CITY HIGHLIGHT, AUGUST 2008

CHARLESTON CITY HIGHLIGHTS
Chris Yeagle, Erin England & Michael J. Ferrer

Charleston Multifamily Market

After several years of escalating apartment values due to condo conversions and residential development, the Charleston apartment market has experienced recessed fundamentals over the last 18 months. Sales volume of multifamily product has slowed in the first half of 2008 as financing became more difficult, new construction starts leased-up, and sellers and buyers struggled with the impact of the recently changed real estate tax laws in South Carolina.

During the first 6 months of 2008, Charleston’s volume of multifamily sales were down 60 percent compared to the same period during 2007; the majority of 2008 sales occurred in the month of January and totaled six property sales in four different transactions. The Berkshire Group of Atlanta entered the Charleston market in early 2008 with the acquisition of three properties which will be repositioned through significant capital improvements and management. Stonemark Equities, also of Atlanta, made their first entry into the market with the acquisition of Oakbrook Village, a Class A asset in Charleston’s booming Summerville submarket.

Charleston is experiencing an exciting period of new construction with every submarket slated to see several new multifamily projects over the next few years. Several of these projects will be some of the only Class AAA projects available to renters due to past product being quickly taken off the market in condo conversions. Charleston-based Greystar is close to delivering Daniel Island Village Apartments, a 283-unit project located on Daniel Island that will likely set the standard for luxury rentals in Charleston. HH Hunt of Virginia is also on a similar timeline to deliver the Abberly at West Ashley, a 213-unit project located in the attractive West Ashley submarket. An unfortunate consequence of the housing market downturn in Charleston is that several multifamily developments intended for sale have made the unplanned transition to rentals.

Moving forward, developers and buyers in the Charleston market are focusing on the anticipated impact of new units and the affect of significantly increased real estate taxes. It is anticipated that concessions will begin to play a larger role in the Charleston rental market over the next couple of years as new construction is projected to be at an all-time high. Significant rent growth on properties will likely only occur as a result of superior location or a well-planned reposition via capital improvements and management. Despite these challenges, the Charleston market has fortunately continued to experience a strong level of interest from developers and prospective purchasers, with most viewing this market as one with a high cost of housing, a growing economy and prosperous long-term outlook.

— Chris Yeagle is an investment advisor with the Southeast Apartment Partners office in Charleston, S.C.

Charleston Retail Market

The Charleston market experienced another solid year of growth in 2007 with 418,814 square feet of retail space being added primarily to the North Charleston and Mount Pleasant submarkets. Even with this expansion of retail space, occupancy increased, all be it marginally, from 87.81 percent at year-end 2006 to 88.86 precent at year-end 2007.

Trends and Forecast

• Retail property growth has been a derivative of the increasing levels in diversity of job sectors and quality of jobs that the Charleston MSA has been able to attract over the last 5 years.

• Retail development has reflected this diversity and has been growing in multiple sectors such as value, grocery-anchored and lifestyle as well as luxury retailers.

• The new tax change that was implemented in 2007 has pushed a significant burden on both non-personal residential as well as commercial properties. As commercial projects are sold, tax rates are increasing by as much as 30 to 40 percent, which in turn is being passed directly onto tenants.

Considering the rising costs of fuel for American consumers and the secondary rise of price of consumer goods as a result, retail development will evolve into becoming more convenience focused than ever before. This may translate into a greater quantity of more convienence-oriented neighborhood centers located close to or inside major residential nodes and a more diverse tenant lineup located in those centers.

As reflected more severely in the national development pipeline, retail growth for 2008 has slowed, but not dramatically. The sector of highest activity in this period should further establish itself in the areas of value retail and grocery-anchored centers. Areas of highest concentration regarding this growth should be Summerville, Goose Creek and Mount Pleasant.

Peninsula

The Peninsula Charleston submarket continues to be the heartbeat of the city. Upper King Street has transformed from a blighted area not on the radar screen of credit retailers to become a hub of restaurants, home décor retailers, design firms and upcoming hotels. Most recently, the “Midtown” project has cleared city permitting approvals and is moving forward with a project that calls for both hospitality and retail components. Additionally, the Mendel Rivers building, located on Meeting Street just north of Calhoun Street, has been acquired by Dewberry Capital with the intent of redeveloping the 2.2-acre site, which also contains an approximately 150,000-square-foot office building fronting Marion Square. When completed, this project has the potential to further revitalize an area that has received considerable attention from city planners. The trend of more national upscale retailers landing on King Street has continued with the recent addition of Apple and Louis Vuitton, which will open in summer 2008. Other recent openings include BCBG/MaxAzria and Aldo Shoes alongside existing stores such as St. John, Gucci and Saks Fifth Avenue.

West Ashley

The opening of Best Buy late in 2006 in the former Toys “R” Us space as well an office/retail development at the intersection of Highway 7 and Orleans Road, fronting Citadel Mall, created a flurry of new activity in this trade area. A new Wal-Mart Supecenter at Glenn McConnell Parkway and Bees Ferry Road also opened and will spawn future activity that could gradually move the heart of West Ashley’s retail market further westward from Citadel Mall. At Citadel Mall, JC Penney will open a new store in the former Parisian store that closed in March 2007, and PetsMart’s just opened a new addition at the entrance. In late 2007, Sembler opened West Ashley Place, a Publix-anchored center with 19,000 square feet of shop space and one outparcel. Kimco has finalized plans to redevelop St. Andrews Shopping Center with the addition of Harris Teeter, junior anchors and additional shop space.

North Charleston

North Charleston remains the epicenter of national power and big box tenants for the Charleston MSA. That reputation grew as the Centre Point project was delivered at the intersection of I-26 and I-526. Anchored by a 352,000-square-foot Tanger Outlet Center and featuring a multi-phase power center, outparcels, restaurants, hotels and unanchored strips in addition to Wal-Mart Supercenter and Sam’s Club, this development has certainly become a destination for shoppers, diners, convention visitors and hotel guests. Currently in planning is Shoppes at Centre Pointe Phase II, which will incorporate additional junior anchors as well as shop space and outparcels. The area bound by I-26, I-526, Montague Avenue and International Boulevard has become a second “node” within this submarket.

East Cooper

The opening of the new 8-lane Ravenel Bridge has further enhanced Charleston’s most upscale suburban market. From a retail perspective, East Cooper grew more than any submarket due to the Market at Oakland, anchored by Wal-Mart Supercenter and Kohl’s. Additionally, Carolina Park, a mixed-use project and home of the new Wando High School to the north, has released residential lots soon to be followed by substantial quantities of retail. In an effort to reduce the traffic burden on Highway 17, Hungryneck Boulevard will be extended. The Highway 17 expansion to 6 lanes between I-526 and the IOP connector has been completed.

Summerville

The Summerville submarket, once a small bedroom community of Charleston, has recently come onto the radar screen of regional and national retailers. Summerville continues to attract national tenants, and it appears that the next major growth area for retail space will take place at the intersection of Berlin G. Myers Parkway and Highway 78, with 3 of the 4 corners there having active projects under way. To the south, the Dorchester Road corridor continues to grow in terms of residential communities as well as retail with an upcoming Lowes and grocery-anchored project being developed by Hendon Properties at the entrance to Westcott Plantation. Additionally, the forthcoming “The Ponds” project located at Highway 17A will feature up to 1,950 residential units as well as a commercial component. The Knightsville area continues to experience growth both in the residential and retail sectors with the addition of Paradise Development’s new Publix-anchored center as well as a new CVS/pharmacy and a Walgreens at the intersection of Old Orangeburg Road and Central Avenue.

Berkeley County

In Goose Creek, major new residential projects along Highway 176, Highway 17A and Highway 52 have been announced that have the potential to be “towns in themselves.” The Parks at Berkeley and similar neighboring developments will bring a quantity of new rooftops to this area that is larger than any other Charleston submarket. This year, Google, Inc., will open a $600 million data center that will further enhance the area’s employment base. A considerable number of grocery-anchored centers have been announced in Berkeley County, including a Super BILO at Tanner Plantation, Harris Teeter at Carnes Crossroads and a Publix on Highway 176.

In Moncks Corner, repositioning based on the opening of TailRace Crossing, a Wal Mart SuperCenter anchored project, continues to take place regarding this once more rural submarket. As expected, many retailers continue to cluster around this new epicenter.

— Erin England is a principal with the Colliers Keenan office in Charleston S.C.

Charleston Industrial Market

While high fuel costs and the falling dollar have both been rallying cries for politicians across the country, these factors converge in the port city of Charleston to contribute to the current and future success of its industrial market. Although it seems counterintuitive, these long-term trends, combined with expanded port capacity, are pointing to a future in which all roads lead to Charleston.

Rising fuel costs have pushed companies to realign their supply chains. The most expensive part of many supply chains is the “last mile.” This makes it cheaper for companies to locate distribution hubs closer to their end customers. With over a third of the total U.S. population already living in the Southeast, Charleston provides a cheaper option for goods destined for the Southeast.

Also, the falling dollar has fueled an export boom for manufacturers, increasing outgoing cargo traffic at the Charleston Port by 21 percent last year. Charleston is particularly well-suited to take advantage of this trend, as many of its current and planned industrial parks have foreign trade zone status. Hillwood’s Charleston Trade Center and the Charleston Regional Business Center will both allow manufacturers the benefit of either delaying or eliminating the U.S. Customs duties on goods imported to the site.

Charleston’s port, already an industry leader in productivity, is preparing to be the ideal solution to global companies seeking to access or export from the Southeast. In 2007, the South Carolina State Ports Authority broke ground on a new three-berth terminal. Adding 50 percent to the current port capacity by 2013, the expansion will be just in time for the 2014 opening of the expanded Panama Canal. The overhauled canal will be able to accommodate the larger Panamax vessels, making it easier and cheaper for more Asian-American trade to pass through East Coast ports. Charleston’s naturally deep port will be ready to take on these deeper-draughting Panamax vessels, while other ports like Savannah deal with the expensive prospect of dredging to maintain depth. Experts are predicting that 20-foot equivalent units volume across the country will grow by 50 percent by 2010, and it will grow by 200 percent by 2020.

Local and national industrial developers have been quick to respond to meet current demand and future potential. Ross Perot Jr.’s Hillwood Investment Properties has positioned themselves well by acquiring prime locations for developing manufacturing and distribution centers with foreign trade zone status. While Hillwood’s Charleston Trade Center is the largest project, they are not the only new comers to town. Childress Klein, Lauth Development Group, the Rockefeller Group and Johnson Development Associates all announced projects of their own. All totaled, these developers expect to deliver over 16 million square feet of new Class A distribution space to accommodate this anticipated growth.

Starbucks Coffee is a prime example of a global company recognizing these trends and following them to Charleston. Starbucks recently selected Charleston for its new distribution center in a 250,000-square-foot space developed by Johnson Development Associates. Continental will provide their third party logistics at the 250,000-square-foot DC, which they leased from Johnson Development Associates. Johnson was one of the first regional developers to identify Charleston’s high growth potential.

Although national economic trends have dampened hopes for growth in some parts of the U.S., sunny Charleston has the port, the large-box industrial space and long-term demographics converging to provide a full head of steam to the Charleston industrial market.

— Michael J. Ferrer is vice president, global logistics, and Todd P. Garrett, CCIM, is an associate with Charleston S.C.-based Grubb & Ellis|Barkley Fraser.

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