s industrial market has shown great activity over the past year and is at record-high occupancy as ecommerce grows and distributors aim to decrease delivery time to customers.  Industrial sales totaled $31.6 million as of mid-year 2015.  The most prominent sales include the NNN-leased 84 Lumber in Summerville that sold for $3.4 million, or $29 PSF and the flex property at 2284 Clements Ferry Road that sold for $3.5 million.  The former Masisa lumber facility, located at 2440 Clements Ferry, traded in February as part of the $8.1 billion  GIC – IndCor transaction. The vacant, 203,000 square-foot warehouse was then sold out of the portfolio in June to California-based ARKA Properties for $9.1 million, or approximately, $45 PSF.

 

Market Outlook

Current market conditions are ideal for prime investment sales opportunities in Charleston, which are expected to remain strong through the remainder of 2015.  As capital continues to flow among markets in the United States, investors will seek opportunities in markets with strong fundamentals and growing economies.  Sales activity is likely to spike in the upcoming months as investors aim to close deals by year-end while taking advantage of the current low interest rate.

 

Investment Activity Around the State

Real Capital Analytics reported a total sales volume of approximately $1.4 billion for South Carolina during the first six months of 2015.  Five of the top 10 most expensive transactions involved multifamily properties.  Greenville and Columbia markets accounted for 37.7% and 14.1%, respectively, of total South Carolina sales volume in dollars as of mid-year 2015.  Charleston sales accounted for 25.4% of total sales.  Below are select statewide transactions.

• Arbors at Brookfield, a 702-unit multifamily community in Mauldin, was sold for $66.8 million, or $95,157 per unit.
• The Meridian, an approximately 335,000 square-foot, Class A office building in Columbia’s Central Business District, was acquired for $65.6 million, or $196 per square foot.

 

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

 

To download the complete report: Q2 2015 Charleston Investment Market Report.