Charleston Industrial Market Stays Hot Despite Higher Costs, Permit Delays | Company
Rising interest rates, supply chain issues and slowing retail sales have yet to dampen demand for industrial warehousing space in the Charleston area.
But developers are paying closer attention to these factors – and the cost of building materials – as they evaluate investments in new buildings in an already overheated market.
“We are seeing more demand from tenants than we have ever seen in the Charleston area,” said Lee Allenmanaging director of commercial real estate giant JLL’s Charleston office.
“It’s an interesting time right now because construction costs haven’t slowed down at all – they’ve continued to rise,” Allen said. “And, with rising interest rates, it has become more difficult to grow because the only way to grow is to pass those costs on to occupants.”
Allen said current economic factors will likely slow new developments over time, even if demand for space remains high. And this means “it will be more difficult to be a tenant in this market”.
According to a report by CoStar, a commercial real estate search provider. This combines with demand growth in the second quarter of more than 10% – the highest jump since 2018. The most strained sector is logistics, by far the largest segment in this field, with a vacancy rate of only 2.4%.
CoStar reports that housing starts are also at their highest level in years – around 2 million square feet in the second quarter.
Mike Whiteresponsible broker at Industrial Charlestonsaid developers entering the market “may have been shocked by the price of construction” and the time it takes to source materials.
“I don’t think it’s an economic setback that’s slowing things down a bit. I think it has everything to do with the cost of construction,” said White, whose Daniel Island-based company markets the cross point industrial project at Palmetto Business Park in North Charleston.
For example, the insulation board that goes under the roofs of massive warehouses is produced outside the United States, and the fire-resistant chemical it is coated with is rare.
“I just priced a project and was told there would be a nine or ten month lead time,” White said. “And you don’t just order it – you have to put down 50% down payment, and they’ll tell you how much the balance will cost when you get it.”
Rising costs are passed on in the form of higher rental rates.
“Everyone in this market right now is going through real soul-searching about how much a building should cost and are tenants willing to pay that price,” White said.
A year ago, a 50,000 square foot warehouse would cost about $5.75 per square foot on a “triple net” basis, which means the tenant not only covers the rent, but all maintenance costs, insurance and others associated with the building.
“Today, no one is quoting anything less than $7.25,” White said.
“By necessity, for these projects to continue to operate, rental rates must continue to increase,” said JLL’s Allen.
So far, there has been little to no pushback from those looking to rent warehouse space.
“Surprisingly not as much as I thought,” said Matt Pickardsenior brokerage partner at Necklaces in Charleston. He said annual escalation rates — the annual jump in rental rates built into a contract — are also higher.
“Charleston has generally been a market where landlords ask for 3% annual raises — that was the market norm for a long time,” Pickard said. “And it was almost overnight, about 90 days ago, that immediately went down to 4% across the board.”
Even so, almost all speculative warehouses – that is, those that begin construction without a tenant – are let before the final certificate of occupancy is issued.
“They need space,” Pickard said. “The Charleston Harbor is one of the top 10 ports and all goods that this country consumes pass through a port, so there will always be a need. With the port’s investment in infrastructure and improvements…they cater to many of these larger retail and e-commerce importers. »
Jim Newsomethe soon-to-retire CEO of State Port Authoritywhich owns and operates the Port of Charleston, spoke at a recent event hosted by Prologis inc., one of the largest real estate investment funds in the world specializing in industrial property. The San Francisco-based firm doubled its bullish industrial stance this month with the $26 billion purchase of Duke Real Estate and its 153 million square foot portfolio.
Newsome left the rally with the understanding that “there is not enough distribution capacity” nationwide.
“Prologis estimates there is a shortfall of 300 million square feet,” he said.
White of Charleston Industrial said about 5.1 million square feet of warehouse space will open in the area this year, and there’s demand for much more.
allow the blues
One factor that’s often overlooked – but plays a key role in how quickly this request can be met – is the permit, and the developers say it’s taking longer than ever due to the influx of applications and understaffing in government regulatory agencies.
“The phenomenon reverberates through every licensing level in every city and county,” White said.
Dany BlackCEO of the South Carolina Regional Development Alliancesay it Army Corps of Engineers told him it would take eight to 10 months to get a permit to fill in the wetlands of a huge industrial park planned for Jasper County.
Pickard said his experience was “north of 12 months” for an Army Corps permit, and that’s after the federal agency spent months mapping wetlands at one particular site, called a jurisdictional determination letter. The corps recently said these Letters of Determination, which can last up to five years, will be given lower priority as they work to clear the backlog of permit applications.
This puts developers in a pretty tough spot because landowners are trying to sell their land as fast as they can and they want to capitalize on the current market situation,” Pickard said.
Property sales typically allow for a 120-day due diligence period and 30-day closing — not enough time for a letter of jurisdiction, let alone a wetlands permit, he said.
“Developers need to place a lot of trust in the consultants they hire to make sure the surveys they come back are accurate,” he said, adding that the Army Corps was taking a more aggressive stance on what he considered wetlands. He said a developer working with Colliers recently received a jurisdictional letter five months after a site was closed that determined some ditches on the property were wetlands that the buyer had overlooked.
“So it’s a huge cost increase, having to pay for mitigation credits, which can significantly affect the whole project,” he said.
The corps, for its part, said there was little impact.
“While there was a slight increase in the number of… permit applications received last year, compared to the previous year, the processing time for these applications has not changed significantly in most cases. “said the spokeswoman for the agency. Glenn Jeffries.
A standard wetland permit can take anywhere from four months to a year, she said.
“However, it’s important to note that these timelines are dependent on receiving a complete application, including all necessary supporting information,” Jeffries said. “Furthermore, when the Charleston District Regulatory Division requesting additional information from an applicant, a routine event, the time frame for a permit decision is ultimately dictated by the speed and quality of the applicant’s response. »
Despite the heightened hurdles to securing warehousing space in the Charleston area, developers — especially private equity investors — see this area as a key growth market. The dollar amount of investment in industrial warehouses by institutional and private equity firms and real estate investment trusts hit an all-time high of nearly 60% of sales volume in 2021, according to CoStar.
“Nobody has a crystal ball to figure out where things are going,” Allen of JLL said. “But I think Charleston is more isolated than a lot of other markets because with its natural land barriers and supply barriers, it hasn’t been overbuilt. And so, I think our risks of having a glut supply are much less than most other major markets in the country.”