Charleston’s industrial market remains hot despite higher costs, permit delays
A truck advertising the Coastal Crossroads speculative industrial construction project sits on the site off Interstate 26 near Summerville. Coastal Crossroads, which broke ground in April, will feature one of the largest speculative warehouses to be built in the Charleston region, at 1.1 million square feet. David Wren/Staff
Rising interest rates, supply chain snarls and slowing retail sales haven’t yet slowed demand for industrial warehouse space in the Charleston region.
But developers are paying closer attention to those factors — and the cost of construction materials — as they weigh investments in new buildings in an already overheated market.
“We’re seeing more demand on the tenant side than we’ve ever seen in the Charleston area,” said Lee Allen, managing director of commercial real estate giant JLL’s Charleston office.
“It’s an interesting time right now because construction costs have not slowed down at all — they have continued to increase,” Allen said. “And, with interest rates rising, it’s made it more challenging to develop because the only way you can develop is to pass those costs along to the occupiers.”
Allen said current economic factors will probably slow new development eventually even as demand for space remains high. And that means “it’s going to be more challenging to be a tenant in this market.”
Average vacancy rates at Charleston-area industrial properties are at an all-time low of about 3 percent, according to a report by CoStar, a commercial real estate research provider. That combines with a growth in demand during the second quarter of more than 10 percent — the highest jump since 2018. The tightest sector is for logistics, by far the biggest segment in this area, with a vacancy rate of just 2.4 percent.
CoStar reports construction starts are also at their highest level in years — about 2 million square feet in the second quarter.
Sticker shock
Mike White, broker in charge at Charleston Industrial, said developers entering the market “may have gotten sticker shock at the pricing of construction” and the length of time it’s taking to source materials.
“I don’t think it’s an economic pullback that’s slowing things down a little bit. I think it has everything to do with the cost of construction,” said White, whose Daniel Island-based firm markets the Crosspoint industrial project at Palmetto Commerce Park in North Charleston.
For example, the insulated board that goes under the roofs of massive warehouses is produced outside of the United States, and the fire-resistant chemical it’s coated with is in short supply.
Dallas-based Dalfen Industrial plans to build a 1.32 million-square-foot distribution site at Palmetto Commerce Park in North Charleston, the largest speculative construction project in the region. It will be marketed to a growing number of e-commerce retailers looking for space near the Port of Charleston. Colliers/Provided
“I just priced a project and was told there would be nine or 10 months lead time,” White said. “And you don’t just order it — you have to put down a 50 percent deposit, and they’ll tell you what the balance will cost when you get it.”
The escalating costs are being passed along in the form of higher lease rates.
“Everyone in this market right now is going through a real soul searching about how do you price a building, and are the tenants willing to pay that price,” White said.
A year ago, a 50,000-square-foot warehouse would cost roughly $5.75 per square foot on a “triple-net” basis, which means the tenant covers not only rent but all maintenance, insurance and other costs associated with the building.
“Today, no one is quoting anything less than $7.25,” White said.
“By necessity, for these projects to continue to work, rental rates need to keep going up,” said Allen of JLL.
So far, there’s been little, if any, pushback from those looking to lease warehouse space.
“Surprisingly, not as much as I thought,” said Matt Pickard, senior brokerage associate with Colliers in Charleston. He said annual escalation rates — the yearly jump in lease rates built into a contract — are also higher.
“Charleston has typically been a market where landlords request 3 percent annual escalations — that was the market standard for a long time,” Pickard said. “And it was almost overnight, about 90 days ago, that immediately shifted to 4 percent across the board.”
Even so, almost every speculative warehouse — that is, one that starts construction without a tenant — is being leased before the final occupancy certificate is issued.
“They need the space,” Pickard said. “The Port of Charleston is a top 10 port and all of the goods this country consumes comes through a port so there will always be a need. With the port’s investment in infrastructure and improvements ... they are catering to a lot of these bigger retail, e-commerce importers.”
A rendering shows the Coastal Crossroads speculative industrial warehouse project that will begin construction this week near Summerville. The project will include a 1.1 million-square-foot distribution center — one of the largest speculative construction projects yet in the Charleston region. CBRE/Provided
Jim Newsome, the soon-to-be-retired CEO of the State Ports Authority, which owns and operates Charleston’s port, was a speaker at a recent event organized by Prologis Inc., one of the world’s largest real estate investment trusts specializing in industrial property. The San Francisco-based firm this month doubled down on its bullish industrial stance with the $26 billion purchase of Duke Realty and its 153 million-square-foot portfolio.
Newsome came away from the gathering with the understanding that “there’s not nearly enough distribution capacity” nationwide.
“Prologis reckons there’s a 300 million-square-foot shortfall,” he said.
White of Charleston Industrial said about 5.1 million square feet of warehouse space will open in the region this year, and there’s demand for plenty more.
Permitting blues
One factor that often isn’t considered — but plays a key role in how quickly that demand can be filled — is permitting, and developers say that’s taking longer than ever due to the influx of requests and staffing shortages at government regulatory agencies.
“The phenomenon is rippling through every level of permitting in every city and county,” White said.
Danny Black, CEO of the Southern Carolina Regional Development Alliance, said the Army Corps of Engineers told him it would take between eight and 10 months to secure a permit to fill wetlands for a huge industrial park planned for Jasper County.
Pickard said his experience has been “north of 12 months” for an Army Corps permit, and that’s after the federal agency has spent months mapping the wetlands on a particular site, called a jurisdictional determination letter. The Army Corps recently said such determination letters, which can be good for up to five years, will be given lower priority as it works to clear the backlog of permit applications.
It’s putting developers in a pretty tough spot because landowners are trying to sell their dirt as quick as they can and they want to capitalize on where the market is now,” Pickard said.
Property sales typically allow a 120-day due diligence period and a 30-day closing — not enough time for a jurisdiction letter, much less a wetlands permit, he said.
“Developers have to place a lot of faith in the consultants they hire to make sure the surveys they come back with are accurate,” he said, adding the Army Corps is taking a more aggressive stance on what it considers wetlands. He said a developer working with Colliers recently got a jurisdictional letter five months after closing on a site that determined some ditches on the property were wetlands the buyer hadn’t accounted for.
“So that is a huge cost increase, having to pay for mitigation credits, that can significantly affect the overall project,” he said.
The Charleston office of the Army Corps of Engineers (above) says it can take between four months and a year to complete a wetlands permit for industrial development. File
The Army Corps, for its part, said there’s been little impact.
“Although there has been a slight increase in the number of ... permit applications received in the past year, when compared to the prior year, the timeline for processing these applications has not appreciably changed in most cases,” said agency spokeswoman Glenn Jeffries.
A standard wetlands permit can take four months to a year to complete, she said.
“However, it is important to note that these timeframes are contingent upon receipt of a complete application, including all necessary supporting information,” Jeffries said. “Furthermore, when the Charleston District Regulatory Division requests additional information from an applicant, a routine occurrence, the timeline for a permit decision is ultimately dictated by the timeliness and quality of the applicant’s response.”
Despite the increased hurdles of getting warehouse space in the Charleston region, developers — particularly private-equity investors — see this area as a key growth market. The dollar amount of industrial warehouse investment by institutional and private equity firms and real estate investment trusts hit an all-time high of nearly 60 percent of sales volume in 2021, according to CoStar.
“Nobody has a crystal ball on where things are going,” said Allen of JLL. “But I do think that Charleston is more insulated than a lot of other markets, because with its natural land barriers and supply barriers, it hasn’t gotten overbuilt. And so, I think our risks of having a supply glut is much less than most other major markets in the country.”