Colliers Report: Patience Required for Charleston’s Retail Tenants

Research & Forecast Report: Q2-2017 CHARLESTON | RETAIL

Key Takeaways

• Tenants waiting longer than ever for the right space in Charleston.
• Limited new supply, high occupancy and rapid economic growth making grade A retail difficult to find.

To download the complete report: Q2 2017 Charleston Retail Market Report.

Hurry Up and Wait

The current economic expansion in Charleston is entering its ninth year, and tenants are finding it increasingly difficult to move from site identification to opening. In general, there is a 12- to 18-month delay between the time a tenant identifies a submarket and site they want to occupy and when they can open their store. This is the result of four factors – some of which are unique to high-growth Southeastern cities.

The first factor making it difficult for tenants to find locations is a shift that has occurred nationally in retail. Until the Great Recession in 2008, most retailers were willing to accept locations in a variety of places within a submarket, driven largely by the need to increase same-store sales by opening new stores. After the recession, retailers across all product categories have demanded space in core retail areas with established and growing retail synergy that includes restaurants, health and fitness, and entertainment opportunities. At the end of the second quarter, core retail areas have 4.1% vacancy while centers in non-core areas in the Charleston Market had 8.1% vacancy.

Second, vacancy in Charleston is historically low. Excluding King Street, 6.1% of the market was vacant at the end of the second quarter. Within the small shop space subcategory, almost one-third of the 527,000 square feet of vacant square footage was in the North Charleston submarket alone – the largest geographically and lowest income of Charleston’s submarkets. The impact on tenants leaves three solutions: (1) negotiate to locate a retailer in a desirable center where the current tenant is doing poorly and engage in the early termination of their lease; (2) wait for newly constructed or redeveloped space to become available; or (3) wait for a tenant to leave the center and bid for the space.

Complicating one of these choices is a limited development pipeline. In the past, developers would build new centers close to new residential development at nearly any location that was legally entitled and had a growing surrounding population base. However, with the national glut of retail space, lenders and investors have constrained the funds available for new retail development to sites where a substantial portion of the property was pre-leased and where it was within a core area. Adding to this issue, Charleston is an inherently difficult market for developing new property due to the substantial number of protected wetlands and challenging local development regulations and permitting timelines. As of the end of the second quarter, there were three shopping centers with 152,110 square feet under construction.

Finally, upfitting of new space is taking longer than ever. First, the widespread construction boom in Charleston has diminished the available construction workforce, which means tenants must wait many months for construction to begin and construction is taking longer, as skilled tradesmen are in short supply, especially in electrical, plumbing and finished carpentry. Second, the planning departments are overwhelmed by applications and simply don’t have the personnel resources to review and issue the permits, in some cases delaying approval.

In summary, the Charleston retail market has become extremely difficult for retailers to locate new stores. Four underlying factors have created conditions where they have no choice but to hurry up and wait.

Market Statistics

Shopping Center Retail

The Charleston shopping center retail market was constrained in the second quarter due to the lack of new inventory. The market vacancy rate reached 6.1% at the end of the second quarter of 2017. Vacancy in core or A position shop space was 4.1%, while it was 8.4% in non-core centers. The overall average asking rental rate for shop space was $20.66 triple net per square foot per year (NNN PSF/YR), unchanged from the previous quarter. Rents in core or A position retail locations were $22.40 NNN PSF/YR, and non-core shop space rents were $19.37 NNN PSF/YR.

Berkeley

This submarket includes several new master-planned developments that will capture the bulk of regional residential development over the next ten years. As a result, there are several retail developments in the planning and permitting stage. Vacancy was 2.5% at the end of the second quarter. Core rental rates for shop space were $16.36 NNN PSF/YR and growing rapidly.

East Cooper

This submarket is the second largest, with 3.4 million square feet of shopping center retail space. Vacancy was 3.3% in core shopping centers and 11.8% at the balance of properties at the end of the second quarter. The average asking rental rate for shop space in core shopping centers was $24.17 NNN PSF/YR. Several shopping centers were moving towards permitting approval, but none were under construction at the end of the quarter.

North Charleston

The largest submarket, comprising 27% of the entire shopping center market, had an overall vacancy rate of 7.9 percent in the second quarter. Core centers had a rental rate of $17.38 NNN/SF and a vacancy rate of 6.2%. Meanwhile, in non-core centers, 9.1% of space was vacant and the rental rate was $11.79 NNN/SF.

Summerville

The rapidly expanding Summerville submarket was the region’s third largest. Lowes Foods anchored the redevelopment of the 92,000-square-foot Oakbrook Station redevelopment, and several other developments were imminent in the area. Vacancy overall was 4.7%, with core vacancy at a historic low of 3.3%. Rents in core centers approached $23 NNN PSF/YR.

West Ashley

The average vacancy rate for the overall West Ashley market was 7.1% at the end of the second quarter, and 5.3% of core retail space was vacant, although most spaces have leases on them. Several properties were being developed or redeveloped during the quarter, including the Harris Teeter-anchored Westwood Plaza and the Whole Foods-anchored West Ashley Station. Rental rates in core centers were $24.81 NNN PSF/YR for shop space.

 

 

Urban Retail

King Street

King Street, stretching from Line Street to Broad Street, consists of approximately 320 properties and 891,000 square feet. At the end of the second quarter, the vacancy rate was 10%. The average asking rental rate for shop space along the corridor is $58.33 NNN PSF/ YR. Many new developments were underway during the quarter, especially in the northern portion of the corridor.

Market Forecast

With continued rapid employment and residential growth combined with a thriving tourism economy, retailers are going to continue to pursue locations within the market. Because the clear majority of available entitled sites are in the Summerville, Goose Creek and Moncks Corners area, most retail development will follow. However, retail growth will also occur in more established markets as redevelopment and gentrification increase overall incomes and densities – especially on the Peninsula, lower Mount Pleasant and West Ashley.

Around Columbia

Growing populations across the state are leading to the expansion and strengthening of existing retail nodes in South Carolina’s main retail markets. Grocers are continuing to expand in all markets, along with other regional and national tenants.

Columbia, South Carolina

• The Golden Triangle, a combination of retail centers along Forest Drive, Devine Street and Garners Ferry Road, has expanded rapidly over the past five years. More growth will follow in the immediate future as redevelopment of underutilized land and second-generation shopping centers occurs.

Greenville, South Carolina

• Retail in the Village of West Greenville continues to heat up as the new location for residential development. With the development of the Brandon Mill and University Center, the West End is expanding further into the mill village crescent that lines the west side of the City of Greenville.

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

 

To download the complete report: Q2 2017 Charleston Retail Market Report.