Midlands’ Central Location to Help Grow Industrial Market

Colliers International | South Carolina
Research & Forecast Report
Columbia | Industrial
Q3 2015

 

Key Takeaways

• The industrial market in Columbia, SC and the surrounding Midlands area continues to strengthen, ending the third quarter of 2015 with declining vacancy, positive absorption and increasing rental rates.
• The Midlands is centrally located between Greenville and Charleston’s tight industrial markets, providing efficient logistics with more options for space than nearby markets.
• Two large industrial buildings will become vacant during the fourth quarter, adding more than 1 million square feet of quality space to the market’s available inventory.
• Speculative construction remains limited despite significant demand for space.
• Capital investments from both domestic and foreign firms remain strong throughout the region.
• Industrial employment increases as demand for industrial services grows.
• Activity is up at the Port of Charleston and South Carolina Inland Port.

 

Location is Key as Transportation Costs Increase

Recent site selection surveys by Area Development Magazine reflect the growing importance of transportation costs and efficient logistics.  As transportation costs increase and account for a growing portion of operating expenses, companies are looking for ways to improve the efficiency of their logistics and supply chain.  The top three site selection factors in both the consultants and corporate surveys were highway accessibility, availability of skilled labor and labor costs.  Real estate and labor costs have historically been the top contributors to operating costs, but as transportation costs increase, logistics is becoming the top site selection factor for many distribution centers and manufacturing facilities.  The surveys’ results bring positive news to landlords and investors in the Midlands market as the region offers efficient logistics via its accessibility from major interstates and connectivity to the South Carolina Inland Port in Greer and the Port of Charleston.  Additionally, technical training programs provide the new talent required for industrial labor at low labor rates given the state’s low unionization rate and affordable cost-of-living.

A recent study by The Boyd Company, Inc. ranked Columbia, SC among the top markets for warehouse locations given the market’s low operating costs compared to other markets surveyed.  Popularity in ecommerce is driving warehouse demand as retailers select distribution and fulfillment centers in close proximity to customers.

 

Highway Accessibility

The Midlands is easily accessible from major interstates I-26, I-77, I-20 and I-95.  Interstate 77 connects Columbia to Charlotte, NC, passing through the growing industrial clusters in Rock Hill, SC along the way, and extend as far north as West Virginia.   Interstate 26 passes through Columbia, connecting the Midlands to the Upstate and Lowcountry allowing easy access from both the Inland Port in Greer and the Port of Charleston.  Additionally, I-20 extends west as far as Texas, passing through major markets such as Atlanta and Dallas and connects to I-95 in Florence.  The I-95 corridor reaches Richmond, VA; Washington, D.C.; Baltimore, MD; Philadelphia, PA; New York City, NY; and Boston, MA.  As the migration from the Northeastern to Southeastern U.S. continues, the connectivity to the Midlands region increases the market’s appeal.  The region’s accessibility allows distributors of consumer products to reduce delivery time to customers while enabling suppliers in the state’s many automotive and aviation supply chains to distribute goods to their customers in a timely manner.

 

 

Availability of Skilled Labor & Labor Costs

As technological advancement continues and manufacturers establish new U.S. facilities, the demand for skilled labor is growing and many are reporting a shortage in available skilled labor.  Major announcements were made from Volvo and Mercedes-Benz Vans earlier this year, which will collectively create 5,300 jobs over the next decade in the Charleston region.  Additionally, expansions at BMW Manufacturing and Boeing South Carolina will create new jobs, adding to the growing demand for labor in the Greenville and Charleston regions.  The new jobs will place a pressure on the availability of skilled labor in those regions.  The Midlands may benefit as manufacturers and distributors seek space in areas with strong availability of skilled labor.  Additionally, the region is home to several technical colleges, such as Midlands Technical College, which teach students the skills required to succeed in the changing industrial sector.

Low labor costs enabled by a low cost-of-living and low unionization rate make the Midlands, and South Carolina as a whole, prime for manufacturing and distribution facilities.  Labor costs are a significant component of operational costs and thus decreasing labor costs reduce overall expenses.

Industrial employment, consisting of manufacturing and wholesale trade employment, accounts for 12.0% of the Columbia, SC MSA’s total non-agricultural employment.  Approximately 1,000 jobs were added from August 2014 to August 2015 bringing total industrial employment to 45,900 jobs.  Industrial employment is on the rise in the MSA and is nearing pre-recession levels.

 

South Carolina Ports

The presence of the South Carolina Inland Port in Greer and The Port of Charleston connects the Midlands to both domestic and global markets.  The Port of Charleston handled 170,528 twenty-foot equivalent units (TEUs) in August 2015, a 4.0% increase over August 2014. Activity at the port is on the rise over recent years and is expected to increase further upon completion of the Panama Canal expansion, which will allow the port to handle larger vessels.

Activity is also strong at SCIP, which is exceeding expectations. SCIP handled 7,322 rail moves in August. SCIP ended its first full fiscal year of operations with 58,407 rail moves. Current users include BMW and Adidas. SCIP has the capability to grow its capacity and will likely expand to accommodate growth and demand for services.

 

Market Conditions

The third quarter brought continued improvements for the Midlands, SC industrial market, which consists of Aiken, Calhoun, Clarendon, Darlington, Fairfield, Florence, Kershaw, Lee, Lexington, Newberry, Orangeburg, Richland, Saluda, and Sumter counties.  The vacancy rate for the region is trending downwards, ending the third quarter of 2015 at 7.9%, down from 8.9% at mid-year and 10.3% one year ago.  Approximately 956,000 square feet of industrial space was absorbed throughout the quarter following strong leasing velocity.

Asking rental rates are increasing as demand for space and construction costs escalate.  Existing space in the 10,000 to 40,000 square-foot size range are leasing for between $4.00 and $4.50 NNN.  Larger blocks of space over 200,000 square feet are leasing for over $4.00 NNN depending on the quality of space.  Tenant improvement allowance is low while construction costs are increasing, placing pressure on tenants who are oftentimes paying for improvements out-of-pocket.

Despite the total vacancy rate being near 10.0%, limited options for quality, Class A space larger 100,000 square feet remain.  Two large blocks of Class A space will become vacant during the fourth quarter of the year, adding more than 1 million square feet to the available inventory.  Bose will vacate its 470,000 square-foot manufacturing facility in Northeast Columbia.  The plant is located on 104 acres in the town of Blythewood and is expandable to one million square feet.  Knauf Insulations will soon vacate its approximately 680,000 square-foot facility in Fairfield County.  The two buildings have the potential to attract major manufacturers, which could generate substantial capital investment and job growth for the region.

Most of the existing vacant space currently resides in lower quality, Class C industrial buildings, providing an opportunity for redevelopment.  Renovation of lower quality industrial facilities along I-26 will likely prove beneficial to investors as the demand for space along the corridor between Charleston and Greenville strengthens.

 

Speculative Construction Remains Limited Despite Growing Demand

• Lexington County’s speculative industrial building is nearing completion at Saxe Gotha Industrial Park.  The 120,000 square-foot industrial facility is expected to be completed by year-end 2015.  The building is being developed by Landmark Builders, and LCK is serving as project manager.
• Two Class A speculative industrial buildings recently completed at Shop Grove Industrial Park in the Southeast Columbia submarket in Richland County.  121 Shop Grove is a 60,300 square-foot industrial facility with 18,000 square feet remaining available for lease.  Party Reflections occupies 42,000 square feet in the building.  196 Shop Grove is a 70,200 square-foot industrial building that delivered 50% occupied.

 

 

 

Investments & Expansions

Capital investments continue to flow into the region from both domestic and foreign firms.  More than $270 million worth of investments have been announced for the Midlands since January 2015.  The investments are expected to create more than 1,000 jobs over the next five years.

• Continental Tire recently broke ground on its Sumter Plant expansion, which is expected to double the plant’s annual production capacity and create 900 jobs.  Approximately 720,000 square feet will be added to the plant, which is currently 1 million square feet.
• China-based Haier plans to invest $72 million to expand its Camden plant in Kershaw County.  The manufacturer plans to build a new 250,000 square-foot addition to its existing 365,000 square-foot facility.  The company plans to create 410 new jobs over the next 5 years and expects to be operational by mid-year 2018.
• Honda of South Carolina Manufacturing Inc. recently announced plans to expand its existing Florence County operations.  The $42 million expansion is expected to create 44 new jobs.
• Sea Pro Boats is investing $5.5 million and creating 238 new jobs.  The boat manufacturer will be occupying in a 200,000 square-foot facility located at 25214 SC Highway 121 in Newberry County.
• McCall Farms recently completed its $4 million expansion of its Florence County operations.  The manufacturer expects to create 25 new jobs  over the next 5 years.
• Italy-based OMP Mechtron is investing $2.9 million to expand and move into an existing 21,000 square-foot facility at 4335 Augusta Highway.  The facility is expected to be fully operational by year-end 2015 and create 20 new jobs over the next five years.

 

Market Outlook

Interest and demand for industrial space in the market will remain through the remainder of 2015 and into 2016.  With Bose and Knauf Insulation vacating their manufacturing facilities during the fourth quarter of the year, the market will likely experience an uptick in vacancy and negative net absorption.  The facilities are expected to receive strong attention and will likely backfill quickly.  Tightening industrial markets in Charleston and Greenville may drive industrial users to the Midlands region as they aim to benefit from efficient logistics offered by the market and South Carolina.  The Federal Reserve has temporarily postponed increasing interest rates, but the rates are speculated to increase in the upcoming months.  Strong sales activity is likely to pick up during the last quarter of the year.  As occupancy costs increase due to rising rental rates and construction costs, some users may find ownership a feasible alternative to leasing space.  Construction activity will pick up as space continues to be absorbed with build-to-suit construction followed by more speculative projects.

 

Around the State

A growing demand for industrial space throughout South Carolina is attributing to tightening markets and soaring rental rates, creating a need for new industrial construction.  Investments continue to be made throughout the state.

 

Charleston, South Carolina

• Volvo is establishing a new $500 million manufacturing facility in Berkeley County. The plant is expected to create 2,000 new jobs over the next 10 years. Initially, the facility is projected to have an annual production capacity of 100,000 cars. The Port of Charleston, skilled labor force and business-friendly environment helped make Volvo’s location decision. The automotive manufacturer will build the S60 sedan model solely in the new Berkeley County plant.
• Construction is underway at Gerber Childrenswear’s new distribution center in Berkeley County. The 477,000 square-foot facility is being developed at Foreign Trade Zone, a joint-venture of The Rockefeller Group and WestRock Land Development.

 

Greenville, South Carolina

• Construction is underway on a new facility for Techtronic Industries (TTi) in Anderson County.  The 1.3 million square-foot light assembly and distribution facility will be located at the intersection of I-85 and Highway 81.
• Dollar Tree announced plans earlier this year to invest $104.4 million in a new, 1.5 million square-foot distribution center to be built at the Cherokee and Spartanburg counties border.
• Construction continues on Hillside Enterprise Park in Spartanburg County.  The 155,000 square-foot speculative industrial building is being developed by Scannell Properties.

 

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

 

To download the complete report: Q3 2015 Columbia Industrial Market Report.