Surge in apartment flipping can lead to higher rents in Charleston and SC, but not always

The 400 Meeting Street Apartments changed names after being sold to My House on Meeting. File/Staff

An Atlanta-based real estate company paid $106 million last summer for three Charleston-area apartment complexes, 10 years after they sold for $51.1 million.

In Summerville, the 240-unit Arbor Village Apartments changed hands last year for $35.4 million, two years after the Dorchester Road site fetched $31.8 million.

On the Charleston peninsula, the 42-unit My House on Meeting apartments were picked up for $22.2 million in 2017, three years after selling for $18.45 million.

Investors can make off with a tidy windfall in their short-term holdings, but the higher price paid for the property eventually trickles down to the end user — the tenant.

Frequent property flipping, perfectly legal in a free market system, can drive up the price of affordability even further, pushing renters farther to the suburbs and away from the service-sector jobs many of them hold in the central business district.

In Mount Pleasant, apartment resident Scott Hammond can attest to that.

When the former Hibben Ferry Apartments on Shem Creek switched hands last August — doubling in selling price in 10 years to nearly $48 million — Hammond, who has lived there for about 18 months, said the rent jumped about $300 a month to help pay for upgrades.

The rental rate now for the 240-unit complex of one- and two-bedroom units called Arium runs from $1,185 to $2,547, according to the complex’s website.

Hammond said he’s moving.

“I’ll probably try to find something farther out that’s a little cheaper,” he said.

Rising rents don’t always follow when a property changes hands, at least according to commercial real estate agents in Charleston.

While the influx of outside investment has ratcheted up in recent years throughout the metro area, it’s not necessarily driving up the price to live in the area, according to Brent Case, president of Coldwell Banker Commercial Atlantic, a North Charleston-based commercial real estate firm.

The main factors influencing affordability in the Charleston area are land and construction costs, he said.

The 240-unit Arbor Village Apartments in Summerville changed hands last year for $35.4 million. Provided/American Landmark

For those properties already built, investors may decide they can get a better return by buying an existing apartment development with high occupancy in a high-growth area such as Charleston.

“Flipping is part of the natural process of development,” Case said. “In commercial real estate, you analyze your return, not for a 30-year hold like a house.”

Properties are bought and then developed, with many developers anticipating a double-digit return after three to five years.

“Their business plan is to acquire, improve and then sell the property,” Case said.

After a property is developed and sold, the new owner will likely see a single-digit return, and Case said the real estate industry has been in that cycle for the past couple of years as flipping of multifamily developments becomes more commonplace.

“You go from people who are entrepreneurial to people who are institutional,” he said, referring to investors such as pension funds and insurance companies. “A lot of institutional money is willing to invest in our market. Our growth has allowed us to be a desired place to park money because we have had a stable economy for the past eight years.”

He said 80 percent of developers sell after three, five or 10 years, but there are still generational firms such as The Beach Co. of Charleston, which hold on to their developments.

Chris Fraser of the commercial real estate firm Avison Young’s Charleston office agreed with Case that flipping doesn’t always result in higher rental rates.

“The buyer is buying an income stream that is already established,” Fraser said. “That doesn’t mean they won’t increase rents as leases expire or if they are below the market rate.”

For those investors buying an older development to upgrade and make it more competitive, “they are clearly creating new value” and higher rents can follow, Fraser said.

“That’s different from buying one recently built,” he said.

Like Case, Fraser said most developers are not long-term holders of property.

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“They create the value and move on to the next deal,” he said. “You typically see it on multifamily projects.”

The reason more reselling is going on now is because the volume of development has been so much higher during the last few years of the nearly decade-long economic expansion.

“Investor demand is strong and sales increased 50 percent for the 12 months ending last September,” real estate investment firm Marcus & Millichap said of the Charleston region in its latest multifamily market report. “The strongest increase in transaction activity was recorded in properties priced between $10 million and $20 million.”

Buy Now The former Hibben Ferry Apartments in Mount Pleasant are now Arium Apartment Homes after the complex changed hands last August, doubling in selling price in 10 years. File/Staff
Room rates

Because of the tight labor market and in-migration of new people seeking jobs and retirement residences in recent years, demand is driving rental rates higher throughout the Charleston region, too.

The average rental price for an apartment in the three-county area grew to $1,140 a month through last September, up 4 percent over the previous 12 months, according to Marcus & Millichap.

That’s below the average of $1,204 in Atlanta but above the $1,111 in Charlotte. The average rent in Columbia last year through September rose to $907 and in Greenville-Spartanburg jumped to $940, the firm reported.

The real estate company puts the occupancy rate in the Charleston area at 94.4 percent, the highest in the state. Columbia registers 93.8 percent of its apartment units rented, and Greenville-Spartanburg’s occupancy comes in at 94.2 percent.

While builders completed about 3,800 units last year in the Charleston region and 3,500 of them were occupied, renters facing the region’s high lease rates also honed in on less-expensive complexes with few amenities and older appliances to make ends meet.

Boosted by the Charleston region’s unemployment rate — the lowest in South Carolina — the area not only posted the highest apartment occupancy rate in the state, it also showed the lowest vacancy rate of 3.9 percent for third-tier apartments, according to Marcus & Millichap. Those include units built within the past 30 years and showing some age, where the rental rate is about $300 below the average.

Apartment deliveries began easing in Greenville-Spartanburg this year, with another decline in completions anticipated during 2019. A dip in the number of move-in ready units is also expected in Columbia next year, further compressing the vacancy rate in both metro areas.

Developers remain busy in Charleston, however, and unit completion this year should reach the highest level in nearly 20 years.

That’s good news for renters because it means the vacancy rate in the Lowcountry will climb over the next 12 months, rising above 6 percent for just the second time in seven years. Those on the hunt for an apartment will have more selection, and competition among complexes could result in lower rates.

If they change hands once they are completed, the rate could rise, but it’s not always the case, at least not immediately.

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