CITY HIGHLIGHT, AUGUST 2009

CHARLESTON CITY HIGHLIGHTS
Taylor Senter, Kim Hinshaw

Charleston Industrial Market

With nearly 20 million square feet of Class A industrial facilities on hold, the Charleston real estate market has certainly felt the impact from the recent woes in the national economy.  Before the collapse of the credit markets, Charleston had become a highly sought-after territory among the who’s who in real estate development. Industry leaders such as Rockefeller Development, Hillwood Properties, Trammel Crow and Childress Klein were buying up land within 30 miles of the Port of Charleston. Plans to break ground on several large-scale speculative distribution and manufacturing facilities near the port were drawn up last year. 

In June, Rockefeller and MeadWestvaco Corp. announced that they had begun work on road improvements around their planned 2.7 million-square-foot logistics park. There also are additional plans to prepare a site pad for the first of four buildings, properties that could be completed within months if a lease were to be signed. For the most part, however, scarce financing and a steady decrease in demand has kept these projects on the sidelines without any real reason to believe that we will see any major movement in the near future. 

Despite the recent downturn in the economy, Charleston remains poised for long-term growth opportunities with several key fundamentals in place. As much as 70 percent of the cargo from the West Coast’s ports is being shipped across the country for delivery to locations east of the Mississippi River. Overcrowded ports on the West Coast, coupled with the widening of the Panama Canal, could drive large container ships to bypass West Coast ports entirely and head directly to the East Coast. The Southeast is the fastest growing consumption zone in the U.S., with the U.S. Census projecting a growth rate of 43 percent between 2000 and 2030. The Port of Charleston offers the fastest, most reliable access to this area through the region’s deepest channels. The port is the most productive in the country, with the fastest turnaround time for ships and cargo in North America. With a 45-foot draft at low tide, Charleston is already equipped to handle the mega ships that will be headed this way once the widening of the Panama Canal is completed. 

While the freeze in the credit markets will continue to slow the road to recovery in the near future, Charleston stands to capitalize on long-term growth opportunities by being a more economical option for shipping companies looking to reach the East Coast.  Direct access to five interstate highways and 60 million people within a 500 mile radius makes Charleston a prime target for investors looking to benefit from the demand for distribution centers in the region.

—Taylor Senter is an associate with Anchor Commercial/CORFAC International.

Charleston Office Market

With the financial sector in the midst of great turmoil, the housing market bottoming out and the jobless rate still on the rise, the commercial real estate market continues to deteriorate, bogged down by increased vacancies and lower rental rates.

Although the Charleston office market is still experiencing increased vacancy rates for second quarter of 2009, the downtown CBD has remained relatively stable, a noteworthy accomplishment given the status of the local and national economies. Vacancy among the suburban areas during the last quarter has increased from 19.5 percent to 21.92 percent.  Downtown’s vacancy rose just slightly to 6.62 percent, and market-wide vacancy rose just more than a percentage point to 19.87 percent.

With the ongoing rise in vacancy rates, landlords are growing more and more anxious to fill empty space. Class A office buildings have taken the biggest hit, as cost conscious tenants are looking for more economical solutions in Class B buildings. In addition, tenants are looking for shorter lease terms, rental rate reductions and concessions, such as free rent and moving allowances, which have not been seen in the market for some time. An excess of sublease space has flooded the market, which is undercutting direct market competition.

Even as the suburban market is experiencing a decline, the defense sector has continued to grow, adding new jobs and acquiring new space. The number of property owners facing financial crises will likely increase during the year as a result of rising vacancies in their properties. The credit markets will need to become more amenable to property debt restructuring to avoid declining pro formas and pools of bad debt for their creditors.  It is most definitely a tenant’s market. 

There are no cranes on the horizon; the development market is still struggling, and sales of office properties have remained diffused. The main obstacles are lack of demand and availability of funds. The difficulties within the credit market are showing no signs of significant improvement. Even the relatively safe owner-occupied loans funded by the SBA are finding little relief. Other than two notable developments — the 66,739-square-foot Cross Creek mixed-use project and the 97,000-square-foot Class A Fabre Centre — there have been few new deliveries in the market since 2008. Limited demand for office investments is likely to continue at least through the end of this year or until lending is stabilized. For those investors who have access to cash, there will continue to be excellent opportunities to position themselves for long term success by purchasing distressed assets.

During the long term and through a good portion of 2010, the leasing market will lead the charge to recovery, with excessive built-up inventory declining. Sales and development will be slow to catch up, and you will see a marginal uptick in leasing rates and sales prices as inventory dwindles.

— Kim Hinshaw, CCIM, is with Anchor Commercial | CORFAC International.

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