Research & Forecast Report CHARLESTON, SC | RETAIL Q4 2016 Tightening Market Leads to Shopping Center Repositioning Bryana Mistretta Research Coordinator | South Carolina Key Takeaways > With the market 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 United States. 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 Harris Teeter. 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, Ashley Landing 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 Lowes Foods, Whole Foods and Earth Fare. 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, Piggly Wiggly, Food Lion, 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.