Rental Rates Reach Record-High Levels as Retailers Grow
- Retailer interest remains strong, supporting new construction throughout the market.
- Declining vacancy and increasing development costs are driving rental rates to historically-high levels.
- Demand for retail space exceeds existing inventory.
- Residential growth and recent job announcements are driving suburban growth while tourism remains beneficial for downtown retailers.
- Gross retail sales are up over the previous year in Charleston and Dorchester counties.
A growing residential population, improving economy, favorable demographics and tourism are supporting significant growth throughout the Charleston, South Carolina retail market. The second quarter of 2015 ended with a vacancy rate of 5.1% for the market, down from 5.5% the previous quarter. Absorption has been limited in recent quarters given the few options for space. Retailers want to locate along prime retail corridors with high-traffic and visibility. As space at these desirable locations becomes increasingly difficult to find, many retailers are backfilling vacant space or signing leases for new centers, which remain under construction. New construction coupled with increasing land and development costs are yielding higher rental rates than those seen in the past.
As of mid-year 2015, asking rental rates for shop space in the suburbs averaged $18.40 NNN, increasing from $18.21 NNN the previous quarter and $16.35 NNN one year ago. King Street tenants are seeing rental rates higher than ever with asking rental rates averaging between $45 NNN and $75 NNN. Shop space along Upper King remains the most affordable averaging $45.00 NNN. Middle King, the highly occupied and popular stretch of shop space, averages $75.00 NNN. Space along Lower King averaged $55.00 NNN.
Gross Retail Sales
According to the South Carolina Department of Revenue, gross retail sales for the Charleston-North Charleston, SC MSA totaled $1.9 billion in May 2015, down slightly over the previous year but up 5.3% from May 2013. Charleston County accounts for 65.7% of the MSA’s gross retail sales and reported total sales of $1.3 billion in May 2015. Sales in Dorchester County increased 24.0% from May 2014 to May 2015 and 33.4% since May 2012. Over the past year, a growth in residential development has generated a greater demand for retail services in Dorchester County.
Downtown Rental Rates are Setting New Records as Tourism Attracts Retailers
Downtown Charleston, specifically King Street, remains a popular destination for tourists and locals alike. The entertainment district, full of restaurants, dessert cafes, bars and boutiques, is growing increasingly dense with limited options remaining for tenants looking for space. Several spaces were vacated during the second quarter of 2015, but quickly backfilled as demand far exceeds available space. The vacancy rate was 3.3% for the Downtown submarket at mid-year 2015. Strong competition among retailers is driving up rental rates to levels never before seen in the submarket. At mid-year 2015, asking rates for shop space along King Street averaged $52.20 NNN.
Construction is nearing completion at Midtown, the cornerstone of Upper King Street. The development will consist of approximately 16,000 square feet of retail and restaurant space, a dual-branded Hyatt House and Hyatt Place Hotel, and a seven-story parking garage. The development is expected to attract increased activity to Upper King Street.
The Millennium Music Building redevelopment recently completed construction. Carolina Ale House, Chipotle and Walgreens are open at the development. MOD Pizza will also occupy space at the building.
Retailers Grow Suburban Presence
Demand is strong for suburban retail space as the area’s residential population grows. Recent job announcements from Volvo and Mercedes-Benz Vans will bring 5,300 new jobs to the area over the next decade. A larger residential population and labor force means greater disposable income and more demand for retail services. Grocers and restaurants are responding by expanding their footprints in the market.
- The region’s second Walmart Neighborhood Market recently opened at St. James Avenue in Goose Creek. Two other stores remain under construction in North Charleston and Summerville. The first store in the area opened in May on Red Bank Road in Goose Creek.
- Chipotle, which currently has two locations in the market, is looking to expand. The fast-casual restaurant is redeveloping a former mattress store at 4953 Centre Pointe Drive and a former Chinese diner at 2051 Sam Rittenberg Boulevard. Chipotle also plans to open future stores in West Ashley, Summerville and Mount Pleasant.
- Harris Teeter plans to open at Westwood Plaza in West Ashley. Space became available for the grocer due to Office Depot downsizing and the relocation of T.J. Maxx within the center. Construction is set to begin later this year and complete within 18 months.
Strong interest and activity in the suburban retail submarket contributed a vacancy rate of 5.2% at the end of the second quarter of 2015, down from 5.5% the previous quarter and 6.7% one year ago. Given the limited options for space, retailers are finding themselves competing for preferred locations while new construction and redevelopment activity gains momentum to meet retailers’ needs.
- Construction continues on Horizon Square at 1101 N. Main Street in Summerville. The center will be anchored by Earth Fare and PetCo. Other tenants include Crust Wood Fired Pizza, Petco and Dunkin’ Donuts and Mattress Pro.
- Nordstrom Rack plans to open September 3rd at Bowman Place, the former K-Mart redevelopment in Mount Pleasant. Dick’s Sporting Goods is already open at the redevelopment located at Johnnie Dodds Boulevard and Bowman Road. The center will also be home to DSW and Kitchen & Company, which will open later this year.
- Hobby Lobby plans to backfill the former Sports Authority space in North Charleston. The 55,000 square-foot space at The Promenade at Northwoods will undergo renovations for Hobby Lobby, which will open early in 2016. Last year, Gander Mountain moved into the former Marshalls space at the center.
- Pawley’s Front Port closed at Belle Hall Shopping Center in Mount Pleasant.
- Breizh Pan’ Crepes recently opened at 39 George Street, the former Freshberry space.
- Ruth’s Chris Steak House recently opened at 55 S. Market Street.
- Cortaditos Cuban Cafe plans to open in August at 616 Meeting Street, backfilling the former Ike’s Hot Fish and Chicken space.
- The Shoppes at Azalea, across the street from Azalea Square Shopping Center, in Summerville was acquired for $5.2 million. The 12,000 square-foot center is fully leased to Moe’s Southwest Grill, Chicken Salad Chick, Great Clips and TCBY among other retailers.
The Charleston retail market is poised for continued success given the region’s strong tourism industry, improving economy and labor market and growing residential population. Vacancy is expected to decline further as demand for space grows. Land and construction costs are rising, which will further contribute to climbing rental rates. Investment sales are likely given the tight market and current low interest rates.
Around the State
Retail development is on the rise throughout South Carolina with new ground-up construction and redevelopments. Retailers are expanding their footprints and entering new markets with multiple planned locations.
Columbia, South Carolina
- South Carolina’s first Kroger Marketplace recently broke ground at Killian’s Crossing in Northeast Columbia. The store will offer bed and bath selections, baby goods, a jewelry counter, home fashion and more, in addition to its fresh foods. The store will also have Kroger Fuel. Other tenants locating at Killian’s Crossing include Chick-fil-A, Applebee’s, McDonald’s and Panda Express. The lifestyle center is located at I-77 and Killian Road and offers 400 acres of retail, residential and commercial space.
- Walmart Neighborhood Market plans to enter the Columbia market with two locations. The stores will be located at 3533 Broad River Road and in Cayce at Knox Abbott Drive and Charleston Highway. Walmart Neighborhood Market stores are typically approximately 40,000 square feet, one-fourth the size of Walmart Supercenter.
- Landmark Square, located at I-77 and Garners Ferry Road, is getting a major face-lift. The shopping center is undergoing renovations and will be home to Ross Dress for Less and Burkes Outlet in the fall. The retailers will be backfilling vacant space. Burkes Outlet will occupy approximately 23,000 square feet and Ross Dress for Less will occupy approximately 27,000 square feet.
Greenville, South Carolina
- Lowes Food, which recently announced plans to enter the Upstate market, has found a site at the intersection of Suber Road and Hammett Bridge Road for its new home.
- Walmart Neighborhood Market in Anderson is nearing completion. The 41,000 square-foot store will be the first in Anderson and is located at Highway 81 and Reed Road.
- Demolition is underway at Lewis Plaza, which will be anchored by Harris Teeter’s new two-story, 53,000 square-foot grocery store.
For more statewide commercial real estate news, check out our market reports at: www.colliers.com/southcarolina/insights
To download the complete report: Q2 2015 Charleston Retail Market Report.