South Carolina’s Industrial Market accelerates through 2015

Key Takeaways

• Domestic and foreign companies continue to invest in South Carolina, benefitting from the state’s pro-business environment and skilled labor force.
• 2015 was accompanied by further tightening for South Carolina’s industrial market.
• Strong positive net absorption in 2015 contributed to a decline in vacancy despite new construction deliveries and two large vacancies coming online.
• Manufacturing is a key element of South Carolina’s economy, accounting for nearly 25% of real gross domestic product.
• Industrial employment is a strong component of South Carolina’s economy.
• The market’s outlook is positive for 2016 and beyond.

Strengthening Economy is Fundamental to Industrial Growth

The national economy continued to improve in 2015 with real gross domestic product (GDP) increasing 2.4% since 2014, the same growth rate as the previous year, according to the Bureau of Labor Statistics.  The nation’s economy has been expanding 15 out of the past 16 quarters.  Most recent South Carolina data shows a 1.8% growth in real GDP from the second quarter of 2014 to the second quarter of 2015.  Real GDP for South Carolina grew 2.1% in 2014.  Continued GDP growth is expected as capital investments and job creation add to statewide production.

Manufacturing, wholesale trade, and transportation and warehousing collectively account for nearly 25.0% of South Carolina’s real GDP.  According to the Bureau of Labor Statistics, as of December 2015, approximately 302,000 jobs in South Carolina belonged to the industrial sector consisting of manufacturing and wholesale trade.  Industrial employment accounts for 14.8% of the state’s total non-agricultural employment and is a key economic driver.  The Greenville-Mauldin-Easley, SC metropolitan statistical area (MSA) holds the largest concentration of industrial employment with 71,900 industrial jobs, accounting for 17.8% of the MSA’s total non-agricultural employment.

Record Export Activity

2015 was the sixth consecutive record year for exports in South Carolina.  According to the U.S. Department of Commerce, South Carolina’s exports in 2015 exceeded $30.9 billion, increasing from $29.6 billion in 2014.   South Carolina is ranked the 15th overall exporter in the U.S., rising one spot since 2014.  China is South Carolina’s top export partner, importing more than $4.4 billion worth of goods from South Carolina in 2015.

A strong automotive presence helps make South Carolina a top exporter of tires and passenger vehicles.  BMW Manufacturing, located in Spartanburg, was the top automobile exporter in the nation, exporting nearly $10 billion in 2015.  The export value of passenger vehicles through the Port of Charleston in 2015 total $9.8 billion.  The presence of the Port of Charleston and South Carolina Inland Port (SCIP) support the state’s growing exports.

The South Carolina Ports Authority reported another active year at the Port of Charleston and South Carolina Inland Port (SCIP).  The Port of Charleston handled 1.9 million twenty-foot equivalent units (TEUs) in the 2015 calendar year, a gain of 10% over 2014.  SCIP handled 7,824 rail moves in December 2015, more than doubling its December 2014 volume.  The facility is exceeding expectations, completing 75,111 rail moves in 2015, 76.5% more than the previous year.  The inland port is motivating regional distributors, such as Dollar Tree, to establish Upstate facilities.  Port activity is expected to continue its trend as demand from BMW, Mercedes-Benz, Volvo and other users grows.  The completion of the Panama Canal expansion in 2016 will further contribute to greater port tonnage.

Key Site Selection Factors Attract Companies to South Carolina

South Carolina consistently ranks among the top states for doing business due to its favorable business environment, low operating costs, and skilled labor force.  Area Development Magazine voted South Carolina the number three state for doing business in 2015.  South Carolina’s overall business environment ranked second, behind number one Texas.   Additionally, Site Selection Magazine ranked South Carolina’s workforce development training third in the Atlantic region, behind North Carolina and Georgia which ranked first and second, respectively.  The ranking is a testament to the state’s skilled labor force at a time when necessary job skills are changing and becoming more technologically advanced.

Manufacturers and distributors are reassessing their growth models as transportation costs increase and speed to market gains importance.  A 2015 corporate site selection survey by Area Development Magazine ranked highway accessibility the top location factor in facility planning.  Transportation costs are making up a growing portion of operating expenses, and thus highway accessibility is oftentimes outweighing real estate costs in site selection, specifically for distribution centers.

Interstates such as I-85, I-95, I-26, I-20, and I-77, run through South Carolina, connecting it to major markets.  South Carolina’s industrial market is growing as manufacturers and distributors looking to optimize their supply chains and reduce operational costs are attracted to the market.  The state has received significant attention from several distribution centers and third party logistics providers, attracting investments from Techtronic Industries, Gerber Childrenswear, Colgate-Palmolive, Dollar Tree, and Kenco Logistics, among others.

South Carolina’s industrial inventory consists of almost 334 million square feet in 4,420 buildings.  The market can be thought of as four major industrial regions, Upstate, Midlands, Lowcountry, and the I-77 corridor.

Market conditions are tightening, reflecting strong interest and healthy demand for space.  The vacancy rate at year-end 2015 was 8.0%, up slightly over the previous quarter but down from 8.8% one year ago.  Charleston reported the lowest vacancy rate of 6.5% at the end of the fourth quarter of 2015, declining from 9.1% the previous year.  The Midlands region was the only one to report an increase in vacancy over the previous quarter due to two new vacancies.

Two large industrial facilities in the Midlands were vacated during the fourth quarter of 2015, adding more than 1.1 million square feet of quality, in-demand industrial space to the market’s available inventory.  The presence of available buildings ranked among Area Development Magazine’s top 5 location factors, and thus the increased vacancy will prove beneficial to South Carolina.

Bose recently vacated its 470,000-square-foot manufacturing facility in Richland County.  The plant is located on 104 acres and is expandable to 1 million square feet.  Knauf Insulations vacated approximately 680,000 square feet at One Guardian Way in Fairfield County.  The properties are receiving significant attention from domestic and international firms.  With limited options for industrial space larger than 250,000 square feet throughout South Carolina and neighboring states, the buildings create unique opportunities for substantial capital investments and job creation.

2015 was a historic year for the industrial market with an overall decline in vacancy, rising rental rates, and significant build-to-suit and speculative construction activity.  Net absorption for the year was over 6.6 million square feet, largely the result of new construction delivering at high occupancy and significant leasing activity.

A shortage of quality, available inventory has been driving speculative construction in most South Carolina markets.  An uptick in construction activity was witnessed in the Upstate, I-77 corridor and Lowcountry regions, but remained limited in the Midlands given the high quality of the region’s existing inventory.  More than 1.6 million square feet of industrial space delivered in South Carolina during 2015, and an additional 8.8 million square feet remain under construction.

Rental Rates Climb

The combined effect of declining vacancy rates, rising construction costs and strong demand is escalating rental rates, which are reaching new record-high levels.  Asking rental rates are increasing steadily across South Carolina.  The costliest industrial space is found in the Lowcountry where high land prices, wetland restrictions and rising construction costs are pushing up rental rates for newly constructed space. Rental rates in the Lowcountry 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.  New warehouse and distribution space in the Upstate is seeing rates between $4.00 NNN and $4.50 NNN while older space of similar quality is receiving $3.50 NNN to $4.00 NNN. Industrial space in the Midlands is also receiving higher rental rates than the past.  Existing space between 10,000 and 40,000 square feet is leasing between $4.00 NNN and $4.50 NNN.  Larger blocks of space over 100,000 square feet are leasing from $3.50 NNN to over $4.00 NNN depending on the quality and location of the space.  Rental rates are expected to increase further as space is absorbed and construction costs increase.

Speculative Construction Update

Manufacturers and distributors are showing a strong desire to locate in South Carolina, motivating developers to invest in speculative construction.  The projects are receiving significant attention and preleasing successfully.  The majority of construction is located in the Upstate, Lowcountry and I-77 corridor.  Speculative construction in the Midlands has been limited.

Under Construction

1. 545 Brookshire Road

Spartanburg County | Beacon Partners | 240,020 SF

2. Flatwood Industrial Park

Spartanburg County | Johnson Development Associates | 363,000 SF

3. North Pointe Building I

Berkeley County | WestRock & SunCap Property Group | 350,856 SF

4. Palmetto Commerce Park

Charleston County | Pattillo Industrial Real Estate | 142,000 SF

5. Carolina Place

York County | Beacon Partners | 277,000 SF

6. White Horse Industrial Center

Greenville County | Brunham Partners LLC & Exeter Property Group

Building 2: 234,000 SF

Building 1 (complete): 306,000 SF (100% leased by Colgate-Palmolive)

 

 

Recently Completed

1. Lexington County Spec Building

Lexington County | Lexington County | 120,000 SF

2. Hillside Enterprise Park

Spartanburg County | Scannell Properties | 155,000 SF

3. Logue Park

Greenville County | Cothran Properties

Building 1:  110,000 SF

Building 2: 90,000 SF (100% leased by Silvercote)

4. Wingo Park

Spartanburg County | Becknell Industrial | 175,000 SF

5. Caliber Ridge Industrial Park

Spartanburg County | Liberty Property Trust

130 Caliber Ridge Drive: 156,000 SF (approximately 25% leased)

6. Southchase One

Greenville County | Pattillo Industrial Real Estate | 205,000 SF

(100% leased by Tower International)

7. Shop Grove Industrial Park

Richland County | Boyd Properties

121 Shop Grove: 60,300 SF

196 Shop Grove: 70,200 SF

8. Building 4 at Charleston Regional Business Center

Berkeley County | Childress Klein & Amstar | 279,000 SF

 

 

Automotive-Related Firms Among Top Investments

Total capital investments in 2015 exceeded $4.2 billion and consisted of 150 projects with 17,280 jobs according to the South Carolina Department of Commerce.

• Mercedes-Benz Vans, a division of Daimler, announced plans earlier this year to invest $500 million in a new Sprinter van plant in Charleston and create 1,300 new jobs over the next five years.  Construction on the new plant is expected to begin in 2016.  The manufacturer is expanding its facility at 8501 Palmetto Commerce Parkway and will use the new plant to manufacture next generation Sprinter vans to supply the North American market.
• Volvo’s first American manufacturing plant is under construction in Berkeley County.  The $500 million facility is expected to create 4,000 new jobs.  The facility will be the sole producer of the new S60 sedan.
• Mitsubishi Polyester Film Inc. announced plans earlier in 2015 to invest $100 million and expand its Greenville County manufacturing facility.
• Global automotive supplier Magna International plans to invest $50.8 million and create 153 new jobs in an expansion of its existing Greenville County plant.  The manufacturer plans to move into a new 165,000-square-foot facility at Matrix Park.
• Tier-one automotive supplier, Tower International, is establishing its first South Carolina plant in Greenville County.  The supplier plans to invest $44 million and create 130 new jobs.  The manufacturer is leasing a new 205,000-square-foot speculative industrial building, Southchase One, developed by Pattillo Industrial Real Estate.
• Honda of South Carolina Manufacturing Inc. is expanding its Florence County operations.  The $42 million expansion is expected to create 44 new jobs.
• Draxlmaier, a top automotive supplier, is expanding its Spartanburg County plant, investing more than $35 million and creating 94 new jobs over the next five years.  The tier-one automotive supplier manufacturers interiors for premium automobiles and plastic components.  The supplier is constructing a new 184,000-square-foot production and logistics facility.
• ZF Transmissions, global supplier of driveline and chassis technology, is expanding its transmission manufacturing plant in Laurens County.  The company is investing $22.5 million and creating 545 new jobs to expand its manufacturing capacity.  The manufacturer and supplier acquired an existing, 150,000-square-foot facility to house its manufacturing and warehousing operations, which will be operational early in 2016.
• Construction is underway on Continental Tire’s Sumter plant expansion.  The expansion is expected to double the plant’s annual capacity and create 900 new jobs.  Approximately 720,000 square feet will be added to the plant which is currently 1 million square feet.

Ideal Environment for Investments

South Carolina’s high occupancy and strong rental rates provide an ideal environment for investment sales opportunities.  High sales prices and low yields in core markets are motivating investors to look at secondary and tertiary markets which offer higher returns.  Sales prices in South Carolina are increasing, but remain substantially below those of gateway markets.  Global connectivity, high occupancy, construction activity and current low interest rates make South Carolina prime for investment.  Investors are willing to purchase buildings under construction and are actively pursuing buildings with vacancy notwithstanding leasing risk.  The demand for industrial investments is outpacing the supply of product.  Despite the recent slight increase in interest rates, cap rates remain compressed.

2016 Outlook

South Carolina’s industrial market is poised for continued success through 2016.  Net absorption is expected to be positive and vacancy is projected to decline.  Recently vacated blocks of space in the Midlands region will likely backfill during the year, generating significant capital investment and job creation.  The presence of Volvo and Mercedes-Benz Vans will attract automotive suppliers and third party logistics providers to the state as manufacturers and distributors seek ways to reduce transportation costs and delivery time.  Investment sales activity will gain momentum as interest rates remain low with occupancy and rental rates climbing.  Speculative construction will slow down in parts of the state, but will pick up again once recently delivered product is absorbed and demand continues to exceed supply.  Construction in the Midlands will remain limited until the quality, available inventory that exists in the market is absorbed.