SOUTHEAST SNAPSHOT, NOVEMBER 2007

Savannah Industrial Market

Foreign imports fuel the growth of Savannah’s port, which drives an emerging and dynamic Savannah industrial market.

Since 1995, container volume at the port has increased by approximately 400 percent and now exceeds 2.3 billion TEU’s (20-foot equivalent units). With this growth, national developers have entered the market and started large speculative construction projects totaling more than 4.5 million square feet.

However, the market is still relatively small at 23 million square feet. While the port’s growth will ultimately create strong demand, there are some questions concerning building size and near-term absorption and overbuilding that will be addressed in the next year. Many of the speculative buildings exceed 500,000 square feet. The Savannah industrial market’s vacancy is certainly healthy at 5.4 percent, but the current state of spec development will probably drive it higher in the short term. Additionally, the amount of vacant space may stall rent growth and keep it in the $3.30 to $4 per square foot range during the next year.

Our Savannah portfolio includes Portside at Grange Road and Crossroads Business Center, where we will acquire three additional fully leased buildings totaling more than 1 million square feet. The average building size in Duke’s portfolio is 285,000 square feet, and the average building age is three years. With an average lease term of seven years, most of our tenants are third-party logistics providers serving companies such as Home Depot, Wal-Mart and Georgia Pacific.

Duke was fortunate to have been the first national developer in Savannah, but we are no longer the only one exploring opportunities there.

Solution Property Group, Oakmont, DP Partners, IDI and Johnson Development are some of the developers with large, speculative projects underway near the Savannah port. Each offers Class A properties that will be positive additions to the market. Most of the new development is north of downtown in the area around Savannah’s airport and near the port. In addition to featuring the port, Savannah is served by I-16 and I-95 and is centrally located in the growing Southeast.

Despite the speculative development around the Savannah port, the largest deals of the past two years have gone the build-to-suit route. Retailers Target and Ikea opted for build-to-suit ownership rather than leasing their logistics centers. Lowes acquired a speculative building for its ownership. Retailers are focused on imported products for distribution to stores throughout the Southeast.

The Savannah industrial market is in an interesting period of transition. The port will clearly drive growth, but it is still a relatively small market. It will be interesting to watch how many large deals choose Savannah over other Southeastern markets. It should be a competitive leasing environment during 2008, but the port’s growth should generate opportunities and provide for a healthy market over the long term.

— Sam O’Briant is executive vice president, Southeast Region, at Duke Realty Corp.

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