CITY HIGHLIGHT, AUGUST 2005

CHARLESTON’S OFFICE & INDUSTRIAL MARKETS REMAIN STRONG
Colliers Keenan

The greater Charleston, South Carolina, economy currently is impacted by the so-called ”housing bubble,” continued unrest in Iraq and guilty verdicts in corporate scandals, leading us to wonder whether we are gaining or losing momentum.

Office

From the fourth quarter of 2004, the overall office vacancy for greater Charleston has decreased from 12.94 percent to 9.18 percent and the overall Class A office market rental rate has increased from $20.11 per square foot annually to $20.81 per square foot. A recently published national report by Colliers International indicated that the Charleston region is one of the top 10 job growth markets in the United States. With these trends and indicators, now is the time to grow the market. The current relative shortage of office space should give rise to new development in the area; however, the combination of lender pre-leasing requirements, increasing costs of land and construction, and continued population growth will drive rental rates higher.

Downtown Charleston

The best way to describe the Downtown Charleston office market is consistent, as it continues to absorb existing product while adding new projects to the growing office base. Demand for Class A facilities continues to grow, and limited new developments are being brought on line to satisfy that demand, such as the 68,000-square-foot 100 Calhoun Street Building and the 40,000-square-foot expansion of 40 Calhoun Street. For the near future, the vacancy will remain stable at 10.16 percent overall, but demand and absorption will lower the vacancy rate over the next 15 months. Other issues will continue to affect the vacancy rate as well, such as the conversion of Class B and C office properties to residential condos. This diminishing supply of office product and the long lead-time for approvals for Downtown developments with further keep vacancies stabilized and put pressure on rents. The current top of the market for quoted office rents is pushing $30 per square foot on an annual full-service basis, with an average Class A rate of $25.33 per square foot and an overall average rate of $21.23 per square foot.

East Cooper

The East Cooper submarket, which is comprised of Mt. Pleasant and Daniel Island, has been experiencing tremendous residential and commercial growth. This exponential growth has created continued pressure for office development in the submarket, with decision-makers wanting their offices to be closer to their homes. This submarket also has had tremendous activity in office condo sales, yielding sales prices exceeding $200 per square foot. With the population growth and current sales and leasing activity, the East Cooper submarket has tremendous opportunity, despite significant increases in office rental rates. Currently, Class A and overall average rental rates are $21.50 and $17.64 per square foot, respectively. Corresponding vacancies are 7.86 and 8.38 percent. Looking to take advantage of this opportunity, developers have close to 1 million square feet of new office projects proposed for this submarket. Some of the proposed projects include The Offices at Belle Hall, a two-building, 75,000-square-foot project in Mt. Pleasant, and the 120,000-square-foot BenefitFocus project on Daniel Island. Both are expected to break ground in 2005.

Lower North Charleston

The Lower North Charleston submarket currently has a vacancy rate of 9.05 percent among the Class A product and 10.25 percent in the overall office market. This submarket houses the largest amount of corporate tenants in the area. The Lower North Charleston market also has the largest amount of new proposed Class A office product, with more than 700,000 square feet of new product planned for development. New speculative office projects that are anticipated to break ground in 2005 include the Belle Oaks office project, comprised of a prominent 90,000-square-foot Class A office project with Interstate 526 freeway exposure, and Faber Centre, a 70,000-square-foot Class A office project in the master planned Faber Place Office Park. At present, the average Class A rental rate is $20.13 per square foot annually, and the average overall rental rate for the Lower North Charleston submarket is $15.76 per square foot.

Upper North Charleston

The Upper North Charleston market has shown great potential and is beginning to show signs of turning the corner, as the Ashley Phosphate Road expansion comes to completion and vacancy rates decrease. Redevelopment activity has been significant on the main business arteries of Rivers Avenue and Dorchester Road, where in-fill development is becoming more prevalent. The only substantial new office project that is planned in this submarket is the expansion of Aviation Business Park, where 18 acres of additional land has been added to this project and close to 200,000 square feet of new Class A office and flex product is anticipated to be delivered over the next few years. The office market also is beginning to see the office conversion of former big box retail projects to potential new opportunities for back office users such as call centers and technical schools, both of which are in growth modes. The average Class A rental rate has increased to $15 per square foot, amid a 9 percent vacancy rate. The overall Upper North Charleston average rental rate is $13.83 per square foot, with a decreased 8.47 percent vacancy rate.

West Ashley

The future for West Ashley looks bright with growth in residential and commercial space, provided a fair and reasonable resolution comes to the controversial Watson Hill tract for new residential development. This submarket saw significant absorption in the Class A product, as vacancy lowered to 8.47 percent. Little new product has been announced in this submarket, although there are a number of new residential projects being developed in this market directly outside the I-526 freeway.  Though still the smallest office submarket in the Charleston area, the Class A product has firmed up with an average rental rate of $22.07 per square foot. The overall average rate is $16.85 per square foot, and the overall vacancy is 21.47 percent.

Forecast

The office market will remain strong for the remainder of 2005. With office market vacancy rates being at their lowest levels in recent times and owners looking to take advantage of maximized values, anticipate more building sales in late 2005 and in early 2006. Rental rates should continue to increase and vacancy should continue to shrink. Although the forecast sounds positive, it is critical to the health and continued growth of the market that new product be delivered. Without new product, price increases will occur at a faster pace, vacancies will continue to drop, corporate expansions could be lost and new economic development would be sacrificed.

— Peter Fennelly, SIOR, MCR, Colliers Keenan

Industrial

The greater Charleston industrial market covers urban, suburban and rural areas of Charleston, Berkeley and Dorchester counties and includes 18.23 million square feet of space that is available for lease to third parties. This total includes buildings and projects that are at least 10,000 square feet in size and, for reporting purposes, the properties are grouped into the three categories of flex (10,000 to 25,000 square feet), distribution (25,000 to 75,000 square feet) and bulk (75,000+ square feet) space. Much of the market activity has been driven by the growth of the Port of Charleston, increases in defense contract work awarded by SPAWAR of the United States Department of Defense, and a continuous growth in the area population. The Port of Charleston enjoys the distinction of being the fourth largest port in the United States and annually increases the amount of containerized tonnage moved across its docks. Defense contract work awarded by the Charleston office of SPAWAR has attracted numerous contractors to the area from around the country; these defense contractors have increased the demand for flex products. As the port traffic and defense contractors grow, so does the population of the greater Charleston area. The phenomenal growth is giving rise to a need for warehousing associated with both traditional retailers and vendors associated with the housing construction industry. Population growth is not only fueling retail development, but also it is putting pressure on retailers to restock merchandise quickly and demanding that housing industry suppliers have showrooms and warehouses close to developing areas for product selection and distribution. The result has been a healthy industrial market for the last few years.

Bulk Warehouse

Bulk warehouse facilities are becoming more prevalent in the Charleston market. The combination of the sea port, the airport, railroads and the highway system are giving manufacturers and distributors good reasons to consider locating or expanding operations in Charleston. Although there are only 17 facilities in the market that contain at least 200,000 square feet, less than half existed 5 years ago and five more are planned for 2006. Activity in the bulk market has been spread around the Charleston area including the East Cooper, North Charleston, Summerville and Berkeley County submarkets. First class industrial parks such as Charleston Regional Business Center, Palmetto Commerce Park and Mt. Holly Industrial Park are designated foreign trade zones and contain enough acreage for additional bulk space development. The Charleston Regional Development Alliance also has done a good job of assembling incentives and marketing the Charleston region to industrial users and, in conjunction with the South Carolina Department of Commerce, was successful in bringing Vought Aviation and Alenia Aeronautica to Charleston for the production of the main fuselage component of the Boeing 787 Dreamliner Airplane. In the first half of 2005, bulk inventory grew by 859,373 square feet, while vacancy dropped by 230,800 square feet to 14.24 percent. Rental rates for bulk space grew by only $0.18 per square foot to $3.67, despite the fact that land and construction costs have increased drastically over the past 18 months. Significant activity in the bulk market included a 600,000-square-foot commitment from Fruit of the Loom and more than 200,000 square feet by East Coast Molding. Currently, plans exist for an additional 1.3 million square feet of bulk space to be developed from late 2005 to third quarter 2006.

Distribution

Despite the fact that new product was brought on line, the inventory of distribution space available for lease by third parties decreased in the first half of 2005 by approximately 227,000 square feet. This decrease is reflective of several properties being purchased by former tenants and other vacant properties being sold to new users rather than being leased. Vacancy among distribution properties dropped by 475,659 square feet to 11.83 percent. Absorption for the period was a positive 248,480 square feet. Average rental rates rose slightly from $4.49 to $4.56 per square foot. The distribution product category was impacted by expansions of existing tenants in the market and the tremendous Charleston housing market. Much of the distribution product remains in older and established parks or areas, but a lot of the new development among this product type is being developed around areas that are geared more to customer access than to highway and truck access. Market drivers in the near term should continue to be the housing industry, the aeronautic industry and existing distribution operations.

Flex

Flex product is the description given to all properties in the Charleston industrial market survey that contain between 10,000 and 25,000 square feet, both multi and single tenant. The flex product inventory decreased in the first half of 2005, much like the distribution product, due to previously leased properties being sold to users. Inventory decreased by 431,461 square feet to 2.71 million square feet. Although vacancy decreased by 171,499 square feet, the decrease in inventory resulted in a negative absorption of 259,962 square feet. Average rental rates for flex space dropped slightly from $5.20 per square foot to $5.14 per square foot. The drop in average rents was a result of newer products selling and older products remaining in the survey. Flex product in the Charleston market can be found in urban, suburban and rural locations. These smaller projects continue to be developed on the fringes of bulk and distribution parks, as well as in in-fill locations close to retail and residential corridors. As land values continue to escalate, flex developments will be pushed more to suburban and rural locations.

Manufacturing

The manufacturing segment of the Charleston industrial market is dominated by chemical, fiber, and aluminum producers and processors, most of which are located in Berkeley County along the banks of the Cooper River. Much of the manufactured goods produced in the market are components for other finished goods. These manufacturers include Amoco, Nucor Steel, BP and Alcoa. Other manufacturers such as Cummins, Caterpillar and Behr Heat Transfer Systems have assembly and retooling operations in the market. That stands to change for the better as Vought-Alenia pushes the construction of its manufacturing facility, which will build the largest fuselage component for Boeing’s 787 aircraft. Construction has begun on the facility, which will cover roughly 300 acres of Charleston Aviation Authority property between the Charleston International Airport and the Charleston Air Force Base. Manufacturing activities should begin within 2 years and employment should reach 1,000. The presence of this facility, coupled with the AAI facility for manufacturing F-17 trainers, will boost the Charleston region as an aeronautic base and help to attract related entities.

Forecast

The forecast for the greater Charleston industrial market is positive. In the coming months, development will begin on several build-to-suit and speculative projects. Lease rates should remain firm, then increase in light of decreased vacancy and sustained demand. There will be some turnover among larger tenants such as ICON, creating large blocks of space, but demand among large prospects currently in the market and a multitude of smaller ones should absorb the additional space in the relative short term. Looking further out, opportunities will exist to develop new product for suppliers and vendors affiliated with Boeing, as well as for refrigerated and traditional warehousing associated with the expansion of the Port of Charleston at the former Charleston Naval Base to accommodate a dedicated break bulk facility. All product categories should continue to see gains, led by bulk and flex properties.

— Terry Ansley, CPM, Colliers Keenan


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