Slowing Construction Pipeline Will Help Balance Supply-Demand Dynamics

Market Overview

The Greenville-Spartanburg industrial market absorption showed a robust increase to 1.7 million square feet of industrial space this quarter, nearly matching the combined net absorption of the previous two quarters and surpassing the Q3 2023 net absorption. New industrial space deliveries continue to a contribute to rising vacancy and availability in Class A inventory.  There are currently 3.8 million sq. ft. of speculative construction underway and expected to deliver by next year, while BTS projects are on the rise with 1.9 million square feet under construction, indicating fundamental advantages the Upstate can provide for specialized manufacturing groups, despite economic uncertainties during a typical election-year slowdown, additional interest rate cuts, sideline money and strong market fundamentals should fuel activity in 2025.  

 

Development Activity

Continued development deliveries over the past year and half have added over 21 million square feet of industrial space to the market, causing the steady rise in vacancy rates though they remain below 10%. The construction pipeline has now slowed to a fraction of the previous 3 years, which is expected to help balance industrial supply and demand, leaving just nine buildings, totaling 4.9 million square feet slated for delivery by year-end with no new starts this quarter. There are 3.8 million sq. ft. of speculative construction within six buildings slated to deliver next quarter. Also, build-to-suit projects have increased, with three BTS projects totaling 1.1 million square feet currently underway and slated to deliver next year. There is substantially less Class A vacancy outside of the Spartanburg West submarket than the rest of the market. The limited inventory in all other submarkets will likely drive new development in the near future.

 

Absorption & Leasing Activity

The Greenville-Spartanburg industrial market saw a significant recovery this quarter with a direct net absorption of 1.7 million sq. ft. This was primarily driven by a leasing velocity of 1.4 million sq. ft., largely from new leases, and a major owner-user sale at 1702 Springdale encompassing 566,479 sq. ft. This marks a positive absorption shift following a sluggish first half of 2024. Notably, the average lease transaction size increased by 30% to 83.8K sq. ft.

 

Capital Markets

This quarter the Greenville-Spartanburg industrial market recorded 25 industrial sale transactions over 10,000 sq. ft., two, of which were over 500K sq. ft. Notably, Augusta Grove Logistics Park 1 of 584K sq. ft. was purchased by MDH Partners for $60M at a capitalization rate of 6% which is currently occupied by Haier. In addition, the owner/user, R.E. Michel Company, purchased a 566,479 sq. ft., Class A distribution center located at 1702 Springdale Drive for $30M. The capital market sector has been slow to recover and there are currently not many investment sale opportunities within the market. However, sideline money, additional interest rate cuts and strong market fundamentals should unlock pent-up demand and fuel cap rate market sales in 2025.

 

Outlook

As the Federal Open Market Committee (FOMC) begins their long-anticipated rate rebalancing with a 50 bps cut in September, the economy seems to be reacting positively. This move combined with their signals of as much as another 50 bps cut by the end of the year has bolstered occupier sentiment and appears to be bringing some users off of the sidelines. This monetary easing, combined with ongoing economic growth, is expected to reinforce modest hiring and consumer spending, ultimately strengthening the commercial real estate market. Specifically, in the Greenville-Spartanburg area, demand for good functional product has increased significantly due to recycled capital and newly lower interest rates. Despite national economic uncertainties tied to the election year, the local market remains resilient, supported by ongoing expansions and a healthy number of new users in the market. This coupled with the strong market appeal and fundamentals mentioned below will continue to create activity into next year lending credibility to the optimistic industrial outlook in the Upstate.