Tight economy, rising interest rates threaten to put brakes on speculative building
Featured in The Post & Courier
By David Wren dwren@postandcourier.com, Oct 30, 2022
A rendering shows the 50,000-square-foot speculative industrial building under construction at 2660 Carner Ave. in North Charleston. The building, about two miles from the Port of Charleston’s Leatherman Terminal, is scheduled for completion in May 2023. Bridge Commercial/Provided
Lenders are starting to give closer scrutiny to speculative warehouse deals in the Charleston region, potentially slowing a market that’s been running full steam ahead since before the pandemic.
“Developers are still bullish on the Charleston industrial market. However, lenders are pausing to evaluate the macroeconomic impacts of rising interest rates,” according to a report by commercial real estate firm Colliers.
“This discrepancy between developers and lenders is sending mixed messages,” the report states.
But banks and other lenders are notoriously risk averse, and their hesitancy to fund new projects could put unfinished projects at risk, despite what Colliers terms “robust developer interest.”
That’s in line with what Charleston industrial broker Hagood Morrison, with Bridge Commercial, told The Post and Courier earlier this month.
Morrison is marketing a new warehouse at 2660 Carner Ave. in North Charleston and a pair of warehouses that Illinois-based developer Janko Group is building in the Winding Woods Commerce Park on U.S. 78 near the intersection of Interstates 26 and 95 in St. George. He said financing issues could scuttle some warehouse developments that haven’t yet broken ground.
“If you’ve got your financing and you’re going, you’re going to be special,” he said.
Mike White, broker in charge of Charleston Industrial, said the fallout isn’t limited to the industrial sector.
“Many lenders are backing away from financing speculative construction, we see this across the spectrum of commercial real estate,” he said.
For example, White said he’s aware of a multifamily project in North Charleston that recently had its funding source pulled.
“Despite high demand and great returns for apartments, new construction is really tough to get terms for,” White said, adding that banks and other lenders are limiting their exposure to commercial real estate.
“I’m pursuing an office building refinance and acquisition and the local lender told me straight up that he couldn’t get approval unless it was a ‘locally sourced’ development team, meaning they had a pre-existing relationship with the borrower,” he said.
Despite the lending woes, demand for warehouse and distribution space remains unabated.
Tenants absorbed 1.42 million square feet of space during the third quarter, Colliers said, shy of the 1.58 square feet that hit the market during that period. Some of the biggest projects in the pipeline include a trio of Omni Industrial Park buildings — developed in a partnership between Stonemont and Clarius — totaling 1.35 million square feet; a 501,500-square-foot Portman Industrial project at Camp Hall Commerce Park; and an Eastport Distribution Center building at 322,400 square feet. All are scheduled to hit the market by the end of this year.
“We haven’t yet seen any let-up in warehouse demand,” White said.
An Oct 19 report by CBRE, a commercial real estate group, said Charleston-area “speculative construction has increased significantly in the last year,” with 6.5 million square feet coming online. That’s the biggest amount the region has ever seen, CBRE said, with speculative building accounting for 88 percent of all industrial warehouse construction. All told, the amount of industrial space available in the area has increased by 31.4 percent over the last five years.
Despite interest rate concerns and economic woes, CBRE remains bullish on future industrial development due to strong cargo growth at the Port of Charleston, a warehouse/distribution labor force that’s expected to grow by 9 percent over the next decade and continuing incentives and tax breaks that have totaled nearly $30 million in the past five years — or roughly $3,761 per new job in the sector.