By Molly Parker
Staff Writer

Residential real estate remains a rocky venture in Charleston and elsewhere, but the commercial side thus far has been spared a major downturn.

Some might even call it a bright spot on the local real estate market that has slowed with the rest of the country.

Hagood Morrison, the director of industrial real estate for Colliers Keenan of Charleston, said he expects that trend will continue in 2008.

Last year was marked by a strengthening of the manufacturing sector and a softening in the distribution center market, Morrison said.

“However, given the amount of assignments we are working on, (2008) should be a strong distribution center year,” Morrison said. “We foresee a lot of activity in the warehouse market both in terms of new product coming to market and tenants looking to absorb the product. I tend to think growth is fueled more by manufacturing than by pure retail distribution.”

The big question marks of the year, he said, are whether Ladson-based Force Protection Inc. continues on pace with the production of military vehicles, and if North Charleston aircraft manufacturers Vought Aircraft Industries and Global Aeronautica, which are helping construct Boeing’s 787, continue to grow.

“Those are the leaders in the industrial market,” he said. “What they do tends to affect a number of different downstream entities.”

The expected downturn in demand for military vehicles could lead to a vacancy in buildings housing smaller spin-off suppliers, Morrison predicted.

But on the flip side, he noted that several large industrial developers are expected to deliver “sorely needed” functional industrial space to the market, which could help grow the economy. 

“Just by virtue of those buildings going up, we’ll see more distribution center operators closely consider Charleston over competing ports because we have the distribution center buildings available,” he said.

The beginning construction phases of the new Charleston Naval Base terminal also will help bolster commercial real estate in 2008, he said. There is extraordinary demand for private port terminals for use in transporting raw materials to meet the growing demand for alternative fuels. A “For Sale” sign on the old Chevron Terminal in North Charleston generated mass interest, Morrison said.

After vetting some 40 prospective buyers, an alternative-fuel plant is poised to take over the 42-acre site that served as a lube-oil blending operation. It shut down last year, taking nearly 100 jobs with it.

“It’s under contract and scheduled to close shortly,” Morrison said of the deal, adding that he could not release the name of the purchasing company until all the paperwork is finalized. 

“It’s a big deal,” he said. “There was extraordinary interest.”

But commercial real estate is not completely shielded from the housing market’s slump. The office market, for instance, has been impacted as a number of residential real estate-related tenants are downsizing or seeking to sublease their office space.

Peter Fennelly, director of office brokerage for Colliers Keenan, said he expects more office space will become vacant because of speculative office development between 2005 and 2006 and the dramatic changes in the residential markets.

“I think the market for office is overcooked a little bit,” Fennelly said. “I think the purchase price for condos is a little rich for the cost. That has to settle in a little bit. With vacancy rates going up and rental rates flat, you may not see the return on that property for a long period of time.”

For the past four years, Fennelly said, the overall office market has maintained solid vacancy in the 10%-12% range, but he anticipates the vacancy rate will move to the 14% range in the first quarter of 2008 and perhaps beyond 15% by the third quarter of the year.

Still, several significant office space projects will be completed in 2008, most of them located in the lower North Charleston area. Those include the second phase of the Carriage Hill Executive Center, the Durlach Associates and Holder Properties’ new Faber Place Building and the Remount Business Center. 

“The bright spot in the overall office market continues to be the downtown office market with limited space available and no new projects to be delivered in 2008,” Fennelly said.

The downtown office space submarket should continue with a solid low vacancy rate in the 6%-8% range for most of the year, with rental rates remaining consistently in the full service $29-$30 per-square-foot range, he said. 

Molly Parker is a staff writer for the Business Journal. E-mail her directly at mparker@charlestonbusiness.com.  

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