CITY HIGHLIGHT, AUGUST 2011

CHARLESTON CITY HIGHLIGHTS
Alan Freeman, R. Milton Thomas III & Jon Chalfie

Charleston Retail Market

Charleston, South Carolina, similar to many cities in the Southeast as well as the rest of the country, appears to be in one of the most interesting economic phases many industry veterans have ever experienced.

Ask a developer how the market is and they will likely tell you the lending arena is loosening up. However, factors such as extremely demanding loan underwriting, with challenging appraisal processes and continued strict loan-to-value equity requirements have kept new retail development to a minimum. Money is available, but getting it in the hands of the development community remains a challenge. On the other hand, ask a retail agent how the market is and they will tell you that it is humming. Leasing agent after leasing agent repeats the same tune. Call volume from national, regional and local retail prospects is climbing and deal volume is growing. Space that had been vacant since the market first fell out is being filled, and demand for quality space appears to be exceeding supply. This is all welcome news for landlords.

Inland-Western, the owner of Azalea Square in Summerville, South Carolina, backfilled its vacant Linens ‘N Things box with ULTA Cosmetics and Party City, further positioning that project as one of the most dynamic and successful power centers in the Charleston area. In North Charleston, Big Lots leased a 35,000-square-foot space formerly occupied by Linens ’N Things in Northwoods Marketplace. Atlanta-based RCG Ventures acquired the center after assisting with the lease.

In Mount Pleasant, after years of speculation, P.F. Chang’s China Bistro is finally under construction at Mount Pleasant Towne Centre and is preparing to open in the fall of this year. With the combination of P.F. Chang’s opening and an upscale dining destination rumored to be taking the former On the Border space, along with the backfill of the former Guy Harvey’s Island Grill, Mount Pleasant Towne Centre is positioned to elevate its dining a notch or two. Also in Mount Pleasant, one of the more sought after grocery names, Trader Joe’s, will open its second South Carolina location in late July.

Developers Diversified has leased the former Wal-Mart in the West Ashley area of Charleston to Kohl’s and Marshalls. An announcement of a fall 2011 opening is expected. The Wal-Mart that formerly occupied the site relocated to Bees Ferry Road several years ago.

This summer, the long-awaited opening of the area’s largest job creator in years occurred when Boeing started manufacturing its new 787 Dreamliner adjacent to the Charleston International Airport. This kind of job growth fuels speculation for a multitude of new retail developments currently under consideration throughout Charleston. Berlin Myers Parkway in Summerville? MeadWestvaco Summerville development? Oakland Plantation expansion? Mount Pleasant Towne Centre area? Central Mount Pleasant? New development possibilities can be seen throughout the market, but require the critical marriage of the right project with the right financial backing and the appropriate expertise to make these developments happen. Who is ultimately successful in putting these pieces together remains to be seen, but it will be fun to watch and also good for the local consumers.

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

Charleston Industrial Market

The first half of 2011 brought greater activity across the board along with an apparent stabilization of rental rates. The road to recovery is still years away, but it appears the economy in the greater Charleston industrial market may have hit bottom. It will be some time before the sales pricing volatility subsides, as there are still an undetermined amount of bank-owned assets which have yet to hit the open market, and the potential of further borrower defaults remains high.

The Port of Charleston received its largest container ship ever in mid-July. The MSC Bruxelles, which is capable of carrying 9,200 TEU’s and can draft up to 49 feet, came in and out of the Wando terminal. While the effects of news like this is slow to impact the Charleston industrial market, it sets the stage for what has been and will continue to be solid growth for the market during the next 24 months. Charleston has always had a strong industrial market and is a newcomer to the larger national and institutional developers, which are poised with land positions to take advantage of ships like The MSC Bruxelles and port growth.

Industrial vacancy is still high but continues to decrease in all submarkets as the impact of Boeing and port growth on the commercial real estate market is beginning to occur. Charleston is a 45 million-square-foot industrial market with a present vacancy of about 19 percent overall. This vacancy will continue to decrease, but with developers like Hillwood, Johnson and Rockefeller ready to build for some of the larger requirements, the largest change in the market in the foreseeable future will be an increase in the size of the industrial market. Fortunately, most of this development will be build-to-suit projects and therefore should not affect vacancy rates. In addition, the newer product will certainly help keep rental rates stable.

 Average asking rates in the greater Charleston market are still north of $5 per-square-foot annually, but the odd blend of sub-50,000-square-foot warehouse space and the new bigger box product will most likely dominate the market moving forward.

Some of the recent significant transactions in the market include Johnson Development leasing  122,966 square feet to Ozburn-Hessey Logistics in Jedburg Commerce Park and CGM leasing  103,000 square feet at 5801 North Rhett. From a sales standpoint, the TBC 1.1 million-square-foot warehouse sale for $49 million to USAA earlier this year remains the most significant. More importantly, it represents Charleston’s new and upcoming role as a player for institutional money slated for the international industrial sector.

Decision makers continue to labor over commitments to move or expand, but the good news is they are looking at long term leases again. Landlord incentives are dwindling, so tenants looking to take advantage of the available incentives should act quickly. As always, the infill product of north Charleston is the hardest area for tenants to locate with the inventory representing the lowest vacancy in the area. North of Ashley Phosphate Road, the field opens up and there is more available land and building inventory.

There is a lot of buzz in the Charleston industrial market and, fortunately, the framework has been set for this sector to continue as the brightest spot for commercial real estate in Charleston and the state of South Carolina moving forward.

— R. Milton Thomas III, CCIM, SIOR, is co-principal of Anchor Commercial/CORFAC International in Charleston, S.C.

Charleston Office Market

The first half of 2011, the office market in Charleston, South Carolina, remained unchanged, according to a second quarter report from Grubb & Ellis. This year continued the gradual improvement in terms of overall numbers, but the second quarter was fairly quiet as few big deals were able to get off the ground, leaving the market unchanged as vacancy rates flat lined.

While downtown and the central business district continued to register positive numbers, several businesses are looking to relocate, but are met with limited options. The highly coveted downtown submarket had only 143,140 square feet of available space, and only 239,465 square feet of vacant space was available in the Mount Pleasant area.

“Downtown and Mount Pleasant have seen a reduction in the available choices,” says Jon Chalfie, senior vice president office sales and leasing for Mount Pleasant-based Grubb & Ellis | WRS. “That’s mostly because there has been no new buildings downtown with the exception of 25 Calhoun Street, which broke ground 6 months ago.” 25 Calhoun Street, with Young Clements Rivers Lawfirm as the main tenant, is the largest office project under development in Charleston.

Current rental rates do not reflect this dilemma of a shortage in space because according to Chalfie, landlords continue to be motivated in searching for deals. Chalfie says, “Landlords would rather be safe than sorry and want to get whatever deal they can right now.” This will eventually lead to an increase in lease prices of Class A office buildings where prices have remained stable during the past 24 months.

A recent trend for Charleston’s office sector includes the arrival of government contractors. They were single-handedly keeping up the numbers as landlords were willing to give them what they were looking for. Another growing trend for Charleston was the growth of owner-occupied developments, especially in the medical field. Market conditions also welcomed the expansion of technology companies trying to replicate a research triangle.

In order for Charleston to overcome the monotony and fully grasp the road to recovery, local growth needs to be promoted. “There’s a number of initiatives that recognize us to be a growing community of office users,” Chalfie says. “Charleston’s really trying to keep the businesses that are here happy and motivate, while at the same time attracting newer companies to the area.”

A recent commitment from Boeing will add close to 4,000 jobs to the area and the Clemson Wind Turbine is currently under construction at the former navy base, setting the city up for future big company commitments. “Charleston is better positioned to recover than some of our regional counterparts in that we’ve got businesses pretty actively looking at the market,” Chalfie says.

When analyzing the rest of the year, Charleston is expected to see some new office development, in addition to conversion of unsuccessful properties. There is much anticipation surrounding the cigar factory in downtown, which was supposed to be converted from an office building to residential condos, but the lender failed and it was taken over by the FDIC. When litigation is over, it will add a large amount of available square-footage to the market.

“This time next year you’ll see prices are probably going to be higher and landlords won’t be as motivated,” Chalfie says. “You’re going to see growing companies be involved in new developments, which will increase office market expansion and create opportunities for developers.”

While the overall Charleston office market was more of the same for the first half of 2011, the Daniel Island and North Charleston office markets improved slightly. Charleston will be concentrating its future efforts in securing technology companies to move to the area to improve market conditions. In order for Charleston to fully recover from its unchanging office sector, the amount of overall size of the office market needs to increase, which the city is starting to accomplish.

—   Brittany Biddy

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