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Small spaces in big demand as Charleston-area's oversized industrial market slows

Demand is cooling for the mega-sized warehouse structures that have grabbed the spotlight in the Charleston region in recent years, but one segment of industrial market has remained in high demand: small spaces of 50,000-square-feet or less.

A new report by real estate analytics firm CoStar, which has an office in Charleston, shows those smaller structures have avoided the pitfalls of rising interest rates, high construction costs and slowing consumer spending that have led to climbing vacancy rates at bigger properties measuring up to 1 million square feet or more.

"That’s particularly true in the Southeastern port markets of Charleston ... and Savannah ... where the median time to lease these smaller properties has fallen to an all-time low of less than three months," CoStar analyst Chuck McShane stated in the report. "The Charleston properties leased in 2.7 months, roughly two months faster than the first quarter of 2018, and the Savannah properties took about 2.6 months to lease, down from nearly seven months over the same period."

A separate analysis by the commercial real estate firm Cushman & Wakefield showed the vacancy rate for all Charleston-area industrial sites was at 1.8 percent at the end of 2022, but that is expected to rise through the end of this year.

Another report by CBRE Inc., put the year-end vacancy rate at less than 1 percent, making the region one of the nation's tightest markets in terms of industrial space.

CoStar said new construction — roughly 11.5 million square feet in the past year, much of it aimed at big retail distributors — coupled with stabilizing demand and a post-pandemic drop in cargo moving through the Port of Charleston will push up vacancy rates while leveling asking rents.

Except for small spaces, that is.

"While e-commerce operations have sought larger spaces with higher ceilings at a lower per-square-foot price, more locally oriented distributors, service providers and manufacturers provide the tenant base for these smaller buildings," McShane wrote.

Those smaller operators feel the same economic woes as the big guys, but there has been little expansion in available properties to meet their needs. Only 2 percent of new construction in the Charleston region is 50,000 square feet or smaller. It's even tighter in Savannah, at 1  percent.

"Limited new supply will likely keep fundamentals for smaller industrial buildings tight, even in Southeastern port markets undergoing rapid supply expansion," according to McShane.

The lack of availability in the 50,000 square feet and under category has led to a premium in asking rents, CoStar said. In Charleston, those properties are now going for $12.04 per square foot annually. That's about 72 percent more than the average of $7.01 for larger properties in the region.

"Out team continues to see spaces under 50,000 square feet lease up quickly," said Brendan Redeyoff, senior vice president at CBRE in Charleston.

Hunter Dunagan with Bridge Commercial in Charleston said in a LinkedIn post that the smallest of those small spaces — about 20,000 square feet — could be getting too pricey for the local businesses that have historically occupied them.

He said the area's relatively low rental rates are attractive to businesses looking to relocate from bigger and more expensive markets in the Northeast and southern California.

"It will be interesting to see how local companies adjust to the market as they come up on the term of their leases," he said.

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Reach David Wren at 843-937-5550 or on Twitter at @David_Wren_

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