Research & Forecast Report CHARLESTON, SC | RETAIL Q1 2017 Food Halls Arrive in Charleston Bryana Mistretta Research Coordinator | South Carolina Key Takeaways > The food hall trend arrives in Charleston. Market Indicators > With the market almost at full occupancy, centers are upgrading Relative to prior period Q1 2017 Q2 2017* tenant mixes with better credit and concepts. VACANCY Food Hall Trend Arrives in Charleston NET ABSORPTION CONSTRUCTION Food halls, like its suburban cousin, the mall food court, are an ensemble of restaurants in a central location with a communal RENTAL RATE** dining area, yet are going a step above your typical fast-casual Note: Construction is the change in Under Construction. restaurants. Food halls are fostering the growth of entrepreneurial *Projected **Rental rates for current quarter are for CBD. Rent forecast is for metro-wide rents. chefs and start-up restaurants by reducing the cost of opening a brick-and-mortar site. The concept, popular nationally in primary markets, is a part of the larger experiential retail trend and is beginning to appear in the Charleston market. Food halls have evolved in larger cities from outdoor markets to Summary Statistics Q1 2017 Charleston Retail Market Market Downtown Suburban indoor, serving fewer raw ingredients and more finished, specialty food products. Popular food halls include Eataly, Ferry Building Vacancy Rate 9.3% 3.7% 9.5% Marketplace in San Francisco, Pike Place Market in Seattle and Reading Terminal Market in Philadelphia. Success of these food Change From Q1 2016 (basis points) - -20 - halls has led to several smaller scale versions in cities like Atlanta, Absorption Raleigh, Washington, D.C., Houston and Dallas. (Thousand Square Feet) 49.6 76.8 -27.2 The food hall trend took off soon after the recession in 2008 as an New Construction (Thousand Square Feet) - - - opportunity for start-up restaurant concepts to build their brand. Under Construction Food halls can have multiple locations such as Eataly with locations 189.4 - 189.4 in New York, Boston, Los Angeles and Chicago or a single location, (Thousand Square Feet) owned by a company, that leases stalls with different levels of Asking Rents efficiencies such as access to a shared kitchen, private kitchen, or Per Square Foot Per Year preparation station. The restaurants leasing spaces in these venues Shop Space are new, local restaurant concepts with a focus on providing an $14.13 $24.15 $13.79 experience to customers by offering specialty foods and drinks that Change From Q4 2016 -0.4% 4.8% -0.9% blend the healthy, local foods trend with cultural experiences. Food halls, although not a new concept nationally, are to the than building new centers. Landlords and value-add investors Charleston market. The first to open in Charleston was Mercantile are capitalizing on this by remodeling and renovating well at The Cigar Factory in 2015, the second is the recently completed, positioned properties, upgrading their tenant mix and raising the Pacific Box and Crate project on King Street. The project is 130,000 rental rates and net operating incomes. Typical improvements square feet of office space including a 10,000-square-foot food hall. include upgrading the façades, repaving parking lots and adding The food hall, called Workshop, has six start-up restaurants: Bad landscaping and new signage, although some landlords are creating Wolf Coffee, JD Loves Cheese, Kite Noodle, Slice Co., Pink Bellies space to accommodate the interest from national and regional and Juan Luis. The trend is spreading with other food halls planned tenants by creating new big box spaces in their centers. Other in the market. landlords are upgrading the tenant mix by replacing older, local tenants with national and regional retailers. These improvements Charleston Reaches Full Occupancy are resulting in increased net operating incomes and providing better retail experiences for the growing number of residents and The Charleston retail market is booming with activity from national tourists. Examples include shopping centers such as Northwoods and regional retail tenants leading to higher occupancy in major Promenade, Westwood Plaza, Ashley Landing and St. Andrews retail corridors and record high rental rates across the market. Center that were redeveloped over the last ten years. Most recently, These strong market fundamentals have encouraged landlords to Ashley Oaks, West Ashley Shoppes and Oakbrook Plaza have been upgrade their tenant mix and quality to increase the net operating purchased and are undergoing a redevelopment and repositioning. income at their properties, which are gaining attention from investors. Higher asking rental rates for retail spaces in Charleston The population of the Charleston-North Charleston Metropolitan are supported by the ever-growing population and the increasing Statistical Area was recorded as 664,607 people in the 2010 average household income. census. In July of 2016, the estimated population of the MSA was 739,000 people and was projected to be 810,000 people by 2021, In the first quarter of 2014, the overall market vacancy for retail an increase of approximately 39 people per day over the next 5 space in Charleston was 7.9%, this quarter it was recorded as years. The growth will occur primarily in the 35 - 44 and 75 - 84 5.9% with the absorption of 572,300 square feet in three years. age groups. Additionally, the average household income is expected More significant is the increase in average asking rental rates for to increase by 9.5% to $79,189 over the same time, likely due to the retail space in the market. The Charleston market has seen record increase in local employment. According to March 2017 data from high average asking rental rates for the last six quarters for shop the Bureau of Labor Statistics, 11,300 jobs have been added in the space, reaching $21.40 PSF/YR this quarter. At the end of the third MSA over the last 12 months bringing total non-farm employment quarter of 2015 the asking rental rate was $17.94 PSF/YR, 19.3% to 354,300 jobs. lower than today. In high-demand submarkets like Summerville, the average asking rental rate for shop space is approaching $23.00 National and regional tenants such as Planet fitness, Harbor Freight and the South Islands is nearly $31.00. In comparison, the less Tools, Aldi, Harris Teeter and Moe’s Southwest Grill have expanded commercialized, Berkley submarket has an average of $14.25 PSF/ within the market, announcing or moving into new locations. YR, yet is still up by 15.8% from the third quarter of 2015. Other retailers such as Lowes Foods, Lidl, Hobby Lobby, Academy Sports and Burlington Coat Factory are also active in the market. Strong residential growth, a difficult regulatory environment Continued increase in demand from national and regional tenants, and increasing land and construction costs make purchasing improvements to existing shopping centers and growth of the and repositioning shopping centers a more attractive option population are expected to raise average asking rental rates further. Workshop Exterior | Pacific Box and Crate Workshop Interior | Pacific Box and Crate 2 South Carolina Research & Forecast Report | Q1 2017 | Charleston Retail | Colliers International Q1 2017 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 2.9% - - - - 37,566 $14.25 East Cooper 3,572,252 6.7% 109,262 $18.82 10,000 $40.00 109,678 $24.44 King Street 918,974 10.6% 40,000 - - - 56,976 $58.33 North Charleston 3,908,074 8.0% 90,548 $10.00 50,686 $15.00 172,345 $16.55 Peninsula 165,647 - - - - - - - South Islands 989,734 3.1% - - - - 30,417 $30.98 Summerville 2,344,925 4.4% - - 23,500 $16.57 80,000 $22.69 West Ashley 2,209,996 5.9% 31,762 31,400 $14.60 67,699 $21.03 Suburban Total 14,324,036 5.9% 231,572 $17.14 115,586 $18.63 497,705 $21.40 Market Total 15,175,410 6.2% 271,572 $17.14 115,586 $18.63 554,681 $26.50 Market Statistics North Charleston The Charleston retail market continues to tighten. The market The vacancy rate decreased from 9.1% at the end of the fourth vacancy rate reached 6.2% at the end of the first quarter of 2017. quarter to 8.0% at the end of this quarter. The average asking The overall average asking rental rate for shop space was $26.50 rental rate for shop space was $16.55 NNN PSF/YR, a 2.7% triple net per square foot per year (NNN PSF/YR), up from $19.88 increase since last quarter . NNN PSF/YR at the start of 2016. Suburban vacancy is lower than the overall market at 5.9%. The average asking rental rate for shop South Islands space in suburban shopping centers was $21.40, although asking The South Islands is the smallest submarket, with 984,000 square rents in some well-positioned centers have reached $40 PSF. feet of inventory. The vacancy rate was 3.1%, down from 3.6% last King Street quarter. The average asking rental rate for shop space was $30.98 NNN PSF/YR, a 6.9% increase in one year. King Street, stretching from Line Street to Broad Street, ended the first quarter with a vacancy rate of 10.6%. The average asking Summerville rental rate for shop space along the corridor is $58.33 NNN PSF/ Retail is expanding rapidly in the highly demanded Summerville YR.