Charleston is nothing if not resilient. The city has a history of surviving and rebuilding after major disasters, from the 1886 earthquake to the Category 4 Hurricane Hugo that struck in 1989. In the current century, Charleston has once again proven an ability to withstand disaster, and today its multifamily market is hardly showing scars of the economic decline of the past few years.
The Charleston multifamily market was primed for trouble just prior to the downturn in 2007 and 2008 because multifamily developers were finishing new construction starts that were increasing the total rental stock by nearly 10 percent. The subsequent two years were difficult, and many longtime local owners reported not having experienced such economic turmoil since the U.S. Navy closed its shipyards here in 1996.
Today, apartment investors are telling a different story. Charleston’s submarkets are all averaging occupancies in the low– to mid– 90 percent range, and concessions rapidly burned off in the second half of 2010 or were paired with significant rent gains. Indeed, the downturn is anticipated to have yielded only four multifamily foreclosures for the entire MSA, most of which were a casualty of larger, nationwide portfolio failures. In short, distress is almost nonexistent in this city’s multifamily stock.
JOBS READY TO SOAR
Charleston’s unemployment rate experienced almost a 7 percent increase between 2007 and the start of 2010. The unemployment rate is now progressively moving toward a more stabilized level, however, and the area can yet look forward to benefitting from several future employment initiatives currently under way from major employers such as Boeing and Clemson University.
The Charleston job market and area are well on track to recover, with a record number of new job and investment announcements having marked a major milestone in the city’s history. This steady level of investment will ensure that Charleston’s employment outlook remains positive, with job creation going on not only in the aerospace and research sectors, but in software and manufacturing, as well.
For the past year and a half, Charleston’s apartment industry has been anxiously awaiting the opening of Boeing’s new 787 Dreamliner plant and the high-paying jobs it will bring to the region. Just as the economy had reached its worst levels in the fall of 2009, Boeing announced its decision to invest $750 million in the North Charleston submarket to build the company’s 787 Dreamliner assembly line. A study conducted by Miley & Associates projects that Boeing will have a $5.9 billion impact on the Charleston area and create an additional 3,800 direct new jobs and more than 11,000 indirect supporting jobs. The aircraft maker has also made subsequent commitments to Charleston and has begun construction on a new interiors fabrication facility in another North Charleston location.
Simultaneously with Boeing’s announcement, Charleston landed center stage in the world’s wind-energy market when Clemson University’s Restoration Institute was selected to build and operate the world’s largest testing facility for next-generation wind-turbine drive trains. The U.S. Department of Energy estimates that as a result, South Carolina could gain up to 20,000 new jobs related to the wind-power industry in the coming years. Recent employment gains, paired with the absorption of new units in the market, have helped stabilize market occupancies across all of Charleston’s submarkets.
For a tertiary market, Charleston has begun to experience a significant level of institutional interest, from both developers and their equity partners. A lack of available financing and poor market fundamentals had ceased any new development activity in the Charleston market over the past couple of years, but 2011 has marked the start of renewed interest and progress in multifamily development. In contrast to the majority of prior developments, this round of investment is placing a heavy emphasis on barriers to entry and high-quality locations.
Future multifamily development in the city will include a very limited number of existing or planned sites, but the majority of developers are seeking sites in Charleston’s top submarkets, where barriers to entry are as high as the premium rents present. HH Hunt and The Carroll Cos., for example, are breaking ground on new developments in the North Charleston–Summerville markets, moving forward on land previously acquired. Meanwhile, development opportunities are materializing in Charleston submarkets that were once considered impenetrable, including downtown Charleston and Mount Pleasant, driven partly by restructuring of developments planned just prior to the market downturn. The downtown, Mount Pleasant, and James Island submarkets are areas where proposed developments historically faced significant opposition or review, and many of today’s opportunities exist in sites that took several years to get through zoning or parcel together, only to have the financing vanish as the capital markets changed. Developers flush with cash and experience are seeking to capitalize on these opportunities where a site can be quickly moved toward a groundbreaking. The most lucrative submarket of Charleston is the historic downtown peninsula, which is host to several colleges and universities and boasts effective rents ranging from $1.50 to $2.00 per square foot. Its concentration of students and high cost of single-family housing create significant barriers to entry, which benefits the apartment market in the neighboring submarkets of Mount Pleasant, James Island, and West Ashley. Developers are currently searching for opportunities in all of these submarkets, seeking to capitalize on opportunities such as partnerships that are restructuring and planned mixed-use developments that currently are not financeable as originally planned. The contraction of available financing for some of these past planned, high-risk developments has led to strong development opportunities for multifamily developers. Local developers have been the first to capitalize on these opportunities by leveraging their in-depth knowledge of the Charleston market. Both McAlister Development and Greystar, for instance, are preparing to close on future development sites in downtown Charleston. These sites will represent the only modern apartment developments in the downtown submarket. Developers are also in hot pursuit of some of the most desirable sites in the neighboring submarkets, which are currently demonstrating full occupancies and effective rents ranging from $1.25 to $1.50 per square foot. Developments in these neighboring submarkets will benefit from recent zoning overlays that, for the first time, allow higher-density developments typical of infill, urban locations.
SALES MAKE A COMEBACK
Charleston’s sales volume plummeted with the recent slowdown in the economy, largely because the lack of distress in the market did not force many foreclosure sales and existing investors could afford to be patient and wait out the downturn. Sales volume did not exceed more than a few deals a year over the past two years. That volume is expected to significantly pick up in 2011, as the remaining three foreclosure sales (in addition to the Sabal Palms sale noted below) come to market and motivated owners capitalize on the improving market fundamentals and interest among outside investors.
Existing Class A and Class B apartment communities still appear to be commanding strong interest among investors who view these properties as being typically well below current replacement costs, catering to an affluent demographic, and lying in the path of economic expansion. For the first time in six years, Class C properties are expected to sell at substantial discounts to their prior values, largely due to the challenges of financing this vintage of product and the current availability of similar product, much of it lender owned, throughout the Southeastern United States. These older properties will make excellent value-add opportunities for future investors, and many of the properties are in irreplaceable locations, such as the waterfront, the James Island submarket, and those within immediate proximity of Boeing.
Charleston did experience two notable sales in 2010, one being the aforementioned Sabal Palms, which represented the city’s first significant apartment foreclosure sale. The 300-unit property, built in 2004, was a failed condominium conversion. Also sold last year was Central Square at Watermark, a 240-unit apartment community built in 2009, purchased by an entity of J.P. Morgan.
Charleston is on track to see significant changes in 2011 as rental demand continues to increase, new industries begin to hire, and multifamily developments begin breaking ground. Truly, The Holy City is showing its resilience once again.