Sales Dominate Fourth Quarter

Q4 2013 Recap

The Charleston industrial market experienced additional improvement during fourth quarter, continuing a trend of declining vacancy that began in 2012. At the end of 2013, the vacancy rate fell to 8.4% from 9.5% the previous quarter and from 10.9% a year ago. Existing product larger than 75,000 SF is almost completely absorbed. Net absorption for the quarter was 384,053 SF and for the year was 1,141,422 SF.

Leasing activity in smaller facilities continued its strong pace as trade suppliers expand and new ones moved to the area. As supply has tightened with decreasing vacancy, average lease rates increased during 2013 and should continue to rise. Construction costs are rising nearly 15% year-over-year for steel and other key items. Fourth quarter’s lease activity was characterized by a large number of leases in the 25,000 SF – 75,000 SF range and one larger lease, Husqvarna leasing 450,000 SF at 1116 Newton Way in Summerville. Yet the total net absorption was very strong compared to the previous several quarters.

The average building cost per square foot will rise to more than $52/SF (150,000 SF +) from the traditional mid to high $40/SF number seen the last five years. Values for future building sales could escalate above $60/SF for longer term, credit build-to-suits with cap rates less than 7.5% on average.

The tightening of the market has led to a strong run of investor and user purchases during the fourth quarter. Investors are back in the market trying to buy buildings again, and they are paying at all-time high price points.

Massive distribution requirements are looming and it remains to be seen whether these will land at the ports or near consumption centers such as Atlanta. We predict at least one and maybe two build-to-suits greater than 700,000 SF in Charleston in 2014. While there is certainly positive momentum in the industrial market, new development is necessary sooner than later to keep the market competitive.

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