THE 5 TRANSACTIONS HAVING THE MOST IMPACT ON THE CHARLESTON INDUSTRIAL MARKET IN EARLY 2014
The Charleston Industrial market has been recovering for the past three years, since Boeing’s 787 Dreamliner Final Assembly campus opened in early 2011. Last year marked a decade-low vacancy rate (below 2% in Class A) as the market absorbed roughly one industrial building per month, tightening supply and providing upward pressure on rental rates. Total rent growth could exceed 10% this coming year, as companies new to the market will have far fewer choices than just one year ago. A knowledgeable tenant rep industrial broker commented recently after last week’s tour for 80-100k SF, “…my guys were pretty disappointed they only had four real choices and two of those were really beaten up buildings”.
As the national industrial vacancy rate settles at a cyclical low of 7.5% this year, driven by e-commerce “big box” requirements flooding into primary distribution markets, more and more capital players are choosing to invest in industrial spec projects as opposed to chasing sub-5 cap yields in multi-family, facing the same competitors in picked-over markets.
Increased leasing activity among Charleston industrial product has clearly accelerated, paving the way for rental rate growth in all product classes. As we predicted in last year’s “Inflection Point” report, Charleston in early 2014 enters a new period of speculative growth, larger footprints and higher value-added manufacturing. The lack of existing Class A product has pressured the three County governments to streamline permitting and bring larger land parcels into the supply pool faster. As retailers adjust their distribution models and more West Coast players migrate to Southeastern ports, we expect to see more absorption with Charleston industrial, impacted most by the following 5 recent transactions:
1301 Charleston Regional Parkway. Sale of 250,000 SF of occupied industrial by hometown owner Greystar to out-of-towner ARKA, a Beverly Hills-based industrial owner with a portfolio stretching across 14 states. ARKA closed with two days remaining in 2013 on 250,000 SF, the largest industrial sale transaction of the year in Charleston industrial. Based nearby the powerhouse markets of the LA/LB ports, ARKA was persuaded by several of their major West Coast tenants that owning industrial product in Charleston was an astute acquisition strategy, given the anticipated increase in container volumes following the widening of the Panama Canal in 2015. We believe that ARKA plays the role of “early adapter”, and represents the tip of the spear as California developers march through the Southland. The subject building’s smaller brother, 200,000 SF across the street, sold one month earlier for $53 per SF to a user, Kontane Logistics, also betting on increased logistics business stemming from The Port of Charleston.
315 Marymeade, Summerville. Sale of 162,000 SF by Childress Klein Properties to a user, beverage and beer logistics player, Lee Distributors, represents a significant step by a logistics player sensing an opportunity to become and owner/operator. Purchaser pricing at $54.00 per SF sets the stage for speculative construction at $60.00 per SF. More importantly, this transaction completely absorbed a high quality, competitive warehouse from the available supply base.
1125 Newton Way, Jedburg. Husqvarna leased 450,000 SF from Chambers Street, completely absorbing the former American LaFrance manufacturing facility. Despite their low lease rate ($4.65 NNN “as is”) and short term (3 years), this D.C. eye-opener was significant in speed (less than 30 DOM) and scale (largest industrial lease of the year). Husq had been in the market for a similar size, to consolidate their European export business, for a number of years, but was never willing to sign the lease term necessary for a build-to-suit. It’s interesting to ponder the fate of a large spec building, would Husq have “paid the freight for the weight”?
21 Acres Sold to Millard Refrigeration. Clocking in at $155,000 per acre for fully entitled, rail-served industrial, with frontage on the sparkly new Palmetto Commerce Parkway, and safely tucked at the mid-point of the “Boeing Corridor”, this land represents the highest price paid for Charleston industrial land on record. Millard Refrigeration intended to construct a state-of-art automated facility, but their plans froze up to a halt over electricity costs and limited frozen protein product to export. Still, this benchmark sale pricing skewed all future comparables higher, particularly the follow-on Boeing transactions. The Boeing Corridor remains the hottest submarket within Charleston industrial.
100 acres Pending Sale at Ingleside to Patillo. Having absorbed all of their remaining land position behind the Boeing IRC, by winning the coveted 737 Propulsion project, Patillo was ready to step further into the Charleston industrial market and went under contract with Weber USA to purchase up to 100 acres within the Ingleside plantation tract. Located directly across the Patriot Blvd. from their former holdings, Patillo will set a new high point for size and scale for unimproved industrial that will require extensive road and infrastructure improvement. The Future Drive project will become a major thoroughfare across North Charleston and will link the residences at Wescott to I-26 via the new Bass Pro Shops interchange on I-26.
What lies ahead for Charleston Industrial?
The trends all look quite good. Users are paying higher prices for older products. Outside investors are entering the market and paying top prices for Class B product. New companies are pushing land prices to record levels. Boeing attracts more suppliers as their 787 production rate goes up, while The Port of Charleston fishes in deeper waters for super post-Panamax vessels. There are fewer and fewer choices for users in the market’s traditional “sweet spot” of 50-75k SF. Leasing and purchase velocity has clearly picked up steam. Thus, we can confidently conclude that Charleston Industrial investments in 2014 will achieve “out-sized gains” when compared to larger, nearby markets like Charlotte or Atlanta, where multiple national developers can produce on scale and such competition for Class A will undoubtedly compress gains.