Port-driven activity contributes to strong development and tight market

Research & Forecast Report: Q1-2016 Charleston’s Industrial Market

 

Key Takeaways

• Charleston, South Carolina’s industrial market continues to tighten as the Port of Charleston remains a driver for manufacturers and distributors looking to enhance their supply chains.
• Activity at the Port of Charleston is up over the same period in 2015 and is expected to increase further.
• Speculative industrial buildings are receiving great attention and are expected to drive additional construction.
• Current market conditions create an ideal environment for investment.

Positive Net Absorption Despite Temporary Uptick in Vacancy

Manufacturers and distributors continued to show great interest in the Charleston, SC industrial market through the first quarter of 2016.  Leasing activity was healthy, and more than 980,000 square feet of space was absorbed despite a slight, temporary increase in vacancy during the quarter.  The total vacancy rate was up to 6.9% at the end of the first quarter of 2016 from 5.8% at year-end 2015 but remains below the vacancy rate of 8.1% one year ago.  This uptick in vacancy was anticipated as several speculative industrial buildings were set to deliver during the quarter.  Approximately 750,000 square feet of Class A, speculative industrial space was added to the existing inventory during the quarter with 500,000 square feet vacant.  Given the strong demand for space in the market, the buildings are successfully attracting attention and exceeding expectations.  The buildings are expected to lease and become occupied in the upcoming quarters.

Success of Speculative Buildings to Spur Next Wave of Development

The success and attention received by the area’s speculative industrial buildings will likely drive additional speculative development sooner than anticipated.

• Construction is complete at North Pointe Business Campus on North Rhett Avenue in Hanahan.  The 350,856 square-foot speculative industrial building was developed by WestRock Land Development and SunCap Property Group.
• A 142,000 square-foot speculative industrial building, developed by Pattillo Real Estate, is complete at Palmetto Commerce Park.

Robust Activity is Evident but Unrelated to Mercedes and Volvo

Despite what many people may think, robust activity in the market comes from a broad spectrum of users that are unrelated to the planned Mercedes-Benz Vans and Volvo Cars facilities and are also unrelated to Boeing.  At a time when transportation costs are climbing, companies are reassessing their supply chains and selecting sites based on highway accessibility, port access and available labor and labor costs.  Charleston offers companies efficient logistics through the Port of Charleston, rail connectivity to the Inland Port and access to major interstates.  Companies are choosing to locate in Charleston for these reasons and not simply due to the presence of the future automakers.

Mercedes-Benz Vans and Volvo Cars are collectively investing $1 billion in the Charleston region and plan to open the initial phases of their facilities in 2017 and 2018, respectively.  The major automotive manufacturers are expected to have a ripple effect on the market and draw suppliers to the area, but major announcements related to the automakers are not likely before the second half of 2016.   Future suppliers will need between 7 to 12 months to construct a new building depending on site readiness.  For this reason, it is still too early to feel the suppliers’ impact on the market’s vacancy rate and market conditions.

The strong presence of BMW suppliers throughout the state is also worth noting.  The existing tier one suppliers are already looking at ways to increase their capacity in order to accommodate future demand from the new automotive manufacturers.

The Port of Charleston is a Significant Market Driver

Many companies that are choosing to locate in Charleston, as well as other parts of South Carolina, have attributed their investment to the presence of the Port of Charleston.  Strong activity at the port is a testament to existing industry and many users of the port.  According to the South Carolina Ports Authority, 1.9 million twenty-foot equivalent units (TEUs) were handed during the 2015 fiscal year.  The port handled 157,962 TEUs in February 2016, a 3.3% increase over February 2015.  Total fiscal year-to-date container volume reached nearly 1.28 million TEUs in February 2016 compared to 1.23 million TEUs during the same period one year ago.

Activity at the port continues to surpass record levels and demand for port services is expected to rise upon completion of the Panama Canal expansion.  Plans are currently in the works for the deepening of the Charleston Harbor to 52 feet in order to accommodate larger Post-Panamax ships.  Upon projected completion of the project by 2020, the port will be the deepest harbor on the East Coast.

Intermodal Facilities Gain Popularity

The Port of Charleston is connected to South Carolina’s Inland Port via Norfolk Southern rail line.  Activity at the Inland Port is exceeding expectations and handled 8,623 rail moves in February 2016, setting a new record for monthly volume, according to the South Carolina Ports Authority.  The port, which began operations in November 2013, has been a driver for the Upstate, SC region but is also beneficial for Charleston’s industrial market.

Intermodal transportation is gaining popularity across the nation with rail becoming a preferred mode of transportation for many, especially those transporting multiple truckloads for long distances.  Just recently, a new rail service was launched between the Port of Charleston and Charlotte, North Carolina.  Containers moving between Charleston and Charlotte will ride an existing Norfolk Southern rail line between Charleston and Spartanburg, where they will connect to an intermodal train service between Spartanburg and Charlotte’s Regional Intermodal Facility at the Charlotte Douglas International Airport.

 

 

Among the Top Rental Rates in South Carolina

Rental rates are on the rise for industrial space throughout South Carolina, but rental rates in Charleston are among the highest in the state.  High land prices and rising construction costs are resulting in above average asking rental rates for new industrial space.  Rental rates range from $5.00 NNN to $5.50 NNN for new industrial space larger than 100,000 square feet while older space of similar size is leasing for $4.15 NNN to $4.25 NNN.

For large industrial users with high production volumes, real estate costs make up just a portion of total operating expenses.  On average, real estate costs account for three to five percent of total operating costs.  For these users, paying higher rent but reducing transportation costs via efficient logistics is driving their decision to locate in the market.

Industrial Properties Are Trading Hands

Given the market’s high occupancy, low interest rates and favorable cap rates, investors are expressing interest in investing in Charleston’s industrial real estate.  Several properties traded hands during the quarter and additional transactions are expected for the remainder of the year.

• A 131,803 square-foot industrial facility located at 211 Farmington Road in Summerville was acquired by an investor for $4.75 million, or $36 per square foot, early in the first quarter.
• 6331 Fain Boulevard, an approximately 53,000 square-foot industrial facility in North Charleston, was acquired for $2.4 million, or $46 per square foot.

Some industrial users are opting for ownership rather than leasing due to the rising rental rates in the market.  More users are likely to invest in ownership as rates rise further.

Industrial Employment is Strong

Industrial employment is on the rise in the Charleston-N. Charleston, SC metropolitan statistical area (MSA) and has exceeded the pre-recession peak.  According to the Bureau of Labor Statistics, approximately 35,300 individuals were employed by an industrial job in February 2016.  An estimated 1,300 industrial jobs have been added to the MSA’s labor force since February 2015, accounting for 15.7% of all jobs added during that period.  The employment sector, which consists of manufacturing and wholesale trade employment, will continue to grow as manufacturers and distributors establish facilities in the market.

Market Outlook

The remainder of 2016 is likely to prove beneficial for Charleston’s industrial market.  Additional declines in vacancy, capital investments and construction are expected through the year.  Manufacturers and distributors looking at the market will belong to many industries but Mercedes-Benz and Volvo suppliers may join the pool of companies seeking space later in the year.  Several sales transactions are expected to close this year as interest rates remain low and market conditions favorable.  Potential cap rates for institutional grade facilities could be as low as 6.25% to 6.50%.  Premium corporations of similar size and quality have hovered in the 6.75% to 7.10% range over the past few years.

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.  Markets around the state are seeing build-to-suit and speculative industrial construction.

Columbia, South Carolina

• The Columbia area is proving beneficial to local industrial users with many actively seeking space and relocating or expanding within the market.
• Sales activity is expected to be strong through the year while market conditions remain favorable and interest rates are low.
• Construction activity has been limited given the high quality of the existing inventory in the market.  Upon absorption of the existing space, speculative and build-to-suit construction will likely gain momentum.
• Bose vacated its former 470,000 square-foot, Class A manufacturing facility in Northeast Columbia late in 2015.  The facility is located on 104 acres and is expandable to one million square feet.

Greenville, South Carolina

• Construction is nearing completion at 545 Brookshire Road in Spartanburg County.  The 240,020 square-foot speculative industrial building is being developed by Beacon Partners.
• The first speculative building at Flatwood Industrial Park is nearing completion.  The 363,000 square-foot industrial building is being developed by Johnson Development Associates.  The master plan for the park shows at least ten additional industrial buildings that could be developed as build-to-suit or speculative buildings.
• Building 1 at Logue Park, a 110,000 square-foot building, in Greenville County is complete.  The building was developed by Cothran Properties.

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

 

To download the complete report: Q1 2016 Charleston Industrial Market Report.