The ‘Sugar High’ is Ending For S.C. Industrial Sector, What Comes Next?Apr 25, 2023 10:56AM ● By David Caraviello
There’s the 3.25-million-square-foot Spartan Enterprise Park in Spartanburg, which NorthPoint Development broke ground on in November. There’s the 3.6-million-square-foot foot Cherokee Commerce Center 85 near Gaffney, to be constructed by Glenstar and Creek Lake Capital. There’s the 3 million-square-foot Walmart distribution center north of Charleston, which is South Carolina’s largest single structure under one roof.
In all corners of South Carolina, the industrial boom that’s revved up the Palmetto State’s economy is plain to see in the form of giant manufacturing and distribution centers occupying millions of square feet. And it just keeps coming: In late 2021 Redwood Materials unveiled plans to build an electric vehicle battery recycling plant, a $3.5 billion investment, outside Charleston. Frampton Construction recently completed a nearly 1 million-square-foot speculative industrial development in Greenville. And in March, Scout Motors announced plans to construct a $2 billion manufacturing plant on 1,100 acres in Blythewood, north of Columbia.
Manufacturing, warehousing and transportation combined to contribute $41 billion to South Carolina’s GDP in 2022, according to the research firm IBISWorld. Spartanburg County alone has experienced one of the largest expansions of industrial inventory in the nation, particularly near a locus that includes the BMW manufacturing plant and Inland Port Greer. Demand has stretched the industrial footprint of all three of the state’s biggest metro areas — Greenville-Spartanburg to Gaffney and Anderson, Charleston to Orangeburg, Columbia up Interstate 77.
A lot of that insatiable demand, though, was driven by the supply chain kinks that accompanied the pandemic. Like the residential housing market, a frenzied transaction pace of the past few years has given way to a rhythm that in parts of the state now feels more pre-Covid 2019. It’s becoming more and more of a challenge to find sites with accessible utilities for these massive industrial complexes. South Carolina’s booming industrial sector is clearly moving out of pandemic overdrive and into a new phase. The question becomes: What will it look like?
“Over the past five to seven years, we’ve had, in my opinion, probably an abnormally heated market,” said Grice Hunt, a shareholder in the industrial services division of NAI Earle Furman, an Upstate commercial real estate firm. “There was this market velocity that we saw with rate growth and price appreciation that was most likely unsustainable. We’ve seen, in my opinion, a normalization of the market: Whereas we were seeing 10 percent rent growth, we’re probably going to settle into 3 to 4 percent rent growth. Where we’ve had virtually zero vacancy, maybe we end up having 1 or 2 percent vacancy. Which is normal, outside of the last seven years or so.”
Supply and demand
Clearly, demand for South Carolina industrial space has not ebbed. In the Upstate, there were 18 million square feet of industrial space under construction as of the fourth quarter of 2022. The Upstate Trade Center, a 907,400-square-foot industrial facility in Greenville County developed by The Keith Corp., was completed in February. Multiple projects are underway in Cherokee County, including a 300,000-square-foot facility to be developed by Treeline. The industrial vacancy rate in the region dropped from 4.3 percent in the fourth quarter of 2021 to 3.09 percent a year later.
But now, according to the commercial real estate firm Colliers South Carolina, industrial construction is more in balance with demand — a change from the hyperactivity of the past two years, which left developers racing to keep up with demand. “We are certainly still in high demand when we look at it from a 10-year window for industrial product,” said Dillon Swayngim, a vice president on Colliers’ Spartanburg-based industrial team. “But we’re coming off a little bit of a sugar high with the Covid demand, which is not reality. But the really good positions out there are still seeing a ton of demand.”
The Midlands has roughly 2½ million square feet of industrial space either under construction or scheduled to be delivered within the next 12 months, said Nick Stomski, a partner in the Columbia office of the commercial real estate firm Trinity Partners. “I feel like there’s a healthy amount of demand to support that new construction delivery,” he added. Inventory in the Midlands has been constrained by the rampant pre-leasing that accompanied the height of the pandemic, leaving the region with a record low vacancy level of 2.36 percent in the fourth quarter of 2022, according to Colliers.
“We have seen a slowdown in new construction in the smaller space arena, select smaller flex, smaller industrial, due to construction pricing and interest rate inflation,” Stomski added. “But the big box stuff, we continue to see new announcements and new building deliveries, and we have great absorption right now in the market. So while there are some sectors that have slowed, it’s not been because of demand.”
The Lowcountry saw its industrial vacancy rate drop to a record low of 1.92 percent at the end of 2022, according to the commercial real estate firm NAI Charleston. In some key submarkets, it’s even lower than that: 1 percent in Dorchester County, 1.7 percent in outer Berkeley County. And the region’s industrial pipeline remains loaded, according to NAI Charleston — nearly 12 million square feet are under construction, with nine projects scheduled to be delivered in 2023 ranging from 305,000 to 1.32 million square feet.
Is it enough? “Will the supply keep up with demand? Great question. I think there’s concern that it cannot, and I would say that’s due to readily available industrial land,” said Dexter Rumsey, a partner with NAI Charleston.
“Logically, the only direction for it to go is up the I-26 corridor toward Ridgeville, St. George, and Orangeburg County. Those are the areas where the ball is moving now because of the lack of land within our beltway,” he added. “Everything’s pushing up I-26, and it will continue to do that.”
Rental rates and debt threshold
Nationally, higher interest rates and heightened economic uncertainly have combined to take a toll on commercial real estate, the industrial sector included. Industrial supply is now outpacing demand, according to Wells Fargo economists Charlie Dougherty and Patrick Barley, who added that industrial rental rate growth began to backslide in late 2022. While industrial prices remained more resilient than those of properties in other commercial sectors, the Wells Fargo analysts believe a potential pullback in consumer spending will test the U.S. industrial market in the near term.
To this point, at least, the industrial sector in South Carolina has largely bucked those national trends. Between the fourth quarter of 2021 and the fourth quarter of 2022, the average market lease rate per square foot increased in all three of the state’s biggest metro areas: from $4.29 to $5.05 in the Upstate, from $4.41 to $4.43 in the Midlands, and from $7.07 to $9.37 in the Lowcountry. Industrial vacancy in all three regions is also at or near historic lows. And South Carolina’s high rate of in-migration compared to other states has helped to supply the workforce necessary to sustain large-scale industrial projects.
“Manufacturers are looking at South Carolina, and the Upstate in particular, because it’s a right-to-work state. There is a growing workforce here due to population migration trends. You have I-85 which gives you access to finished goods and raw goods, you have port facilities, you have logistical infrastructure,” Hunt said. “You have quality of life, you have low cost of living, you have economic incentives, you have availability of power. So you have all of these factors that weigh in and impact a manufacturer’s decision, which makes it very appealing for them to locate within the Southeast and particularly to South Carolina.”
Challenges, though, remain for an industrial sector which in some parts of the Palmetto State is adjusting to a less-frantic transactional pace. In the Midlands, rental rates on new construction haven’t appreciated at the same rate as those for second- and third-generation buildings, Stomski said. “They have advertised rates that are lower than where I think they need to be,” he added. “I don’t know if that’s because building packages were bought prior to some construction pricing escalations, but I feel like there’s rent growth on that new construction side that is yet to be realized.”
In the Lowcountry, Rumsey said rising interest rates along with the escalating costs of land and construction materials has led developers to more thoroughly scrutinize their project’s soft costs. “Not only have the interest rates doubled from a year ago, the debt-to-equity ratio has come up to a level where it’s almost 55 percent equity to 45 percent debt,” he added. “Compare that to years before, where the debt threshold was 70/30. So significantly more equity has to be pumped into projects. And that’s happening, because people are still looking for a yield.”
In the Upstate, the rate of preleasing has fallen precipitously. In early 2022, according to Colliers, 16 million square feet of industrial inventory was under construction, with 10 million of it preleased. Of the 18 million square feet of industrial space under construction as of the fourth quarter of 2022, just 4 million was preleased.
“One of the differences we’re seeing is that before, there was a lot of, ‘Let’s just go get it. I don’t even need to see it. I can basically make a decision for my board, and we’re going to go ahead and negotiate this and move in,’” said Brockton Hall, a vice president in the Colliers industrial division.
“Now, it’s getting more to, ‘Let’s do our due diligence. How far out is this building going to be completed?’ Or, ‘We’d rather find an existing shell rather than lease something coming out of the ground.’ Every building that was delivered early in 2023, that is on the ground right now, we have multiple proposals on,” Hall added. “The demand is there, it’s just waiting. People are just being a lot more diligent and a lot more cautious about how they’re going about taking the space.”
From Chester to Cherokee
The first contract awarded by the federal government for work on I-85 in South Carolina came in 1956, according to the Federal Highway Administration, and it provided $280,665 for the construction of a bridge over the Broad River in Cherokee County. Nearly seven decades later, the stretch of I-85 better known for the looming presence of the Peachoid has helped Cherokee County become a budding star of the Upstate’s industrial sector.
That much is evident just by driving down I-85 in Cherokee County today. Off Exit 87 is the 1.4 million-square-foot distribution facility shared by DHL Supply Chain and Mann+Hummel, a German company that manufactures filtration systems. Off Exit 96 is the 1 million-square-foot facility occupied by Techtronic Industries. The forthcoming Cherokee Commerce Center 85 will consist of up to six buildings constructed in multiple stages.
“There’s tremendous potential and tremendous runway for Cherokee County,” Hunt said. “There are probably 8 million square feet of space going in that direction that are projected, planned, or under construction. And those are just the sites that have utilities; there’s a lot of land that still doesn’t have utilities, and in five to seven years, all those sites could potentially be served. And that opens up a lot more land. There’s this tremendous runway for Cherokee County.”
Part of Cherokee County’s appeal is that it simply has available land to accommodate industrial projects that are growing ever larger in size, as companies move to increase efficiency by having more under one roof. “At ground zero for our Upstate industrial market, sites that can accommodate these larger buildings are getting very, very hard to come by,” said John Montgomery, managing director at Colliers, referring to I-85 near BMW and the inland port. “It’s like a tube of toothpaste — you squeeze it, and it comes out both ends. We’re seeing activity up and down I-85 as a result of the core of the market being developed.”
That’s happening everywhere in the state. In the Midlands, Stomski said he’s seeing more developments move into western Lexington County and up I-77 into Chester County — the latter of which, like Cherokee County, also offers proximity to a Charlotte industrial market that’s bursting at the seams. And with central sites like Palmetto Commerce Park in North Charleston near capacity, the Lowcountry’s industrial footprint now stretches all the way into Orangeburg County, which is “extremely active,” Rumsey said. Walterboro along I-95 is another potential Charleston-area hotspot, he added.
It can take work to transform a parcel of land into a site suitable for a massive manufacturing plant or distribution center. Montgomery said Spartanburg County awarded a large portion of the funds it received from the American Rescue Plan Act to the Spartanburg Sewer District to build infrastructure to accommodate potential further industrial growth. And the state has been willing to offer incentive packages like the $1.2 billion used to coax Scout Motors to Richland County.
“The state is working feverishly to try and inject capital by way of federal and state incentives to provide for infrastructure building,” Rumsey said. “Because you can’t bring in an auto manufacturer or even a distribution facility without critical utility connections like sewer systems and storm water systems, which can cost $9 to $10 million for one site.”
Perhaps nowhere in the state is feeling the squeeze more acutely than Spartanburg County, South Carolina’s industrial heartland with over 80 million square feet of inventory. “Are there some sites available in Spartanburg County? Yes,” Hunt said. “But you may need a road improvement, or you may need a utility run, and you may be able to go to Cherokee County and find it for a lower price point. And so that’s why we’ve started to see that product move up.”
Of course, projects in development like the 300-acre Spartan Enterprise Park prove that Spartanburg County isn’t done yet. Like the industrial sector in the rest of the state, it’s just adjusting to a different reality. “It’s certainly getting harder to find sites,” Hall said. “But there are always opportunity if you’re willing to roll up your sleeves.”