Charleston’s commercial real estate market ‘on fire’

RMS Beauty found that its choices were limited when the growing Charleston organic cosmetics firm began looking for new office space with a storage area.

Vacancy rates
Throughout the Charleston area, the vacancy rate of commercial space stood below 10 percent in all major sectors for the first quarter of 2015, a sign of a healthy market that could lead to more construction.

The vacancy rate is an average of information provided by commercial real estate companies Avison Young, Colliers International, Lee & Associates and Lincoln Harris.

Sector Vacancy Q1 2015 Vacancy Q4 2014

Industrial 7.0% 7.9%

Office 8.8% 9.7%

Retail 5.8% 5.9%

“Our biggest problem was trying to find something that included a warehouse and nice office space,” said Elaine Sack, vice president of operations for the West Ashley business. “The only options seemed like North Charleston and Summerville.”

Elijah Brown with Tidewater Interiors cuts ceiling tiles inside a new commercial office building that is nearly completed off Island Park Drive on Daniel Island.
Enlarge Elijah Brown with Tidewater Interiors cuts ceiling tiles inside a new commercial office building that is nearly completed off Island Park Drive on Daniel Island.
Affordability was one factor. Also, an ideal space on the upper peninsula wouldn’t be ready in time for the company’s move earlier this year. The company employs several people from the College of Charleston, and accessibility for them had to be figured in as well.

“We didn’t really want to be any farther out than West Ashley,” Sack said.

After months of searching, the firm left its 1,100-square-foot Sam Rittenberg Boulevard location in March for a space four times larger in West Ashley Business Center on Savage Road.

“We have been really happy here,” Sack said.

Her experience reflects the shrinking inventory of empty commercial space in the region. The vacancy rate for all three major segments — industrial, office and retail — is below 10 percent. While a sign of a strong market, commercial brokers said it’s also a signal that it’s time to add more space. Without more supply, rental rates could accelerate, especially as blue-chip employers like Boeing, Daimler and Volvo bring new jobs and more residents to the region.

Industrial market
“The market is on fire, and there is no inventory,” said Alan Bolduc, who specializes in warehouses and types of industrial real estate at the local office of Avison Young. “It’s a very, very challenging market right now. We are becoming extremely busy with inquiries from 5,000 square feet to 150,000 square feet. The inventory is almost nonexistent. Some of the bigger boxes are coming out of the ground, so we are going to satisfy some of that demand.”

The new additions include:

A 350,000-square-foot Hanahan speculative building, meaning no tenants have committed to leases, by MeadWestvaco and a Charlotte partner.

Childress Klein’s 279,000-square-foot shell structure in Charleston Regional Business Park off Clements Ferry Road.

The parking lot takes shape at a new four-story office building off of Island Park Drive on Daniel Island.
Enlarge The parking lot takes shape at a new four-story office building off of Island Park Drive on Daniel Island.
A pair of 67,500-square-foot buildings in Atlas Commerce Park on Palmetto Commerce Parkway in North Charleston.

Aside from those one-off deals, the dearth of new space goes to “one of those chicken-and-eggs kind of things,” he said. “The banks aren’t lending. Most funding has to come out of pocket. They don’t believe the demand is there yet.”

Bolduc believes otherwise based on the response to an ad he placed for the new Atlas buildings.

“I had five inquiries pretty quickly, so the demand is there,” said Bolduc, who hopes the recently announced Daimler and Volvo auto plants will “kick start a lot of speculative development.”

MeadWestvaco Corp.’s MWV Community Development and Land Management unit, which owns the future Volvo factory site, is getting off the sidelines. It recently announced plan to build a 350,000-square-foot “spec” building off Henry Brown Boulevard with a Charlotte-based partner. The property will be marketed to light manufacturers and warehouse businesses that want to be close to the port and the local interstate system.

“By all measures, Charleston is a strong, under-supplied market,” said Kenneth Seeger, president of MWV Community Development and Land Management. “Over the last year, we’ve seen record low vacancies for ‘Class A’ product. Demand in both manufacturing and distribution sectors is far exceeding supply, and we feel the timing is right for this project.”

Office space
Charlie Carmody, senior vice president with the Charleston office of CBRE, a global commercial real estate firm, has more than 30 years of experience in the office leasing and brokerage business.

He laments the lack of new construction.

“Sooner or later, somebody is going to start building buildings again,” he said.

Efrain Rosales and Victor Hugo frame the walls for offices inside a new four-story structure on Daniel Island. It opens in June and is being developed by Holder Properties of Atlanta.
Enlarge Efrain Rosales and Victor Hugo frame the walls for offices inside a new four-story structure on Daniel Island. It opens in June and is being developed by Holder Properties of Atlanta. photos by Grace Beahm/Staff
For now, rent hikes have been moderate, but that’s likely to change, especially for higher-end properties, Carmody said. The annual rental rate for office space in the region is about $21 a square foot, according to an average of reports from several local real estate firms.

“Vacancy rates have dropped and rental rates have not significantly increased, but they have increased some,” Carmody said. “We expect to see those continue to increase, particularly for Class A space.”

Another challenge is that most lenders require that new buildings be partially preleased before they’ll finance them. That’s difficult in the current market because it can take a year to complete a building, Carmody said.

“When I get assignments for office space, they want to move in the next six months,” he said.

Holder Properties is one looking to capitalize on the void.

In just a few days, the Atlanta-based developer plans to open a new four-story, 75,000-square-foot office building on Daniel Island. The top floor will house HCA South Atlantic, which oversees Trident Health System, Summerville Medical Center and hospitals outside of the market. Jeff Mixson, senior vice president at Holder, said the building is about 45 percent leased. He hopes the majority of the structure will be filled within six to nine months.

“The momentum in the Charleston area is good,” Mixson said.

When the company started work in October, the Daniel Island deal was purely speculative.

“We thought the time was right,” Mixson said. “A lot of the decision-makers are in that area. Daniel Island had grown to the point where it needed some speculative development.”

Space also is being added in the region’s tightest office market, in downtown Charleston, where vacancy rate is less than 5 percent. Most of the construction activity is north of the peninsula’s traditional central business district, said Mike Ferrer, broker in charge of the local office of Lincoln Harris, a commercial real estate firm. The redevelopment of the Cigar Factory is one prominent example.

“You still see accounting, law and banking downtown, but most creative industries are going out to the North Morrison area,” Ferrer said. “They are gravitating toward more open concepts in bigger offices.”

New space also is coming online at the Midtown mixed-use project near King and Spring streets. A block up, the owner of The Post and Courier plans to break ground this year on its mixed-use Courier Square project, which will include offices.

“Will people pay the premium for first-generation space? That’s what the first couple of projects will prove,” said Ferrer, whose firm is marketing some of the commercial space at Courier Square.

Retail sector
Of the three commercial real estate sectors, the housing-sensitive retail market is still feeling the effects of the last recession and real estate crash. It has the least amount of available inventory, with an average vacancy rate south of 6 percent, based on a composite of local market reports.

The rub is that demand “is probably as good as it has ever been,” said Will Sherrod, who specializes in retail real estate for Lee & Associates’ Charleston office.

“What we are running into is the decline in inventory,” he said,

The reasons for the lack of new retail space are myriad, from escalating land costs, to regulatory barriers to financing challenges.

“If you went into a bank with any kind of speculative development, they would probably not loan you the money,” Sherrod said.

That’s a direct result of the financial crisis.

With little new supply and demand on the rise, the price of retail space is increasing, which inevitably is passed on to shoppers. The rate now averages between $15 and $18 per square foot per year throughout the region.

In downtown Charleston, rates are $60 or better per square foot in prime locations.