A flurry of speculative construction in recent months is taking the pressure off what had been a tight industrial real estate market throughout the Charleston region.
About 1.7 million square feet of warehouse and manufacturing space came online in the fourth quarter of 2015, according to a new report by the commercial real estate firm CBRE. Most of that space has been speculative, meaning it was built before businesses committed to leasing it.
“Do we need more space and do we need that flow of space to continue? I think the answer to that is yes,” said Bob Barrineau, senior vice president of CBRE’s Charleston office. “But the ability to site someone now is better than it’s been in some time.”
Most of the recent “spec” construction — about 630,000 square feet — has been along the Clements Ferry Road corridor, while Northpointe industrial park in Hanahan and North Charleston’s Palmetto Commerce Park have a combined 492,000 square feet of new space.
“We’ve got good diversity in that spec,” Barrineau said. “We’ve got buildings that suit the global trade and logistics world and buildings that suit the light manufacturing, automotive and aerospace, or some type of value-added component.”
While such a large amount of space dumped on the market at once could be detrimental, Barrineau said the tenants interested in the buildings “look good and lead you to have confidence that those will be leased and more will come.”
All of this doesn’t even include construction of automaker Volvo’s new manufacturing plant in Berkeley County, which will measure more than 2 million square feet.
A recent CBRE report shows there are two major drivers in the Charleston area’s industrial market — international trade and advanced manufacturing.
“Trends in international container traffic are impacting industrial markets throughout the United States,” the report states. “East Coast ports, like Charleston, are seeing an increase in traffic due to an interest in diversification by manufacturers and logistics providers. This trend is expected to accelerate due to the widening of the Panama Canal, which is scheduled for completion in the first half of 2016.”
Activity at the Port of Charleston, which nearly set a record for containerized cargo during the last fiscal year, is expected to increase significantly over the next five years, the report states, driving distribution demand in the market.
The growth isn’t all port-driven, however. The region’s “industrial market is increasingly featuring a more diverse trend of activity featuring high growth in aeronautical manufacturing, automotive manufacturing and defense contracting.”
Charleston is one of the fastest-growing markets in the Southeast, “which increases the attractiveness of the market as an option for local distribution,” the report states.
Volvo’s decision to build its only U.S. manufacturing site near Ridgeville will push suppliers and manufacturers further up the Interstate 26 corridor.
“Over time, we expect Charleston to be viewed more attractively as an investment market as investors seek higher returns in secondary and tertiary markets,” according to CBRE.
All of the interest is driving down vacancy rates and driving up rents.
Vacancy rates at sites suited for manufacturing and industrial uses fell to 6 percent in the three-county region during the fourth quarter of 2015, compared to 8 percent the previous quarter.
Such space is almost unheard of on the peninsula, which has a 2.2 percent vacancy rate, and the East Cooper area, which is less than half that amount. The more traditional industrial areas in North Charleston and Ladson are at 5.9 percent. The only place in the region with double-digit vacancy is the Highway 52 North corridor, at 11.1 percent.
Annual lease rates are reflecting the area’s growing popularity, with developers getting $8.02 per square foot for their East Cooper properties and $6.51 per square foot on the peninsula. The North Charleston and Hanahan areas have lease rates in the $4 to $4.50 per square foot range. West Ashley, typically flex space or service-related industrial, is commanding $11.50 per square foot.
Barrineau said the spec construction has led to an overall increase in lease rates.
“It’s all been Class A space,” he said, referring to best-in-class properties that command the highest rents. “Obviously, construction costs and land costs have increased, so in order to get a return rental rates have to go up.”
One problem area, Barrineau said, is industrial-zoned property on the peninsula that appeals mainly to technology-related companies.
“That area is getting so much pressure and competition from the tech companies that they’ve priced them out of the market,” he said.
Marc Murphy, chief executive of software development firm SPARC, said the tight market for technology businesses is hindering expansions and relocation plans.
“The lack of facilities that are ready to move into, especially downtown, is challenging both the growth of companies downtown and companies that want to move in,” he said.
When SPARC wanted to expand, for example, Murphy said the company could not find any existing space so it is adding a sizable new office building at its Clements Ferry Road campus.
“As companies start exploring Charleston as a landing spot, there needs to be places for them to go,” he said.
Reach David Wren at 843-937-5550 or on Twitter at @David_Wren_