The Charleston region’s industrial, office and multifamily sectors are booming amid “the golden era of commercial real estate,” said Bob Bach, Newmark Grubb Knight Frank’s director of research for Americas.
“This has been a great run for commercial real estate. ... It has been the strongest period, and at the same time the most sober-minded period, in commercial real estate — and by sober-minded, I mean we haven’t overbuilt,” Bach said.
The jobs and residents coming into the Lowcountry have buoyed its commercial real estate market. The region’s ability to attract both retirees and millennials creates a diverse economy, Bach said to about 100 business leaders and developers during Newmark Grubb Wilson Kibler’s Charleston forecast.
The Charleston region is now competing with Dallas, Denver, Nashville, Tenn., and Silicon Valley, Calif., in job creation and population growth, as well as rising rental rates and declining vacancies, Bach said.
Bob Faith, founder and CEO of Greystar and one of three panelists at the event, said Charleston’s quality of life and job opportunities are attracting new residents and developers from across the country.
He said Greystar’s Elan Midtown apartment project, located at the corner of Spring and Meeting streets, was the most profitable apartment development deal in the company’s history until a Silicon Valley project surpassed it last year.
“The fact that we’re even having the conversation of a project in Charleston compared to one in Silicon Valley is pretty interesting,” Faith said. “People want to live here. Charleston has a lot of dynamics going for it.”
Faith said Charleston remains an attractive place for developers to generate high returns on investments, but he noted that the city’s permitting process and parking requirements prove difficult.
“It’s great to preserve our heritage — that’s important — but it’s not so great that it takes longer to get building permits here than it does in New York City,” Faith said.
Charleston Mayor John Tecklenburg said the city’s permitting process and occasional development moratoriums are designed to protect the city’s history and character, as well as to prevent it from becoming a cookie-cutter city.
Tecklenburg said the city has more than $1 billion worth of building permits approved currently — a first for Charleston — despite developers’ complaints.
“Charleston has such great bones,” Bach said. “Downtown Charleston is so walkable. ... Downtown Greenville is active and has improved over the years, and Columbia is probably going down that same path as well; but Charleston has been there for years and years and years and the rest of the country is catching up to that.”
‘Solve affordable housing’
Tecklenburg said the insufficient amount of affordable housing to meet residents’ needs is one of the biggest issues facing the city over the next few years.
“It’s really gotten to the point where it’s impacting our economic sustainability where we don’t have enough housing product for working families and moderate-income folks,” Tecklenburg said. “There’s a lot of pressure with the population growth.”
Faith of Greystar said the industry recognizes the dearth of affordable housing options in cities, including Charleston, as “one of the biggest challenges of this generation.”
Faith said the luxury apartments being built today will become the affordable housing options in 30 years. In the interim, he said the private sector has no incentive to build affordable housing options.
“If we want to solve affordable housing in this country, we have to get away from providing subsidies from the federal government to single-family homeownership and redirect those subsidies into the development of affordable housing with density, because that’s how you can generate the numbers. ... You can’t force the private sector to build affordable housing unless you provide incentives for it,” Faith said.
What’s hot, what’s not
The Charleston region’s office market is seeing vacancy rates around 9%, below the national average of 13%, with rents going up in the mid-single digits.
Some areas of Charleston are following a trend seen in bigger cities, in which technology and creative firms seek out renovated warehouse buildings as opposed to high rises or sprawling suburban campuses, Bach reported.
Some developments on the upper peninsula — such as Raven Cliff Co.’s Half Mile North on upper Meeting Street and the soon-to-be-finished Pacific Box and Crate project on Upper King Street — are examples of that. The Cigar Factory, a 240,000-square-foot building along East Bay Street, was recently renovated into multitenant office space.
Bach said 1980s-style suburban tech campuses still have some success in markets like Dallas and Silicon Valley. Daniel Island is home to large tech campuses for software firms Blackbaud and Benefitfocus, both of which are undergoing expansions.
The Lowcountry industrial market continues to be hot, Bach said, particularly as the Port of Charleston expands and Charleston Harbor inches toward being deepened to 52 feet. He said the market needs more large distribution centers, rather than older, outdated industrial facilities.
“The industrial market is in the best shape I’ve ever seen it,” Bach said, noting the demand for new construction.
Bach said he expects to see a continued decline in decades-old apartment complexes and large malls in suburban markets. More people desire housing near office spaces and retail spots with walkable amenities interspersed.
Mixed-use developments are likely to stay in demand because millennials and retiring baby boomers desire smaller footprints and walkable neighborhoods, he said.
People want to be able “to step out their front door and walk someplace and not have to necessarily use their car,” Bach said. The planned Laurel Island development along the upper peninsula is designed to meet those needs.
Tecklenburg and Faith agreed that the Neck area of the upper peninsula is ideal for large, mixed-use developments. Tecklenburg said he hopes to see a mix of small, neighborhood-service stores, like a grocery store, as well as big-box stores, like Target’s urban store option, a smaller version of its typical store.
‘This expansion will end’
Bach said another recession is likely coming, but he expects the real estate boom to continue, most likely for two more years.
“Recessions are hard to predict,” Bach said. “I don’t see anything on the horizon immediately that will tip us into recession, but we need to be practical about it. This expansion will end.”
Rental rates will go down and vacancy rates will go up during the next recession, although Bach said he does not “believe it will be as severe as in past cycles.”
Bach said the industry has shown more restraint than in previous decades by not building beyond demand. The Federal Reserve has voiced concerns about a possible commercial real estate bubble.
Other concerns from the Fed include the overvaluation of real estate and the volume of sales activity. Bach said the industry has experienced strong sales and capital flow since the recession. Bach said the industry will adjust to increased interest rates.
“It’s not a question of whether the Fed is going to raise interest rates; they are,” Bach said. “It’s a question of how quickly, and hopefully, how slowly they will do it.”