Research & Forecast Report CHARLESTON, SC | Q4 2016

Tightening Market Leads to Shopping Center Repositioning

Bryana Mistretta Research Coordinator |

Key Takeaways >> With almost at full occupancy, centers are upgrading Market Indicators tenant mixes with better credit and concepts. Relative to prior period Q4 2016 Q1 2017* >> Specialty fitness boutiques are expanding rapidly. VACANCY

Shopping Centers are Repositioned NET ABSORPTION Landlords are repositioning their shopping centers to take CONSTRUCTION advantage of Charleston’s historically robust retail market. Strong RENTAL RATE** residential growth, a difficult regulatory environment and increasing Note: Construction is the change in Under Construction. land and construction costs make purchasing and repositioning *Projected shopping centers a more attractive option than building new **Rental rates for current quarter are for CBD. Rent forecast is for metro-wide rents. centers. Landlords are capitalizing on this by remodeling and renovating well positioned properties, upgrading their tenant mix and raising the rental rates and net operating incomes.

The rapid expansion of the population and tourism are the primary Summary Statistics drivers of the retail market in Charleston. Charleston’s population is Q4 2016 Charleston Retail Market Market expected to grow at a rate of 39 people per day over the next five years to more than 810,000 people, making it one of the fastest Vacancy Rate 6.2% growing in the nation. Tourism has grown substantially over the past 30 years, with 556 new hotel rooms added in the past two Change From Q3 2016 (basis points) -30 years and 1,300 more hotel rooms in the pipeline. Arrivals at the Absorption Charleston Airport are growing, too, reaching 1.9 million people, (Thousand Square Feet) 39.9 twice the number of arrivals ten years ago. Together, this growth New Construction demands increasing amounts of retail. Increased demand for retail (Thousand Square Feet) 0 space has brought the market vacancy to 6.2% and the average asking rental rate for shop space to $23.24 per square foot per Under Construction (Thousand Square Feet) 267 year (PSF/YR). These market fundamentals are attractive to those looking to reposition shopping centers. Asking Rents Per Square Foot Per Year Construction is booming across all property types in the market, creating a constrained labor market and higher labor costs. Suburban Shop Space $19.61 According to the Bureau of Labor Statistics, in South Carolina, Change From Q4 2015 6.6% average hourly wages in the construction sector have increased 28.5% to $23.00 per hour since November of 2007. Engineering News-Record (ENR) magazine analyzed the average cost of several specialized laborers in regions across the . In 2011, the hourly rate for labor in the Southeast ranged from $13.97 for business. Grocers and gyms co-occupying popular shopping general laborers to $23.77 for heavy equipment operators, and in centers provide the opportunity of convenience by giving customers 2016, the hourly rates increased to a range of $15.42 for general several types of products and services in one place. Over the last laborers to $28.00 for heavy equipment operators. five years, many shopping center owners and the grocery stores that anchor them have begun accepting gyms and boutique fitness Available land for retail development in the Charleston market is studios as co-tenants because they attract customers of a similar constrained by a tightening regulatory environment. New flood zone demographic. maps recently became effective, requiring new development to be at higher elevation, and wetlands protection has strengthened. Active fitness studios in the Charleston market include Koko FitClub, Additionally, residents are increasingly opposing new development Crunch Fitness, Pure Barre, Orangetheory, Journey Cycling, of all property types. These regulations and political opposition are 9Round, Bikram Yoga, Barre Evolution and Anytime Fitness. These prolonging the permitting process for new development, making the studios usually occupy between 2,000 and 3,500 square feet of reuse of existing properties even more attractive. space.

Capitalizing on these three factors, value add investors and existing >> Koko FitClub has two locations, one in the Sweetgrass Corner landlords are rushing to purchase and reposition well-located shopping center anchored by Bi-Lo and The Cigar Factory. retail properties. Typically, they are upgrading their tenant mix by >> Crunch Fitness has a location in the Promenade at Northwoods replacing older, local tenants with national and regional retailers. shopping center. They are also upgrading the façades, repaving parking lots and >> Pure Barre has three shopping center locations. adding landscaping and new signage. These improvements are resulting in increased net operating incomes and providing better >> Orangetheory Fitness has two locations, one in the Earthfare- retail experiences for the growing number of residents and tourists. anchored Summerville Marketplace and the other in the St. In particular, shopping center repositioning is driven by national Andrews Shopping Center anchored by . tenant activity in the market. Landlords are creating space to >> Journey Cycling is in the Six Mile Marketplace anchored by accommodate the interest by rebuilding big box spaces in their Harris Teeter. centers. Over the last ten years, shopping centers such as the >> 9Round has five locations throughout the market and one Northwoods Promenade, Westwood Plaza, and St. planned. Andrews Center were redeveloped. Most recently, Ashley Oaks, West Ashley Shoppes and Oakbrook Plaza have been purchased >> Bikram Yoga is located in the Harris Teeter-anchored Shoppes at and are under redevelopment. Seaside Farms. >> Anytime Fitness has four locations, including one in the Johns Fitness Boutiques Active in Market Island Shopping Center anchored by Bi-Lo. A move toward healthy living has popularized niche grocers like Cross-shopping has been a major influence on grocers loosening , Whole Foods and . It has also popularized use clauses and now welcoming fitness studios in their shopping specialty fitness studios. Many of these fitness studios are locating center. The presence of these boutique fitness studios has in turn near specialty grocers and attracting similar establishments like encouraged a co-tenancy with other health-focused tenants such as outdoor apparel stores and juice bars. This change has occurred vitamin and nutrient shops, juice bars and outdoor apparel shops. because of less restrictive landlord requirements and the As fitness studios gain popularity within the market, more will begin emergence of cross-shopping. occupying shop space in grocer-anchored shopping centers. Until recently, shopping centers anchored by grocers precluded gyms from occupying space in the center with use clauses in Charleston, SC Retail Submarkets their leases, due to the competition for parking spaces. These use clauses restrict the types of tenants that can occupy the shopping center or the products the tenants sell. However, the grocery market has changed in Charleston over the last decade. Previously 3 it was dominated by large chains like Bi-Lo, , , and Harris Teeter. Today, grocers have new competition for 4 the upper end of the market from niche grocers like Fresh Market 1 5 Downtown and Whole Foods. To capitalize on new traffic generated by the 2 2 East Cooper evolution of the fitness industry, grocers have become more willing 6 1 to loosen their use clauses to accept boutique fitness studios and 3 Berkeley 4 Summerville gyms as co-tenants. 7 5 North Charleston A shift towards healthy lifestyles and convenience shopping has also led to the emergence of cross-shopping, the act of parking 6 West Ashley in a shopping center with the purpose of visiting more than one 7 South Islands

2 South Carolina Research & Forecast Report | Q4 2016 | Charleston Retail | Colliers International Q4 2016 Retail Market Summary Statistics

Charleston, SC ANCHOR SPACE JR. ANCHOR SPACE SHOP SPACE (GREATER THAN 25,000 SF) (10,000-25,000 SF) (LESS THAN 10,000 SF) INVENTORY VACANCY RATE VACANT ASKING RENT VACANT ASKING RENT VACANT ASKING RENT MARKET (SF) (%) (SF) (NNN) (SF) (NNN) (SF) (NNN) Berkeley 1,299,055 3.2% - - - - 41,386 $14.70 East Cooper 3,572,252 6.2% 74,942 $14.59 10,000 $40.00 127,518 $24.09 King Street 851,374 10.3% 40,000 - - - 47,884 $58.33 North Charleston 3,908,074 9.1% 165,362 $10.00 37,596 $15.00 153,910 $15.57 Peninsula 165,647 ------South Islands 989,734 3.6% - - - - 36,032 $31.96 Summerville 2,344,925 2.3% - - - - 53,492 $18.53 West Ashley 2,209,996 6.9% 60,378 $10.00 31,400 $13.36 59,623 $18.79 Suburban Total 14,324,036 5.9% 300,682 $12.66 78,996 $18.81 471,961 $19.61 Market Total 15,175,410 6.2% 340,682 $12.66 78,996 $18.81 519,845 $23.27

Market Statistics North Charleston

The Charleston retail market continues to tighten. The market The vacancy rate decreased from 9.6% at the end of the third vacancy rate reached 6.2% at the end of the fourth quarter. The quarter to 9.1% at the end of this quarter. The average asking rental average asking rental rate for shop space was $23.27 per square rate for shop space was $15.57 PSF/YR NNN. foot per year triple net (PSF/YR NNN), up from $19.88 PSF/YR NNN at the start of 2016. Suburban vacancy is lower than the South Islands overall market at 5.9%. The average asking rental rate for shop The South Islands is the smallest submarket, with 984,000 square space in suburban shopping centers was $19.61, although asking feet of inventory. The vacancy rate was 3.6%, down from 3.9% last rents in some well-positioned centers have reached $40 PSF. quarter. The average asking rental rate for shop space was $31.96 King Street PSF/YR NNN, a 10.3% increase from the start of 2016.

King Street, stretching from Line Street to Broad Street, ended the Summerville fourth quarter with a vacancy rate of 10.3%. The average asking Retail is expanding rapidly in Summerville. The vacancy rate rental rate for shop space along the corridor is $58.33 PSF/YR was 2.3% at the end of the fourth quarter, a significant decrease NNN. The majority of the vacancy is due to the vacated Morris from 3.1% last quarter. The average asking rental rate for shop Sokol store, which is 40,000 square feet. The space is currently in space was $18.53 PSF/YR NNN at the end of the quarter, a 2.5% a design charrette to find a new use for the space. decrease from the third quarter due to fewer quality spaces Berkeley available in the highly demanded submarket. Construction has begun at the new Lowes Foods as part of the Oakbrook Plaza The vacancy rate at the end of the quarter was 3.2%, a slight redevelopment. increase from 3.0% at the end of the third quarter. The average asking rental rate for shop space was $14.70 PSF/YR NNN. The West Ashley vacancy rate is expected to increase slightly with the delivery of The average asking rental rate was $18.79 PSF/YR NNN for The Market at Carnes Crossroads, a 142,000-square-foot center. shop space, up from $17.28 PSF/YR NNN a year ago, an 8.7% has announced a 36,000-square-foot store for St.James increase. The vacancy rate was 6.9% at the end of the quarter. A Avenue next to the Crowfield Village Shopping Center. 45,000-square-foot Whole Foods was announced for the former East Cooper Dosher’s IGA on Savannah Highway.

The vacancy rate in this submarket was 5.9% at the end of the Suburban Average Asking Rental Rate | Shop Space fourth quarter, a slight decrease from 6.0% at the end of the third quarter. The average asking rental rate for shop space Q4 2015 $18.40 was $24.09 PSF/YR NNN, up from $22.23 PSF/YR NNN a year ago. Construction is progressing at The Market at Mill Creek, a Q3 2016 $19.92 78,000-square-foot Lowes Foods-anchored shopping center. Q4 2016 $19.61

3 South Carolina Research & Forecast Report | Q4 2016 | Charleston Retail | Colliers International ASHLEY OAKS RETAIL VILLAGE PHASE III

1119 WAPPOO ROAD Employment and Gross Retail Sales CHARLESTON, SOUTH CAROLINA Ashley Oaks Charleston’sPRE-RENOVATION growing IMAGE population- FOR REFERENCE and ONLY tourism sector drive gross retail sales. The Charleston – North Charleston Metropolitan Statistical Area (MSA) is the combined Berkeley County, Charleston County and Dorchester County. The South Carolina Department of Revenue reported gross retail sales as $3.5 billion for the month 12.12.2016 of June 2016 for the Charleston – North Charleston MSA, a 39.4% increase from the $2.1 billion reported in June of 2015.

A strengthening economy and growing number of major employers in the Charleston – North Charleston MSA has contributed to strengthening employment. Employment in the Charleston – North Charleston MSA was recorded as 347,400 people in September of 1 2016. Since September of 2015, 11,800 jobs have been added to the Source: Overcash Demmit Architecture DEMOLITION GENERAL NOTES SYM�OLS LEGEND VICINITY MAP ARCHITECTURAL STRUCTURAL ELECTRICAL

1. DASHED LINES INDICATE ITEMS TO BE DEMOLISHED. 1 A0.0 COVER SHEET 12.12.2016 MSA,2. WHERE a BUILDING3.5% ELEMENTS increase. NOT SPECIFIED TO BE REMOVED Over the last1 SIM two years, 23,800 jobs have OBSTRUCT DEMOLITION OR ALTERATIONS CALLED FOR, G.C. SHALL AE1�1 DETAIL TARGET A0.1 APPENDIX � 12.12.2016 NOTIFY ARCHITECT AND OWNER BEFORE PROCEEDING. 3. THE GENERAL CONTRACTOR SHALL FIELD VERIFY ALL EXISTING 1R�� been CONDITIONSadded, AND NOTIFY aTHE ARCHITECT7.4% OF ANY DISCREPANCIESincrease. WITH AE0.1 EXISTING PHOTOGRAPHY 12.12.2016 THE DRAWINGS, PRIOR TO BEGINNING ANY WORK OR ORDERING ANY

R �� R �� AE0.2 EXISTING SITE PLAN 12.12.2016 MATERIALS. 1 A1�1 1 ELEVATION TARGET ASHLEY OAKS RETAIL 4. ALL BUILDING COMPONENTS AND FINISHES WHICH ARE TO REMAIN IN AE1.1 EXISTING �UILDING FLOOR PLAN 12.12.2016 PLACE SHALL BE PROTECTED FROM DAMAGE, AND IF DAMAGED, SHALL 1 AE2.1 EXISTING �UILDING ELEVATIONS 12.12.2016 PHASE III BE REPAIRED OR REPLACED AT NO COST TO THE OWNER. 1R�� 5. ALL NEW OPENINGS IN FIRE RATED ASSEMBLIES SHALL CONFORM TO Charleston, SC MSA Employment Trends THE CURRENT SC BLDG CODE AS WELL AS OTHER APPLICABLE CODES. SIM 1 AD1.1 DEMOLITION FLOOR PLAN 12.12.2016 1119 WAPPOO ROAD �. COORDINATE ALL ACCESS POINTS WITH THE OWNER PRIOR TO 1 SECTION TARGET 1 AD2.1 DEMOLITION ELEVATIONS 12.12.2016 CHARLESTON, SOUTH CAROLINA BEGINNING ANY WORK. AE1�1 �. EMERGENCY EGRESS PATHS OUT OF THE FACILITY SHALL BE 1 AD3.1 DEMOLITION SECTIONS 12.12.2016 MarketMAINTAINED DURING CONSTRUCTION.Forecast 14 350 8. PATCH AND REPAIR HOLES IN EXISTING GYPSUM BOARD PARTITIONS FROM REMOVED EQUIPMENT, MECHANICAL AND ELECTRICAL DEVICES 1�1A DOOR NUMBER A0.2 �EFORE � AFTER RENOVATION 12.12.2016 AND OUTLETS, ATTACHMENTS, FURNISHINGS, ETC. A1.0 RENOVATED FLOOR SITEPLAN 12.12.2016 �. PATCH AND REPAIR ALL EXISTING CEILINGS, PARTITIONS AND FLOORS W�1 WINDOW SYMBOL TAG DISTURBED FOR NEW WORK AND FINISHES. 1 A1.1 RENOVATED FLOOR PLAN 12.12.2016 1�. GENERAL CONTRACTOR TO INSTALL DUST PARTITIONS - COORDINATE ROOM

1 A2.1 RENOVATED ELEVATIONS 12.12.2016 Total Non-Farm Employment (Thousands) LOCATIONS WITH OWNER. NAME ROOM NAME AND 12 1 A3.1 RENOVATED FACADE SECTIONS 12.12.2016 A growing11. REMOVE FROM SITE residential AS SOON AS POSSIBLE ALL DEMOLISHED population, 1�job1 FINISHcreation NUMBER and a thriving tourism MATERIALS, DEBRIS AND RUBBISH. DO NOT ACCUMULATE DEBRIS ON 1 A3.2 RENOVATED FACADE SECTIONS 12.12.2016 330 15� SF THE FLOOR OR AT THE SITE. N 1 A4.1 RENOVATED DETAILS 12.12.2016 12. THE ARCHITECT AND ENGINEERS HAVE MADE A REVIEW OF THE 1i INTERIOR WALL TYPE EXISTING CONDITIONS, BUT IT IS THE RESPONSIBILITY OF THE GENERAL 1 A5.1 DOOR � WINDOW SCHEDULE 12.12.2016 economyCONTRACTOR ANDwill ALL TRADES continue CONCERNED TO VERIFY ACTUAL to drive spending and expansion of retailers CONDITIONS AND DETAILS THAT WILL AFFECT NEW WORK AND TO NOTIFY THE ARCHITECT OF ANY DISCREPANCIES BEFORE BEGINNING COLUMN�REFERENCE ANY DEMOLITION OR CONSTRUCTION WORK. ��� GRID IDENTIFICATION 10 in the13. REMOVE Charleston EXISTING WALLS, DOORS, FLOORING area. AND CEILING FINISHESSeveral large master planned communities BACK TO BASE BUILDING SURFACES AS INDICATED. BEARING OR FLOOR ELEVATION 310 14. PATCH EXISTING FLOOR, WALL AND CEILING SURFACES IN AREA OF DEMOLITION AS NEEDED TO RECEIVE NEW FINISHES. ASSEMBLY TAG, SEE SHEET A1.�1 15. EXISTING FIRE ALARM DEVICES AND SPRINKLERS CONFLICTING WITH FOR WALL, ROOF AND FLOOR ISSUE : DATE in theNEW Summerville CONSTRUCTION TO BE RELOCATED BY GC ACCORDINGarea TO will lead to theASSEMBLIES continued expansion of the FOR PERMITTING :12.12.2016 GOVERNING LOCAL CODES. 8 1 01.20.201� 1�. FIRE PROTECTION SYSTEM TO REMAIN OPERATIONAL DURING � KEYNOTE TAG REVISIONS : CONSTRUCTION. --- : --- 1�. DEMOLITION OF PARTITIONS WITH ELECTRICAL DEVICES TO BE Charleston’s retail market to the west.FINISH TAGGrocers and other national --- : --- COORDINATED WITH ELECTRICAL CONTRACTOR. ELECTRICAL 290 TERMINATIONS TO BE PERFORMED BY ELECTRICAL CONTRACTOR. ------T1.18 TOILET ACCESSORY TAG : 18. WHERE EXISTING ELECTRICAL IS PERMANENTLY REMOVED, ALL --- ASSOCIATED BOXES, DEVICES AND WIRING TO BE REMOVED BACK TO --- : retailersSOURCE. EXISTING will CONDUIT lead THAT IS NOT ACCESSIBLEthe TOway BE in anchoring these large developments 6 --- : --- ABANDONED AFTER IT IS STRIPPED OF ALL WIRING. ------1�. WHEN REMOVING EXISTING VWC, DO NOT ALLOW PAPER SURFACE OF : DRYWALL TO BE TORN --- : --- 2�. GC TO CONTACT ARCHITECT CONCERNING ANY EXISTING MECH SUPPLY --- : --- and grocersOR RETURN GRILLS, DUCTING, will ETC. IN CONFLICTcontinue WITH NEW to expand in the other retail submarkets. CONSTRUCTION. GC IS RESPONSIBLE FOR RELOCATION OF CONFLICTING 270 --- : --- MECH EQUIP PER THE ARCHITECT� ENGINEER'S DIRECTION. --- : --- 21. GC IS RESPONSIBLE FOR REPAIR� REINSTALLATION OF ANY MECH, 4 DemandELECT, AUDIO for VISUAL, FIREspace PROTECTION EQUIPMENT, will ETC. THATcontinue IS to increase, leading to further --- : --- DAMAGED OR TEMPORARILY REMOVED DURING DEMOTION. 22. GC IS RESPONSIBLE FOR VERIFICATION AND PROPER RETENTION OF ALL EXISTING FIRE RATED STRUCTURE, WALLS, FLOORS, ETC WITH-IN SCOPE COVER SHEET- OF WORK. REPAIR DAMAGED FIRE RATED ASSEMBLIES AS REQ'D TO declineOBTAIN PROPERin RATING.market vacancy rates and escalating the average asking 2 250 DRAWING INDEX rental rates for retail spaces.

0 CURRY ENGINEERS, LLC �K CONSULTING, INC. 230 2612 LARCH LANE, SUITE 110 301 McCULLOUGH DRIVE, 4TH FLOOR Non-Farm Jobs Added Over 12 Months (thousands) Over Jobs Added Non-Farm MOUNT PLEASANT, SOUTH CAROLINA, 29466 CHARLOTTE, A0.0 843.849.9�55 EXT 26 980.2�2.2009 Copyright 2016 Overcash Demmitt Architects Around South Carolina ODA No. 152909.03 CADD File: 2909.02_A0.0 Dec-11 Apr-13 Apr-15 Apr-16 Apr-12 Apr-14 Dec-13 Dec-15 Dec-16 Dec-12 Dec-14 Aug-13 Aug-15 Aug-16 Aug-12 Aug-14 Growing populations across the state are leading to the expansion Total Jobs Added Total Employment and strengthening of existing retail nodes in South Carolina’s main Source: South Carolina Bureau of Labor Statistics retail markets. Grocers are continuing to expand in all markets along with other regional and national tenants. Commercial Real Estate Growth Cycle: Where the Columbia, South Carolina market stands and where it is going. NEW CONSTRUCTION >> Lowes Foods is building two stores in Lexington County, one RENTAL RATE at the corner of Augusta Highway and Charter Oaks Road and EMPLOYMENT another on the corner of Sunset Boulevard and Hope Ferry Road. OCCUPANCY is building two locations, on Two Notch Road PHASE 1: RECOVERY near Village at Sandhill and on Sunset Boulevard in Lexington.

PHASE 2: Greenville, South Carolina EXPANSION >> A 49,000-square-foot Lowes Foods will anchor the 17,000 COMMERCIAL square feet of shop space at the new Shoppes of Pelham. The REAL ESTATE Pelham Road corridor currently has just three grocer-anchored GROWTH shopping centers, all of which are at full occupancy. These new speculative retail spaces will meet the demand and raise asking CYCLE rental rates to a range between $29 and $30 NNN PSF/YR. PHASE 4: RECESSION PHASE 3: For more statewide commercial real estate news, check out our HYPERSUPPLY market reports at: www.colliers.com/southcarolina/insights

4 South Carolina Research & Forecast Report | Q4 2016 | Charleston Retail | Colliers International FOR MORE INFORMATION: 554 offices in Liz H. McCary Director of Marketing | South Carolina countries on +1 803 401 4269 66 [email protected] 6 continents Bryana Mistretta Research Coordinator | South Carolina United States: 153 +1 803 401 4252 Canada: 34 [email protected] Latin America: 24 Asia Pacific:231 CHARLESTON RETAIL PROFESSIONALS: John Orr, CCIM | Vice President EMEA: 112 +1 843 720 7504 [email protected]

Elyse Chubb Welch, CCIM | Brokerage Associate +1 843 720 7508 $2.5 [email protected] billion in annual revenue Colliers International | Charleston 25 Calhoun Street, Suite 220 Charleston, South Carolina | USA 2 +1 843 723 1202 billion square feet under management

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