Regional Spotlight: Charleston, South Carolina
The metro has a strong market structure likely to hold up under pressure.
In March 2020, Charleston, South Carolina’s home sales posted a year-over-year growth of 6%, even with a coronavirus shutdown already looming on the horizon. Local businesses, including tech employers like Atlatl Software, home repair services like Punchlist, and a number of local and national commercial real estate developers, reported their outlooks for spring 2020 would remain positive and, in many cases, largely resistant to the COVID-19 shutdown. They set the tone for the city’s real estate sector as we move toward the halfway point in 2020.
Justin Scott, CEO of Atlatl, reported only about one in 10 of his customers have “put a pause on purchases” from his company, which creates three-dimensional visualizations for manufacturers of complex machinery. The company continues to employ its roughly 60 employees, and its augmented reality software is filling a niche many companies need desperately as stay-at-home policies keep clients and service providers physically distant.
Other Charleston industries are showing remarkable tenacity as well.
For example, South Carolina’s ports in Charleston, Greer and Dillon all maintained normal operations into the second quarter of 2020 despite the coronavirus pandemic. And the Hugh K. Leatherman Terminal, located in nearby Mount Pleasant, remains on track for phase-one completion in March 2021. The facility’s five enormous cranes, all manufactured in China by the world’s only large-scale ship-to-shore crane company, are on track to be delivered in August or September. Statewide, South Carolina ports facilitate about 225,000 statewide jobs, so ongoing operations at these facilities indicate an underlying economic strength in the region.
Of course, not all areas of the Charleston real estate market are doing “business as usual,” noted Bobette Fisher, president of the Charleston Trident Association of Realtors. She said March 2020 activity put the market in a strong position to face “the inevitable impact of the global pandemic on our market,” but she emphasized the housing market is likely to have “several challenging months ahead.”
For example, Charleston’s available housing inventory dropped dramatically at the end of the first quarter of 2020. Homeowners removed their houses from the market to avoid showings that would expose their families to “through traffic” at a time when social distancing was becoming part of daily conversation. Interestingly, this could to some degree insulate the Charleston market from the wild price swings other markets may experience.
Fisher said, “Charleston is in a somewhat unique position in that we continue to see buyer interest and demand in our market even as we progress through this highly unusual situation.”
For real estate investors interested in the Charleston area, Fisher’s optimistic take on the situation can be feasibly supported with the area’s strong economic foundation. However, the positive aspects of Charleston’s “unique position” are tempered by some serious coronavirus-related issues.
Is Support System Holding Firm?
Investors interested in the Charleston area should look carefully at the strategic position of a potential acquisition before making a purchase. For example, Charleston led national numbers last year in terms of how many new homes were added in the area, with Construction Coverage reporting the area added more than 6,700 new homes total, more than twice the national average. Analysts expect the new construction sector of the real estate industry to weather the current economic crisis far better than the existing-home sector. So, the relatively higher availability of new construction and a preexisting trend toward new development could make Charleston particularly attractive to investors in this sector.
On the other hand, certain industries in Charleston have been hit particularly hard. Employees in the area’s previously booming restaurant and hospitality industries are filing unemployment claims in record numbers. The South Carolina Department of Employment and Workforce (SCDEW) reported a 400% increase in claims the week of March 19, 2020, alone. That was the week following the state governor’s order calling a halt to all dine-in activities at restaurants, bars and cafeterias. The order also banned organized events of more than 50 people. South Carolina did take steps to protect these workers by enabling employers to file unemployment for employees infected with the virus, affected by a temporary shutdown, who have slow or smaller workloads, or who have temporary or seasonal work.
Investors whose investment strategy involves housing for this currently unemployed population may have difficulty liquidating inventory at this time. Still, it is possible that investors who can hold these assets may benefit in the long run, once the state “reopens” its economy. In January 2020, the Charleston area’s unemployment was so low that SCDEW executive director Dan Ellzey said in a public statement, “More jobs are available than people to fill them. … South Carolina continues charting record levels of low unemployment while more people are earning paychecks than ever before.”
Whether the state can regain that momentum will hinge largely on the fallout from the extended national COVID-19 shutdown and how the state handles its reemergence from sheltering-in-place orders. College of Charleston economics professor Frank Hefner suggested the aftershocks of the coronavirus outbreak could be like that of a hurricane in some ways, but emphasized the comparison is neither direct nor wholly reliable.
“This is so unusual; anyone that tries to put a number on it is really going to be shooting blind,” Hefner said.
When a hurricane hits the state, people may leave the area but then continue to spend money inland—sometimes more than they would spend if they had remained at home. Furthermore, when the storm is over, those people return and bring their buying power with them.
“The local stores [in areas that evacuate] may lose a lot of retail sales, but people will need to buy from them a week later,” Hefner said.
In the case of the coronavirus, consumer absence in the area could be multiplied by five times or more, depending on how long the state remains on lockdown. As a result, the financial stress on local businesses will be magnified.
“Every time I have stood in [my restaurant] kitchen when it was empty before, I knew it would be full again,” said local barbecue joint owner Aaron Siegel, who laid off 390 workers in late March. “This time, you don’t know when you’re going to be back, or if you’re going to be back.”
Other industries in the Charleston area are faring better, in many cases because their projects are large enough that prior momentum is carrying them forward or because they are better equipped to permit remote working. A Pepsi plant located in Charleston’s upper peninsula recently sold for more than $8 million, and the leaseback arrangement and future mixed-use development continue as planned for that transaction. Charleston’s upper peninsula is also home to Magnolia, one of the area’s largest ongoing developments. A project of Highland Resources, the development will include housing for potentially 10,000 residents; 420,000 square feet of retail space; 850,000 square feet of office space; and a large public park.
David Bodenman, Highland president and interim CEO, said his company’s response has been to carefully evaluate its priorities for the project and move forward.
“With the upheaval in the economy, buyers for lots have just all said, ‘Let’s think about this for a little while,’ and that’s the prudent thing to do,” he said in an interview with local publication The Post and Courier. “Well, in response, the prudent thing for us to do was look at what should be the priority for cash flow and construction.”
Highland Resources opted to continue requisite environmental cleanup in the area and remain flexible in terms of its vertical development projects, putting short-term plans for apartments on hold. The company is not walking away, however.
“This project is unique and in a unique location. Our company sees this as a legacy opportunity,” said company vice president Weldon Johnston in the same interview.
Opportunity Waiting in the Wings
The future of real estate in Charleston remains uncertain. As with most market sectors in the U.S. right now, many investors are waiting on the sidelines, carefully watching for the right opportunities and strategies to emerge from the uncertainty. After all, when the closest comparison one can make is “the fallout could be similar in this market to what happens after a devastating hurricane and you might want to multiply that by five,” it pays to be cautious. However, Charleston, South Carolina, comes with some unique geographic advantages.
First, it is physically distant from most of the markets ATTOM Data Solutions considers to be “most vulnerable” to coronavirus-related housing meltdowns (they are largely located in the Northeast). Second, its ports are operating normally, except for cruise operations, which are paused indefinitely. Third, Charleston was well-positioned for market stress by virtue of a strong winter season, an already low housing inventory and well-funded development projects with momentum underway.
In the words of Warren Buffet: “Predicting rain doesn’t count; building the ark does.” Buffet spent far longer than many investors expected sitting on about $128 billion in cash and equivalents as the markets corona-imploded in March, although he did buy a million shares in beleaguered airline Delta at the start of the month. Real estate investors who keep their capital at the ready in Charleston will have the opportunity and wherewithal to act when opportunities emerge.
Sidebar: Charleston’s Historic-Home Market Requires Research and Patience
Charleston, South Carolina, is known for its beautiful historic homes. Many real estate investors have fallen into the “trap” of purchasing a home on the historic register with the idea of fix-and-flipping for a fast and enormous profit. While a skilled historic-home renovation can generate massive returns, investing in historic homes is not for the faint of heart.
These homes often come with extremely detailed restrictions, easements and standards intended to “preserve and protect the old historic or architecturally worthy structures and quaint neighborhoods” of Charleston,” according to the Charleston Board of Architectural Review (BAR). These restrictions can make historic homes and neighborhoods extremely attractive and luxurious locations, but it can also absolutely destroy your project timeline or budget.
For example, some historic homes in Charleston not only do not have modern insulation but installation is limited or prohibited. Others come with strict requirements for dealing with the replacement or repair of original windows or for handling exterior painting and finishes. What might look like a basic coat of orange paint, for instance, could be a highly specialized, historic “wash” process that creates an orange effect. It is possible you might have to replicate the process rather than just the color, and you could face serious fines if you fail to do so.
If the allure of renovating an historic home in Charleston still calls to you, then consider the benefits of investing near an historic district rather than in it. Charleston is home to dozens of historic sites and a main historic district that boasts waterfront parks, the South Carolina aquarium and the Historic Charleston City Market. The area is highly walkable, and residents pay a premium for modern homes as well as historic ones.
Sidebar: Short-Term Rentals in Charleston Likely to Suffer in the Short-Term
In 2019, Airbnb hosts earned $111 million in South Carolina, and Charleston hosts accounted for half of those earnings. In 2020, however, things are looking a little different.
During the first half of the year, the area progressed from being a southern hot spot for entertainment, hospitality, beaches and great food to something of a ghost town as state and local officials issued shelter-in-place orders and the governor of the state asked out-of-state visitors to self-quarantine for two weeks upon arrival.
Not surprisingly, Charleston’s short-term rental industry suffered, although not as much as in some other areas of the country where local governments are a little friendlier to short-term rental owners. In Charleston, it is criminal to own an illegal short-term rental property, meaning any short-term rental that is not a primary residence for the owner could come with a fine of more than $1,000 each time it is rented out. The city established a task force of dedicated enforcement officers and is the only city in the country that criminally prosecutes illegal short-term rentals. As a result, many Airbnb owners had already begun liquidating their inventory in the area or converting to longer-term strategies before 2020.
“We recommend that investors use house hacking if they wish to invest in Airbnb Charleston real estate,” said Mashvisor writer Hamza Abdul-Samad. “With house-hacking, Charleston investors can fulfill the legal requirements to invest in Airbnb…and have a primary residence.”
Because Charleston’s beachfront communities are largely closed until at least midsummer, , the Airbnb and vacation-rental season in 2020 could take a serious hit. But analysts say if the economy “reopens” in time, many families could take last-minute vacations once stay-at-home orders are lifted.
Charleston Airbnb investors and South Carolina short-term rental investors should stay aware of state and local regulations for vacation rentals at this time. Many renters from the Northeast, where the virus hit hardest, sought to rent in large groups in areas they perceived to be less threatened. Particularly when it comes to beachfront property, local governments responded by prohibiting new bookings, including in some areas near Charleston. As these policies change with regularity in response to the viral progression, investors must remember that short-term rentals are highly unpredictable now. But, there could be good opportunities to acquire properties for the future.
