CITY HIGHLIGHT, AUGUST 2007

CHARLESTON CITY HIGHLIGHTS
Hagood Morrison, Simmons Johnson, Peter Fennelly and Erin England

Charleston Industrial Market

The growth of manufacturing in Charleston is significantly enlarging the economic base of the community. Primarily, Force Protection and Protected Vehicles, two local companies realizing exponential growth in orders and production of mine resistant vehicles for the U.S. armed forces and its allies, have fueled manufacturing growth in Charleston.

Vought/Alenia is a recently completed facility employing 1,000 people, which serves to construct the aft fuselage component of the new 787 Dreamliner, the first large commercial airplane made mostly of carbon fiber components. The launch of this aircraft is poised to be the most successful commercial aircraft launch in history based on existing orders.

In March, the Daimler Chrysler Plant commenced assembly of the next generation Sprinter Vans. Demand is strong for these highly fuel-efficient and versatile vehicles.

The Port of Charleston’s solid gains continue. Port management anticipates a 5 percent container traffic growth for the next fiscal year. Recent port happenings include: commenced construction on the new 280-acre terminal, predicted to be operational in 2013 and increase capacity by 50 percent; received post panamax cranes for use for larger ships; the relocation of Mediterranean Shipping Line’s (MSC) South Atlantic corporate headquarters to a new 45,000-square-foot office building; and a consortium of four shipping companies’, called the New World Alliance, decision to renew its 5-year shipping contact.

Absorption for the Charleston industrial market was 3.6 million square feet in 2006 and the market grew to 25.2 million square feet. Currently, vacancy is hovering around 5 percent. Buildings under construction include Charleston Regional Business Center by Childress Klein, Palmetto Commerce Park by Pattillo Construction Company, Jedburg Commerce Park by Johnson Development, totaling 940,000 square feet with an average size of 313,000 square feet. The leasing of these facilities will impact average bulk lease rates by pushing them up from the existing rate of $4.14 to approximately $4.50.

Industrial land prices are at an all time high. Owners of port proximate land are asking $50,000 per acre for interior, but not entitled land. Meanwhile, the 86-acre Macalloy site sold for $350,000 per acre with the value being attributed to its wharf capabilities and its proximity to the future Port of Charleston.

Johnson Development Associates is under contract with CB Richard Ellis Realty Trust to purchase 5 million square feet of warehouse space across the state for approximately $45 per square foot. This includes property at North Rhett Business Center and Mt. Holly Commerce Park. Other industrial properties currently for sale are the 203,223-square-foot Masisa Building, the 603,214-square-foot Mikasa Building, the 886,902-square-foot Leeds Park Facility, the 348,000-square-foot AGFA facility, and the 40-acre Chevron fuel plant.

In the next 6 months, container traffic increases and manufacturing growth will heighten demand for industrial buildings and record absorption will continue; lease rates for large functional distribution centers will be firmly established in the $4.50 NNN range; and manufacturers and suppliers will seek sites and buildings in Jedburg and the outlying areas in Dorchester County.

— Hagood Morrison and Simmons Johnson are with Colliers Keenan in Charleston, South Carolina.

Charleston Office Market

Absorption for the first half of this year remains consistent with recent years. Colliers Keenan has tracked absorption in the range of more than 175,000 square feet in completed transactions leading into June and the prediction for the second half of the year remains positive with a number of lease transactions looking to come to conclusion. Again, the market is leading into the problem of having limited amount of large contiguous office space. The downtown market only has two spaces in excess of 10,000 square feet available. The suburban markets have large blocks of space still available in Offices at Belle Hall in Mount Pleasant, Daniel Island Executive Center and the Mead Westvaco sublease. The markets should look favorably on these buildings in the third and fourth quarters of this year. The first and second quarters brought success to many of the speculative projects from last year, such as Holder Properties 103,000-square-foot Ashley Overlook project, which is well on its way to achieving 100 percent occupancy.

The activity for new office growth for tenancy has been good in the region with continued growth led by the defense sector with SPAWAR Charleston continuing to award contracts for a multitude of defense and infrastructure related assignments as well the service and support for many of the economic development manufacturing wins over the past few years. The negotiations for the landlord and tenants have been even with recent availability of new product to the market. For the economic health of the region, the market needs to be prepared to deliver sizable amounts of product in 2008 to keep pace with the normal absorption.

The overall market registers vacancy at 12.19 percent and Class A vacancy at 14.34 percent. This is trending down from the end of 2006 reporting due to solid leasing and limited new product being delivered in the first half. Further, minimal phantom space (excess corporate space not being marketed) exists in the marketplace, therefore, vacancy should move back to a 10 to 12 percent level for both overall and Class A space in the marketplace by the end of this year.

Rental rates in all submarkets are achieving the highest numbers that have been attained in the regions history due in part to increasing land prices and construction costs, along with the impact of solid net job growth in the area. The downtown office market for Class A product is a solid $29 to $30 per square foot rental rate for current product and has potential rates for new product exceeding $35 to $36 per square foot. The suburban Class A markets are experiencing similar dynamics with current rental rates for existing product achieving $24.50 to $25.50 per square foot and future developments in the suburban markets having the necessity to achieve rental rates in excess of $26 per square foot to be successful.

With the tremendous amount of development that occurred last year, the market is seeing a slowdown by developers to deliver new projects to the marketplace now. This is due in part to the excess vacancy that was delivered to the marketplace in the past year and the need for natural absorption to take place. With the more than 800,000 square feet delivered to the marketplace in 2006, another approximately 250,000 square feet of new deliveries is expected throughout 2007. Some of the new developments completed this year included the 150,000-square-foot speculative development at Carriage Hill Executive Center in North Charleston and a variety of smaller office projects disbursed throughout Mount Pleasant and North Charleston.

Based upon population trends, traffic patterns and corporate migration, the future of the region’s office market lies further out Interstate 26 with limited amounts of land at historically high prices remaining on Interstate 526. Developers should be seeking their land acquisitions in the North Charleston, Goose Creek and Summerville markets, in which the greatest potential for job growth exists, new housing starts exist and options to provide relief to an already busting road infrastructure exist.

Another opportunity that is evident in the marketplace is the ability to reposition office buildings that have either been neglected or needed significant refurbishments. Investment sales activity has picked up significantly thus creating the motivation for the redeployment of capital into new improvements or infrastructure to capture higher rental streams. 

Given the current activity in the marketplace and the limited amount of new development on the horizon, the market should maintain a consistent leasing track for the remainder of this year. Rental rates should stabilize for any existing product and the potential for rising rental rates in 2008 and 2009 is anticipated.

— Peter Fennelly is vice president with Colliers Keenan’s Charleston, South Carolina, office.

Charleston Retail Market

The Charleston retail market remained strong during the first half of this year, with steady growth both on the peninsula and in the suburbs. The retail market has now surpassed 15.3 million square feet including enclosed malls from year-end 2006 to mid-year 2007 and stood at 88.58 percent occupied as of mid-year 2007. Rental rates escalated mildly from year-end 2006, which reflected continued demand as well as rising land and development costs.

While last year saw increases in acquisition volume and price per square foot, this year has thus far been more of the same. Regarding cap rates, the Charleston MSA continues to experience a downward push and the market continues to be quite robust especially among the REIT and institutional investors. Several recent retail investment transactions have helped to keep this trend in place including the late 2006 acquisition of Mount Pleasant Towne Center by Miller Capitol.

There are several factors that are currently contributing to the momentum that Charleston experienced during the first 6 months of this year. Charleston’s recognition as an international travel destination has increasingly helped to illuminate the MSA to a wider audience regarding development, acquisition and inbound migration. From a statewide perspective, populated growth accelerated in 2006 partly due to migration from the Northeast, and other Southern states such as Florida. As a result, the state added more than 70,000 new residents last year. Dorchester County, in particular, has experienced the most population growth in the MSA since the beginning of the decade.

Along with population growth, the job market also continued to expand during the first quarters of this year. During this period, employment in the retail sector increased by 700 jobs. Successful economic development efforts have helped to diversify and broaden the job base with new employers such as Daimler Corporation, Vought Aircraft and Google as well as The Port of Charleston’s expansion.

As of mid-year 2007, there were several suburban projects slated for development. The bulk of the gains that the retail market will experience in terms of gross leasable area will take place in Dorchester and Berkeley counties. These projects include approximately 550,000 square feet of proposed retail developments in Goose Creek, and an approximate 450,000-square-foot lifestyle center in Daniel Island.

— Erin England is with Colliers Keenan’s retail services group in Charleston, South Carolina.


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