CITY HIGHLIGHT, AUGUST 2010

CHARLESTON CITY HIGHLIGHTS
Michael J. Ferrer, Todd P. Garrett & Alan Freeman

Charleston Industrial Market

The Charleston Industrial market has had its recent share of success. Last fall, the region was picked by Boeing to manufacture and deliver the 787 Dream Liner aircraft. They are in the process of building their new 700,000-square-foot facility on a long-term land lease on the grounds of the Charleston International Airport. This is in addition to the more than 600,000 square feet that they currently occupy in the market. This facility is expected to generate more than 3,800 direct jobs. The Boeing project has also led to several other companies and projects reviewing and strongly considering the Low Country as a place to do business. Right on the heels of the Boeing announcement was the announcement by TBC Tire Kingdom to locate its new 1.2 million-square-foot East Coast distribution center in our market at the Rockefeller Industrial Park.  This was all tremendous news for the local market, especially in light of how dismal 2009 was for most Americans. In total, more than 5,200 direct new jobs will be coming to the Charleston area as a result of the arrivals of these new companies and the expansion of existing companies. These deals lead us to believe that recovery will come quicker to Charleston than to many other parts of the country.

At the midway point of 2010 we continue to see evidence of an improving market, as companies realize improving revenues and seek longer-term leases. While the numbers do not immediately inspire confidence, when we look below the surface, the story is much more positive. Several large transactions have already taken place this year:

1.) Food Handler has renewed its 200,000-square-foot lease with Pattillo;

2.) A mobile home manufacturer has subleased 300,000 square feet from Briggs Plumbing;

3.) SAIC has subleased 305,000 square feet from JAG; and

4.) Pattillo was awarded the design-build for the 240,000-square-foot Boeing cabin interiors plant.

While these deals do not do a lot to positively impact absorption, they do help attack the high availability rate. We cannot expect rental rate growth until the glut of cheap sublease space is first removed. These deals also help the market by replacing jobs that were lost by the properties’ primary tenants going dark in the first place. The multiplier effect is already being felt, as several mid-size deals have been completed by unrelated industries looking to open locations in Charleston in anticipation of new growth. A recent study that we conducted in association with the College of Charleston shows that we haven’t began to see the ripple effects that will be coming. The 5,200 direct jobs will create more than 25,000 additional jobs in the area, which will create a demand for an additional 6 to 8 million square feet of commercial space in the market, absorbing 75 to 100 percent of current vacancies.

The stabilization of vacancy and influx of jobs indicate that we are seeing the bottom of the market. There has not been a significant change in rental or vacancy rates for several quarters in a row. While the vacancy and availability rates may seem high, a closer look reveals that much of the product remaining on the market has severe functional obsolescence issues and will remain difficult to lease even in a better economy. This is especially true in the big-box distribution segment i, as there very few institutional-grade sites available to occupy.

We forecast a continued reduction in the amount of shadow space as more and more subleases are backfilled or expire. Only then, will vacancy rates really see a significant decrease.

Very few land transactions, industrial or otherwise, have occurred during the last 12 months. According to multiple listing services, only 24 land properties have traded hands in the entire market — most at 2000 to 2003 prices. During the same 12 month period in 2005 and 2006, 154 land properties sold. This is indicative of how much tighter lending standards have become for financing land. Many of theses deals, if not all, have been for owner-occupants who plan to operate on these land sites. Financing for speculative development is impossible through traditional means.

All in all, with the amount of activity at the top of the market we feel that these deals will lead our market into recovery faster than many other markets around the country. We, as a market, are well poised to capitalize on the new Panama Canal expansion and the wave of cargo that will follow. Our deepwater port has done a tremendous job of adapting to accommodate the new wave of Post-Panamax vessels that will revolutionize international shipping.

— Michael J. Ferrer, CCIM, Vice President Global Logistics, and Todd P. Garrett, CCIM, Associate, Industrial & Investment Services, are with Charleston, S.C.-based Grubb & Ellis |WRS.

Charleston Retail Market

As the stifling heat of the summer hits Charleston again with a thunderous blow, retailers are left with many questions: where are the next sites going to be? Has the economy back-stepped into the second dip of the Great Recession? Has the momentum and promise of growth been slowed in the pluff mud of the Low Country?

The end of 2009 brought good news to the area. Boeing announced the development of the 787 Dreamliner assembly plant to be located at Charleston International Airport. The expansion of the existing Boeing facility, which currently manufactures rear fuselages, is expected to bring almost 4,000 new jobs as well as significant peripheral business growth to the area and is the single most newsworthy event to hit the Charleston market in decades.

The recently renewed growth of the cruise industry has also been a boon to the historic downtown Charleston market. In an effort to capture additional cruise dollars, the State Ports Authority is proposing a master-planned, waterfront development to include a new cruise terminal along with retail and entertainment components. This effort is designed to provide improved waterfront access to city residents as well as the 4 million tourists that visit annually.

Similar to the rest of the Southeast, Charleston’s retail activity is currently focused on necessity-driven and value-oriented retail. Three Harris Teeter grocery stores have recently opened within the region, and Trader Joe’s — a value-oriented, specialty grocer — is currently considering the highly competitive market of Mt. Pleasant.

Saks Fifth Avenue is the most recent casualty of consumers’ thirst for value-oriented retail, as it announced the closing of its store in the tourist-driven, historic downtown market earlier this summer. Fortunately for this submarket, internationally renowned retail Forever 21 will soon open along the King Street retail corridor, anchoring an area that is still home to names such as Gucci, Polo/Ralph Lauren and Versace.

North Charleston, at one time South Carolina’s leading market in gross sales, has been cannibalized by the emergence of Summerville and Center Pointe. The bankruptcies of Circuit City and Linens ‘N Things, coupled with the departures of PetsMart and TJMaxx, have left many boxes dark and empty. Some of this space has been filled with value-oriented and necessity-driven retailers such as Burkes Outlet, which replaced TJMaxx at Kimco’s North Rivers Market, and Save-A-Lot, a national grocery chain that opened on North Rivers Avenue in a former Kerr Drug location.

Similar to other second-tier cities, Charleston has seen little-to-no new or proposed, significant retail development. However, when capital returns, it’s likely that emerging markets such as West Ashley and Mt. Pleasant, with their current shortage of big-box opportunities, will be among the first to be home to new retail destinations.

While the Carolinas are facing historic peaks in unemployment, the puzzle pieces appear to be in place for Charleston and the surrounding region to grow in the coming years. Despite concern of a second recessional dip, the region’s willingness to invest in its future creates an overall feeling of cautious optimism.

— Alan Freeman is a partner with The Shopping Center Group in Charleston, S.C.

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