Commercial real estate gains ground amid continuing uncertainty
By Andy Owens
Published Sept. 26, 2011
Like residential real estate, Charleston’s commercial market has found itself subject to the whims of foreclosures.
The market has seen an uptick in the first part of 2011, with a stabilization of rental rates and leases, according to a midyear market report from Anchor Commercial in Charleston.
But pricing volatility follows distressed real estate, and the commercial brokerage said it might be a while before those properties are flushed out of the system.
“Rental rates have edged up because vacancies for the most part have gone down,” said Reid Davis, a commercial broker and principal at Anchor Commercial. “We’ve seen the rental rates definitely bottom out, but sales prices are really hard to peg and are really all over the board.”
Davis said part of the problem is that distressed properties aren’t tracking with the market. Even if a commercial parcel sells high, another nearby piece of property could go for significantly lower if a seller needs to get out from under the debt. As well, highly motivated banks facing the daunting task of liquidating repossessed property might be willing to take a loss.
“The good news is vacancy continues to decrease in all sectors, and the local impact of Boeing on the commercial real estate market is beginning to reveal itself,” Anchor said in its report. “This vacancy decrease will eventually lead to increased rental rates in the coming months.”
Increasing prices can signal a healthy market along with declining inventory. The result is the kind of movement that hasn’t been seen in the past few years as potential lessees and buyers try to lock in deals. Combined with landowners’ reluctance to cut dramatically into asking prices, many would-be tenants fear the existing incentives could be gone soon, Anchor said.
“Decision-makers continue to labor over commitments to move or expand, but the good news is they are looking long-term again,” Anchor’s report said.
Inventory isn’t expected to increase anytime soon, Anchor said, because development of new and speculative property is at an all-time low.
One transaction that contrasts with that trend is a data center to be operated by Roper St. Francis Healthcare at Palmetto Commerce Park. Davis said the $3.2 million, 23-acre purchase that Anchor helped broker will allow the health care system to consolidate its data operations and some of its office staff.
“Palmetto Commerce Park has a lot going on out there,” Davis said.
Earlier this month, The InterTech Group announced it was going to build a $30 million-to-$40 million aerospace manufacturing facility at Palmetto Commerce Park. The first phase of the 300,000-square-foot facility is expected to be completed next year.
The report said not to expect any large-scale changes in inventory “until the vacancy is manageable and the lending environment loosens up.”
“Medical continues to do well, and industrial probably continues to do well,” Davis said.
He said medical office space and general office space are areas of growth in the Charleston area. But all sectors have been doing better, according to Anchor’s midyear report for 2011. Occupancy, absorption and rental rates are all headed up.
“If you’re just looking at the last six months, everything is doing better. The transactions have definitely picked up and there has been some positive absorptions,” Davis said.
There has been a surge in the use of existing property, called infill, rather than building from the ground up. That wasn’t the case before the recession, Davis said. Part of the reason was that vacancies in existing property were relatively nonexistent before the economic downturn. There’s more existing property on the market now.
“Infill areas are doing well,” Davis said. “They continue to do better than the new-growth areas. That’s probably true across all of it. You look at the areas during the boom that were just starting to get developed; those remain the most challenging.”
Hagood Morrison, a commercial real estate broker for Colliers International, recently saw that trend play out in the lease of an existing warehouse space to be used to hold cargo coming from the Port of Charleston.
A company that previously warehoused Starbucks coffee beans in the Jedburg area has leased a 101,705-square-foot property in Hanahan.
Morrison and Amanda Kitchen, also with Colliers, helped broker the deal between Continental Terminals Inc. and the property owner, who was represented by CB Richard Ellis Carmody.
Morrison said Continental was brought into the region by Starbucks Coffee Co., which needed a food-grade warehouse to keep the company’s beans under certain conditions for roasting at the company’s St. Matthews facility. Starbucks opened the roasting plant in Calhoun County in 2009. The roaster employs 100 workers.
No coffee beans are grown on the U.S. mainland, so any coffee must be imported.
“They held the coffee here, and when it was called out by the Starbucks roasting facility in St. Matthews, they would send it out there,” Morrison said.
Continental lost the Starbucks contract to Ozburn-Hessey Logistics, which is now occupying the facility in Jedburg, Morrison said. Continental specializes in coffee and cocoa, Morrison said. He said the company expects to attract contracts similar to the work it did in Jedburg.
Morrison said that industrial and warehouse space is getting “sucked up” in the Charleston area and that more buildings are going to be needed to meet demand, but few are being built.
Eventually, prices on industrial square footage are going to increase.
“Pricier is good, because it’ll encourage development,” Morrison said. “We’re at that crossover point right now.”
Morrison, who spoke during a recent Business Journal event, said distribution centers are going to feel the squeeze of dwindling vacant inventory that is being felt in several areas.
Morrison said distribution centers are key to helping increase the number of containers coming through the Port of Charleston, which has an effect on businesses across the state, the region and the nation.
The Panama Canal expansion, expected to open in 2014, is expected to bring many of the largest ships in the world, carrying tons more cargo than the port is currently seeing.
The bigger ships will dump that cargo, which will need storage at nearby distributions centers; and communities than can respond will have an advantage, Morrison said.
“In our world, we’re worried about the lack of distribution centers,” he said.
Davis said empty land is the most difficult to sell right now, partly based on the amount of existing, infill inventory available on the market.
“So sales prices are all over the board, depending on the assets,” Davis said. “Land is probably the most unstable. The finance ability and the desire for people to buy vacant land (means) it’s probably the toughest time to sell right now in any sector.”
Matt Tomsic contributed to this report. Reach Andy Owens at 843-849-3142.