CITY HIGHLIGHT, AUGUST 2004

CHARLESTON: POSITIVE OUTLOOK FOR REMAINDER OF YEAR

The Charleston, South Carolina, commercial real estate market has seen a fair amount of activity in 2004, and predictions are positive for the rest of the year. Executives from Integra Realty Resources and Colliers Keenan of Charleston analyze various sectors of the market.

Office

Is the glass half full or half empty? On the one hand, we must consider that we are living in a robust economy, with great gains in the real estate industry. On the other hand, we must recognize the fragility of the times, with continued unrest in the Middle East, skittish stock market reactions, high rates of personal bankruptcies and a sure-to-be heated presidential election campaign. For the greater Charleston office market, the glass seems half full, with declining vacancies, strong tenant and buyer activity, solid investment acquisitions and announcements of planned speculative development.

Downtown Charleston

Downtown Charleston abounds with strong tenant and buyer activity, great amenities and high barriers for new development. Vacancy among existing buildings will continue to shrink and rental rates will rise as limited new product is developed. In addition to the 100 Calhoun St. office building, projects should break ground in the first quarter of 2005 at Charleston Gateway Center and at the intersection of Meeting and Wentworth streets, effectively adding approximately 120,000 square feet to the Class A inventory. Much of the space being developed has commitments from prospective users.

Mt. Pleasant

From a dismal 26 percent vacancy in the first half of 2002, the Mt. Pleasant submarket has risen like a phoenix, with positive absorption driving the vacancy rate down to 9.71 percent and developments are being announced that will mirror Downtown Charleston’s rental rates and sale prices on a per-square-foot basis. This 24-month growth and absorption cycle has given rise to speculative plans for 1.1 million square feet of new development in a 1.6 million-square-foot submarket. Obviously, even the strongest absorption in a submarket this size would not be able to handle this much new product expeditiously, but there is little chance of all 1.1 million square feet coming to market at once. New projects should break ground and get underway at Offices at Belle Hall, with a possibility of development beginning in the Oakland Plantation property. Combined, these phased projects could add approximately 350,000 square feet of inventory.

Lower North Charleston

Limited opportunities remain for the corporate tenant in this submarket, with healthy absorption in Class A product. Class B product is being similarly absorbed, primarily by defense contractors. The Lower North Charleston submarket has a current overall vacancy of rate of 18.97 percent including the 38,000 square feet of contiguous space in Ashley Corporate Center. However, a few potentially significant transactions could absorb a major portion of the remaining vacancy, leaving few good opportunities for additional users in the submarket.

Upper North Charleston

The Upper North Charleston submarket, though typified by a lack of new office development, higher vacancy rates and lower rental rates, has begun to turn the corner toward positive absorption and rising rental rates. Though new development remains minimal, existing office product is beginning to be absorbed and is being reconditioned in the process. The completion of some of the major road improvement projects is also helping to remove many of the previous objections to office locations in the submarket. Numerous small defense contractors and insurance tenants are moving into the market and driving the vacancy down.

West Ashley

The West Ashley submarket continues to struggle with office viability as the smallest office submarket in terms of total inventory. Greater interest in residential development of large land tracts in West Ashley may lead the way to greater office needs in the submarket. Increased demand will be needed to reduce current vacancy and grow rental rates.

The overall greater Charleston office market shows great promise for the coming 24 months in both continued absorption and increasing rates. During that time frame, new office projects will emerge and others will be announced. The market will see increased costs of construction and, regardless of the level of activity, the market will cast its focus on the presidential election in November and feel the impact of the outcome.

— Peter Fennelly, SIOR, vice president of marketing, Colliers Keenan of Charleston LLC

Retail

The overall vacancy rate for the Charleston metropolitan statistical area has declined to its lowest level since 2000 according to the Reis MetroStats, First Quarter 2004. The overall vacancy rate of 9.5 percent is lower than the vacancy level of 10.5 percent during fourth quarter 2003. While the market has tightened, the vacancy levels are still above the South Atlantic region average retail vacancy of 7.2 percent and the national average of 7.4 percent.

Average asking rent for retail space in Charleston increased by 1.7 percent to $11.92 for non-anchor space for first quarter 2004. This was higher than the 0.4 percent increase experienced by the Southeast and 0.5 percent for the United States, according to Reis. Every submarket showed increases in asking rents during the first quarter 2004, according to Reis. The Mt. Pleasant submarket reported a 2.8 percent increase in asking rents, up to $14.82 per square foot. This was the highest of the submarkets. The lowest was reflected by the North Charleston/Peninsula submarket at 0.4 percent, which indicates an average asking rent of $10.40 per square foot.

The various submarkets of Charleston vary widely with respect to vacancy levels. The Mt. Pleasant submarket is experiencing the lowest vacancy rate of 2.6 percent, while the Summerville submarket has a vacancy rate of 12.6 percent. Between fourth quarter 2003 and first quarter 2004, every submarket experienced a decrease in vacancy level.

Mt. Pleasant has seen its share of new construction, and even more is planned. The newest project, the Shoppes of Park West, is a 68,930-square-foot shopping center that features a recently competed 45,030-square-foot Publix as its anchor. Wal-Mart has shown interest in the Mt. Pleasant market recently. The retailer wants to build a Supercenter in across from the 68-acre Towne Centre development.

— Michael Dodds, MAI, CCIM, managing director, Integra Realty Resources – South Carolina

Industrial

The Charleston industrial market is a port-driven market, with approximately 22.52 million square feet of inventory. The product mix is comprised of approximately 6.03 million square feet of heavy manufacturing facilities, 8.18 million square feet of box distribution facilities (projects greater than 100,000 square feet), 5.4 million square feet of local distribution facilities (projects that range between 25,000 and 99,000 square feet) and 2.9 million square feet of flex space (projects ranging from 10,000 to 24,999 square feet). Vacancy rates are high due in part to the functional obsolescence of many buildings located in older submarkets as well as the general relocation of the transportation hubs in the area. Many companies are also moving their operations further away from the port terminals and their related congestion as increased drayage costs are offset with lower suburban rental rates and land cost, even in the face of increasing gasoline prices. Ease of access, proximity to major traffic arteries, construction type and layout efficiency have also contributed to this trend.

Increased port traffic has also helped to increase demand. The port of Charleston is the fourth largest container port in the country. It is second on the East Coast only to the Port of New York/New Jersey; it handled 1.68 million 20-foot equivalent units (TEUs) in 2003, up 11 percent from year-end 2002. The port is anticipating strong growth in 2004. The port has expansion plans to build a 250-acre, three-berth marine terminal at the old naval base to keep up with the increased container volume. The port was estimated to have a $23 billion statewide economic impact on South Carolina last year alone, and that number is anticipated to grow again this year. This will cause greater absorption in the distribution and warehousing segments of the Charleston regional industrial market.

Many of the defense-oriented firms have continued to be awarded large contracts generated from Operation Enduring Freedom in Iraq as well as the Department of Homeland Security. These firms continue to expand into flex/R&D space, which has seen their rental rates increase because of the increased demand. Rates for this product type vary greatly depending on build-out ratio of office/lab/warehouse space. The rates range from $9 to $14, triple net.

Manufacturing has continued to suffer in Charleston as there has been increased interest due to the aggressively priced projects that are available. Few transactions have been getting done. There are Class A, state-of-the-art manufacturing facilities with tilt construction, abundant parking, above-market eave heights and great office build-out ratios currently available for pennies on the dollar compared to their initial construction cost and a third of what it would cost to build a comparable building.

The big box market in Charleston, which includes projects greater than 100,000 square feet, has seen some activity this year. There was a lot of early interest, but few transactions have materialized. There are very few available options to out-of-market tenants looking to relocate here and not enough local demand to support speculative construction of these types of facilities, as evidenced by the few existing speculative big boxes continuing to remain vacant. There is currently only one project that could cater to the 500,000 square feet and up user.

Mid-range distribution facilities — projects between 25,000 and 50,000 square feet — have seen much more activity with several transactions recently being completed for 50,000 square feet in the North Charleston submarket. This market has been better insulated from the demand for tilt-up concrete buildings, with many tenants stressing bottom line costs versus building asthetics or preferred suburban locations. These rates have stayed consistently in the low- to mid-$4, triple net range. This market will continue to see activity, with some companies taking advantage of the soft rates and landlord concessions to occupy more space.

The flex warehouse market has done well, particularly multi-tenant flex projects. Many smaller service-orientated industries have spurred the demand for tilt-up, in line, multi-tenant flex space. These companies are willing to pay $6 to $11, net, per square foot, depending on the build-out ratio, construction type and project location. The vacancy rates for this product type have continued to outperform the rest of the Charleston industrial market. For example, the East Cooper submarket for flex space has 231,000 square feet of flex product with an average of $8.10-per-square-foot (net) rental rates with the majority of the projects being tilt-up construction located in Class A parks. This level of success has prompted the announcement of 200,000 more square feet of space that will be coming on line in that market within the next 12 to 18 months. Multi-tenant projects have less than 9 percent vacancy rates. This market has continued to perform well.

Charleston’s regional industrial market has enjoyed steady positive absorption in the first half of 2004. One of the driving factors in providing steady but competitive rental rates is the fact that few new projects are coming on line. Rental rates should continue to hold at current levels until demand increases due to anticipated manufacturing output. Last year, many small companies took advantage of low interest rates to pursue build-to-suit options rather than taking advantage of the attractive rental rates that were available due to relatively high 22 percent vacancy rates in greater Charleston (as of year-end 2003). This year, we have seen the vacancy drop to about 18 percent (as of July 1, 2004). The decrease in vacancy rates is in part due to the fact that rising steel and material prices have started to deter the interest in build-to-suit opportunities. Additionally, the Federal Reserve’s raising interest rates has affected interest in new development.

The overall forecast for Charleston remains strong. Increased consumer confidence and lower unemployment will translate into a healthier economy both locally and nationwide; with increased spending will come the need for tenants to increase their demand for warehouse space, even with the proliferation of radio frequency identification technology, to accommodate the increase in inventory. All of this spells good news for Charleston. While R&D and flex are seeing new speculative development, do not expect to see speculative big box construction until late 2005 or early 2006.

— Michael Ferrer, industrial services group, Colliers Keenan of Charleston LLC

Multifamily

Charleston continues to experience higher vacancy rates than the region and the nation according to the Reis MetroStats, first quarter 2004. The overall vacancy rate of 9.4 percent is 30 basis points higher than during fourth quarter 2003, but still well below the 10.7 percent vacancy rate during first quarter 2003. The South Atlantic region reflected an overall vacancy of 8 percent, while the national average was 7.2 percent.

The average asking rent in Charleston increased by 0.3 percent for first quarter 2004, which was higher than the 0.2 percent increases experienced by the Southeast and the United States, according to Reis.

The Airport/North Charleston/ Summerville submarket has been experiencing the lowest vacancy rate at 7.2 percent, while the average asking rent increased 0.7 percent to $595 per month.

The Hanahan/North Charleston submarket reflected the highest vacancy rate at 13.4 percent. This is the highest vacancy rate for the submarket since Reis started surveying Charleston in 1999, and is a 50 basis point increase over fourth quarter 2003. The average asking rent increased 0.7 percent to $542 per month.

The popular Mt. Pleasant submarket, with a vacancy rate of 8.5 percent, actually saw a decrease of 0.8 percent in the average asking rent during first quarter 2004. The average asking rent remains the highest of all submarkets at $822 per month.

Low interest rates for homebuyers have certainly affected the multifamily market in Charleston, as it has across the country. Home sales in the tri-county region shot up 25 percent in 2003, when the region sold 11,496 homes, surpassing the 10,000 mark for the first time.

While vacancy rates have remained between 9 and 9.5 percent for over a year, new construction is projected to remain steady. Reportedly, there are approximately 1,000 units under construction, with more planned. New development includes a 280-unit apartment complex in Summerville. Alta Sands will be located behind the Azalea Square shopping center and will include one-, two- and three-bedroom units.

— Michael Dodds, MAI, CCIM, managing director, Integra Realty Resources – South Carolina

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