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How an unexpected issue is affecting real estate in South Carolina

Contributing Writer //April 13, 2023//

How an unexpected issue is affecting real estate in South Carolina

Contributing Writer //April 13, 2023//

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Economic headwinds continue to bluster, but so far, commercial real estate seems to be holding its own in South Carolina. Sectors vary from market to market, as do the challenges that may affect given subsectors. And recently, one unexpected issue has emerged that could contribute to some short-term softening.

“We're seeing premiums increasing by at least 25 percent, especially in coastal areas, for both commercial and residential (real estate),” South Carolina Realtors Association CEO Nick Krymedas said.  “These increases don't factor in expected increases in flood insurance, so it has us concerned.”

Overall, however, commercial real estate continues to perform solidly, say those in the know.

“We continue to see a robust Industrial market and a very active retail market,” David Lockwood, COO of Colliers’ Columbia office, said. “Office leasing is strong with a definite flight to quality in the urban and suburban areas. There is a weakening of large capital market investment sales of multi-family properties and office properties.”

Industrial sees net job gains

Industrial development is strong across the Palmetto State. According to the South Carolina Department of Commerce, sectors such as manufacturing, trade, transportation and utilities, and health and education services, all saw net job gains in 2022.

According to reports from Avison Young In Charleston, the industrial sector saw a 2% net absorption in fourth quarter 2022 and a historically low vacancy rate at 1.9%. In addition, the area saw 11.5 million square feet of industrial development activity in fourth quarter 2022 and average asking rents at $6.99 per square foot, which was 3.2% higher than the previous quarter.

The average industrial space sales price came in at about 88 per square foot, which was 3% higher than third quarter 2022, and loaded import container volume saw a 7.3% increase in 2022 over 2021. Industrial construction was up 37% as well, with 67 projects and some 11.5 million square feet either proposed or under construction, representing about 15% of the metro area’s inventory.

Columbia is also seeing brisk industrial activity. According to a report from Colliers, the area needs additional speculative development to keep up with market demands. Currently, 2 million square feet are under construction and scheduled to deliver in 2023. with most space already pre-leased. Columbia’s net industrial annual absorption was 1.85 million square feet in 2022. Overall, the market posted 473,233 square feet of absorption during fourth quarter 2022 and 1.85 million square feet over the course of the year, with a vacancy rate dropping to an all-time low of 2.36% .

In Greenville, manufacturing continues to drive industrial inventory. As of the end of 2022, some 63 properties representing 20.9 million square feet and 11% of the total inventory were under construction.

Office is slow but steady

The Charleston area is seeing slower but still steady growth in this sector as people continue to relocate to the area and businesses start making decisions as to how they will proceed post-pandemic. Labor increases are continuing, especially in professional occupations, according to NAI.

Columbia is also seeing slow but steady activity, according to Colliers. However, large office tenants in the Columbia market are few and far between. The overall Class A vacancy rate in the central business district is 9.73% leaving little opportunity for 10,000+ square feet to locate to the Columbia downtown market in a high-quality space.

Over the past six years, 87% of the total 1,689 office transactions were 5,000 square feet or less: office transactions of less than 2,000 square feet comprised 58% of the total leases (986 transactions); and office deals within the range of 2,001-5,000 square feet made up the remaining 29% (487 transactions). Therefore, going forward small tenants will slowly absorb the small suites remaining in Class A space.

In the upstate, especially in the Greenville area, the flight to quality trend increased, with Class A office developments taking up nearly 98% of all construction activity.

Multifamily staying strong

Multifamily continues to enjoy strong fundamentals and great stability as more people move to South Carolina; indeed, the Palmetto State is one of the top destinations for people who are relocating. In Charleston, especially, the multifamily market continues to benefit from employment, median household income growth, and net migration, according to a recent Berkadia market report. Several corporate relocations and expansions are taking place in 2023, with a total investment of $112 million and the creation of 630 new jobs.

Like Charleston, the Greenville metro, which has seen an increase of more than 130,000 people since 2010, continues to benefit from the trend of people leaving high cost, large metro areas for smaller, more affordable metros.

The Columbia metro has remained steady as well, with an overall occupancy rate at around 93% — this with 699 new units added in 2022.

Retail is still growing

In Charleston, especially, retail is growing, although despite significant and continued population increases, there has not been much of an uptick in inventory space. Permitting requirements, cost of locations, operations, supply, and labor, as well as other factors, present challenges to retail operators. With a record low vacancy rate and not as much retail construction underway, most retail operators are concentrating on existing spaces.

“The Charleston retail market remains strong with a vacancy rate hovering at record lows,” NAI’s Will Sherrod said. “There is little expectation of much addition to the retail inventory despite the residential growth in the region…The challenges facing retailers continue to mount with commodity price increases, labor costs, and occupancy costs all increasing faster than sales numbers.”

The situation seems similar in Columbia, according to Colliers. As of fourth quarter 2022, retail vacancies had not only declined to the lowest levels in decades, but rents have risen as well. In some cases, landlords have been anxious to get junior anchor and anchor spaces back to be able to lease to tenants who are expanding and who can pay higher rental rates.

Overall, the prospects for commercial real estate appear to be solid.

“We are very fortunate to be in South Carolina where we see very little impact in the economy,” Lockwood noted. “Inward migration of people and the excellent economic development announcements are keeping us humming.”

Jim Tatum is a contributing writer for SC Biz News.

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