The Charleston area's speculative warehouse market, already in the middle of a historic expansion, is about to get bigger and analysts agree there's still plenty of room for growth.
"Charleston is a new market to many developers, and the returns are strong," said Bob Barrineau, senior vice president of the commercial real estate firm CBRE Inc's Charleston office. "It's a rapidly growing port market with a diversifying base. Hard not to love the industrial opportunity in the market."
The Silverman Group is the latest to take the plunge, saying this week it will buy two parcels along U.S. Interstate 26 near Jedburg for construction of a 562,544-square-foot warehouse. Those parcels, totaling 203 acres, were developed by WestRock Land and Development and the Rockefeller Group.
The site already is home to distribution centers for Gerber Childrenswear and TBC Corp., a tire distributor.
New Jersey-based Silverman said the land deal is scheduled to close next week, but did not disclose the price. The speculative warehouse — meaning it will be built without any tenants in hand — should be finished by the end of this year.
It's the second big "spec" project announced this month. Earlier, Spartanburg-based Johnson Development Associates said it will build an 829,000-square-foot building on nearly 91 acres along Old Dairy Road in Jedburg — across I-26 from the Silverman project.
Their combined 1.4 million square feet is joining another 2 million square feet of speculative space already under construction in the Charleston region.
Mark Vitner, an economist with Wells Fargo in Charlotte, thinks the market for big warehouses hasn't yet peaked, adding "it is a great time to be building spec" in the Charleston area.
"Charleston is seeing an incredible amount of industrial development right now and is poised to grow rapidly as major projects like Volvo and Mercedes come fully online," Vitner said, referring to new manufacturing campuses being built by Volvo Cars and Mercedes-Benz Vans. Both will start production later this year.
"I am not concerned about over-development right now, but would not be surprised to see vacancy rates rise when global economic growth slows in a couple of years," Vitner said.
Barrineau said the industrial market is being driven by vehicle suppliers and distribution sites for e-commerce and traditional retailers.
"I have four different prospects all ranging from 250,000 to 1.2 million (square feet) with current interest in Charleston," he said. "The e-commerce user is constantly evolving, and most are requiring new construction to accommodate their needs."
While a short-term glut of speculative space might create higher vacancies, flatten rental prices and "alter the perception of solid market fundamentals," a CBRE report states, the fallout isn't expected to last very long.
"Over time, we expect Charleston to be viewed even more attractively as an investment market as investors seek higher returns in secondary and tertiary markets," the report states.
Industrial vacancy rates in the Charleston region have been on the rise as more speculative building takes place, according to a report by the commercial real estate firm Avison Young — up to an average 9.7 percent in the fourth quarter from 7.4 percent a year earlier.
But that same analysis said "demand continues to be strong for our area," with new corporate tax laws helping to spur investment decisions.
The Jedburg area toward Volvo's manufacturing campus has been this area's hottest market, with 750,000 square feet of space occupied in March alone. That includes a 307,350-square-foot warehouse, originally a spec building, at Charleston Trade Center where New Jersey-based RPM will operate a warehouse and logistics center.
In addition to vehicle and commercial plane manufacturing, analysts say, developers are being attracted to this area by a revitalized Port of Charleston, which is setting records for containerized cargo moving through its terminals.
This isn't the first spec building boom for the Charleston area, but it is the biggest. The last one, which took place amid the irrational exuberance of the stock market's late 1990s rise, saw about 1 million square feet of space added to the landscape. After the market crashed, Charleston area vacancy rates in 2001 soared to nearly 18 percent.
Developers didn't see that bust coming, with one Charleston executive responding to pre-crash questions about overbuilding with a simple but emphatic: "Excess space? No."
These days, CBRE's Barrineau said, developers are fully aware "there is always the risk of some type of national or international negative impact."
But financial fundamentals are different now, he said, than in the free-spending days ahead of the housing crisis.
"Construction in the 1990s was driven by relaxed lending standards that resulted in overbuilding pretty much everywhere," Barrinieau said. "The capital markets are certainly more fond of industrial now more than ever, and this is helping to get this new construction financed. But today, it is much more market-driven."