Colliers Report: A tight Columbia market may lead to office transformation

Research & Forecast Report
Q3-2018 COLUMBIA | OFFICE

Key Takeaways

• The Columbia office market posted a high absorption this quarter, mainly within the CBD office market.
• Overall weighted asking rental rates are expected to be lower due to the lower quality of the remaining availabilities.
• Office buildings are evolving to keep up with coworking trends, technological advancements and healthy lifestyles.

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Coworking, technology and healthy initiatives drive office transformation

Office properties are evolving throughout primary U.S. markets due to coworking space popularity, enhanced technology and health-conscious initiatives; all three trends are interwoven with one another and are transforming the nature of the traditional office building.

Coworking is defined as a group of people (often from various companies) using a shared workspace. The popularity of this modern way of working is increasing exponentially. Not only does coworking allow start-ups and small businesses to work in open, contemporary spaces with amenities they may otherwise be unable to afford, it also provides larger companies the opportunity to “test the waters” in a new market by using swing space or a small satellite office prior to making a long-term commitment in a new location. In addition, office owners are able to upgrade and fully lease the remaining spaces in their buildings through the coworking model. Coworking spaces will differ from market to market, but will likely have the following similarities: high-end finishes, collaboration space and amenities; advanced technology, with the ability to work remotely; and 24-hour access to accommodate varying work hours.

Not only is workspace evolving, new forms of technology, such as driverless vehicles, may transform office buildings on a larger scale and sooner than expected. While this trend is still in the testing phases and it is indeterminable when it will turn from future hype to a real-world everyday application, if it continues as is expected in “fair-weather areas,” office building owners will need to plan ahead to successfully adapt to it. According to Forbes, Uber bought 24,000 SUVs from Volvo to form a fleet of driverless vehicles that could hit the roads as early as 2019. Due to driverless transportation and the future of less all day parking needs, office building owners may eventually transform excess garage space into mixed-use environments. This mixed-use model will increase building foot traffic and add various everyday conveniences while remaining lucrative to the garage owner.

In addition to the changes of coworking and technological advancements, employees are now more focused on healthy work lifestyles. Millennial employees constituted 35% of the workforce in 2017, which means there is roughly one Millennial out of every three employees. They are technologically, environmentally and health conscious. Many of the future office market changes will reflect Millennial values. Office properties are trending to be more flexible, with options for tenants such as: pet-friendly office buildings, garden areas and indoor/outdoor working centers, onsite fitness centers, convenient bicycle racks, fresh markets onsite, and chef-inspired fast casual dining options nearby, to name a few. Many of these amenities may eventually be created within the aforementioned converted garage space, thereby repurposing office building garages.

Office space throughout the U.S. is evolving to include coworking space options, enhanced technology leading to the development of excess garage space into mixed-use possibilities and health-geared office buildings. While some conversions are currently happening, others may be trends which will eventually reach the Columbia market and change the nature of Columbia office buildings.

Market Conditions

The competitive Columbia office market has 16.19 million square feet within eight submarkets. Currently, 30,000 square feet of suburban office space is under construction. The overall quarterly market absorption was 137,511 square feet during the third quarter of 2018. The majority of absorption was within the central business district; 66,510 square feet was located within three buildings: the First Base Building; 1600 Williams Street and 1732-1734 Main Street. The Columbia market vacancy rate dropped considerably during the third quarter to 10.86%, down 86 basis points from last quarter and 12.06% lower than it was one year ago. The overall average market full-service rental was $15.97 per square foot during the third quarter of 2018, which is 2.50% lower than the second quarter of 2018 and may be due to the lower quality of the remaining available space.

Columbia Business District (CBD)

The Columbia Central Business District has 97 buildings totaling 5.69 million square feet within the market. The vacancy rate within the CBD dropped from 11.34% during the second quarter of 2018 to 9.54% this quarter; likewise, Class A vacancy is also lower, down from 10.12% during the second quarter to 9.54% this quarter due to 38,264 square feet of Class A office space absorption. The overall CBD submarket absorbed an astounding 102,695 square feet of office space this quarter. The average weighted rental rate rose from $20.49 per square foot during the second quarter of this year to $20.52 per square foot this quarter. However, Class A weighted rental rates dropped slightly from $22.32 per square foot during the second quarter of 2018 to $22.04 per square foot during the third quarter of 2018. Because rental rates are weighted based on the available remaining space, unless high quality space becomes available, the rental rates will likely continue to be lower in the coming quarters.

Suburban

The Columbia suburban market consists of 225 buildings totaling 10.49 million square feet, and there is currently a 30,000-square-foot office building under construction in the Cayce/West Columbia submarket. The suburban submarket vacancy rate fell from 11.92% during the second quarter of 2018 to 11.58% during the third quarter, and the overall market absorption was 35,947 square feet. Class A office buildings within the suburban submarkets posted an absorption of 38,252 square feet this quarter, and the vacancy rate dropped to 6.55% during the third quarter from 8.48% last quarter. The average weighted rental rates within the suburban submarkets averaged $14.75 per square foot, and Class A suburban rental rates rose from $19.03 per square foot last quarter to $19.27 per square foot this quarter for the remaining available suburban office space.

Significant Transactions

According to CoStar, the third quarter of 2018 began with 26 sale transactions, including two portfolio sales: Synergy Business Park in Columbia sold for $24.25 million and 201 and 203 West Main Street in Lexington was purchased for $2.7 million. There were also 47 leases signed in Columbia from July through September of 2018, most of which ranged between 2,000 and 4,000 square feet. The two largest leases this quarter were both by tenants who wish to remain undisclosed: an 18,200-square-foot office tenant at 1001 Pinnacle Point Drive; and a 12,000-square-foot office sublessor at 1 Harbison Way.

Sales

• A 7,400-square-foot medical office building located at 3630 Sunset Boulevard in West Columbia was purchased by CNA Development, LLC for $1.32 million.
• A 36,377-square-foot, Class B office building located at 6941 Trenholm Road in Columbia was purchased by Olmstead US LLC for $1.29 million.

Construction Pipeline

The Columbia Central Business District has no construction underway; however, there is one building within the Cayce/West Columbia submarket currently under construction.

Under Construction

• A 30,000-square-foot West Columbia office building located at 100 Corporate Boulevard is under construction and, according to CoStar, is expected to deliver during November of 2018.

Office-Using Employment

Office-using employment are those jobs related to the professional and business services, financial activities and information sectors. According to the most recent July 2018 data from the Bureau of Labor Statistics, Columbia office-using employment totals 86,200 this quarter, which is 700 additional office-using jobs than this time last year. Total non-farm employment during the third quarter of 2018 was 402,500 within the Columbia Metro Statistical Area (MSA) and there have been 2,100 non-farm employment jobs added in the past 12 months. As of July, 2018, the unemployment rate in Columbia was 3.4%; that is the lowest it has been in over 10 years.

Market Forecast

The Columbia office market remains tight, with few quality spaces available to lease; this will cause the weighted market rental rate average to decline until the remaining spaces are updated or upgraded space becomes available. In addition to general suite upgrades, Columbia will begin to see office building transformations, which are beginning to occur in primary markets throughout the U.S. In order to keep up with coworking trends and technological advancements, parking garage space may eventually be developed into a mixed-use areas if the driverless car trend becomes an everyday reality. Also, office buildings will be geared toward healthy initiatives by creating more outdoor work spaces, pet-friendly environments, fast casual eating options, coffee shops or juice bars, onsite shopping, and flexible building access to accommodate the varying work schedules of Millennial employees. With no significant new construction planned for the Columbia office market and owners hesitant to build due to the rise of construction costs, the conversion of remaining building areas may be the newest trend to look for within Columbia office buildings.