InvestmentIs Charleston SC Headed for A Real Estate Investment Bubble?

Memory is a fallible thing. Add recall to that process and our recollection of things past can differ widely.  The more traumatic event though, the more commonality we have in our collective recall.  For many, the events of the last real estate “meltdown ” have left common scars on our psyche and they remain to haunt our investment decisions. So given the Charleston SC real estate market is very active, some may even say “hot, ” should we be worried that we’re headed for another bubble?

We can’t speak about the national picture as we’re simply not qualified to do so.  However, on a local basis we have seen a lot of change over the last few years and a great deal of outside money turn its focus to the Charleston Tri-County area. We have an expanding population, bringing 40 or so families a day into Charleston and the surrounding counties. We have industrial expansion, with very large employers in manufacturing and digital technology; and our hospitality and tourism industry is the envy of many.  Add to this the backdrop of a breathtaking city, focused on innovation and sustainable growth, and Charleston truly is a great place to be. 

So the core drivers are in place. We have other drivers too, in so far as reducing investment returns in the larger gateway cities where the cycle has progressed further or popularity has reduced available returns. But let’s stop with the high level “helicopter view ” and speak instead to actual investments in our portfolio and how they have been performing.

Student rentals. These have always been active downtown. A model has been to purchase run down properties near colleges in the historic districts, renovate and rent out on a per-room basis.  Smaller homes rented better than ones with more than five rooms, but overall the market was healthy.  What has happened is the house prices have recently outstripped rent increases, meaning that the student rental you own may give a good return against the capital you have in. As the home value has risen you may be better off releasing that cash and investing elsewhere.  Buying well operated student rentals will no longer yield the 15% cash on cash that it once did … in today’s market 6% would be a closer estimate of yields.

Commercial. Always a mainstay.  I can only speak to smaller commercial markets, but rental rates have held up well, and in the right location they will continue cash flowing.  Given the general rise in property values and limited availability, most performing commercial investments are worth holding through this real estate cycle and in to the next before selling.  Many properties in popular areas are changing hands at 4-6% cap rates making them now uneconomic for the smaller investor using commercial loans and local banks. 

Short term rentals. If you have a legal one in the correct “overlay zone ” in Charleston then hold on to it as they are the single best performing asset class in town right now – approximately 2x what would be achieved from student let even after the additional costs of operation.  Banks may be wary of this class of investment until your management record and profit is established so they can be “cash hungry ” assets to build up. The City of Charleston is examining this industry and many changes may be in the wind for 2017 … so be wary. 

Long term (non-student) rentals. Not a great investment class given the rise in home values.  Long term rental is better as a holding action for a home you will eventually live in.  Rents cover the cost of ownership but not really the acquisition costs so overall long term rentals can be a poor investment.

Land. This can be interesting as a medium-term hold.  You will be swimming in a pond with some very large fish so the opportunities are to be nimble and ahead of the general pack, but opportunity is still there and one where we are very active in (we’ve built 8 downtown homes in the last five months) – very focused areas outside of downtown but still on the peninsula (more on that in a later Blog). The other play here is to aggregate land, specifically land-locked development plots and we see a few developers in this space.  The PUD (Planned Urban Development) on Foundry Alley just off Nassau Street is an example of one where we are involved.

Note: So to circle back to the start of this blog… Bubble?  Well think of it this way, as demand grows and product availability decreases, then prices rise.  Rising prices will reduce returns and as returns get squeezed then that is a surety of a bubble on its way.  Is this the case across the real estate market locally? Well no … not really.  Is it the case in specific sectors? Well yes … so be careful.  Either way, a good investment strategy is to retain a good margin of equity in your holdings and sufficient liquidity to see you through a tight spot  – given that, as sure as “death and taxes, ” real estate is cyclical and there will be a crash of some form at some time in your future.

We are always happy to share our expertise should you have a desire to explore investment opportunities as they currently exist in the Charleston market.