Colliers Report: Columbia steadily moving toward development

Research & Forecast Report
Q1-2018 COLUMBIA | OFFICE

Crystal Baker Research Coordinator | South Carolina

To download the complete report: 2018 Q1 Office Columbia Report

Key Takeaways

• Upgrading spaces will raise rental rates and office property values, eventually pushing the market toward new development.
• Worker-readiness programs such as readySC and Apprenticeship Carolina prepare a workforce of customized talent.

Slowly growing

The Central Business District office vacancy is low at 11.56% for all classes of buildings, and while overall average full-service market rental rates are gradually on the rise within the Central Business District, there is a considerable rate gap between current rental rates and rental rates high enough to spur new downtown office development. However, the Columbia market dynamic is prime for development in every other aspect. There are several factors that contribute to creating an environment healthy for office development, such as: central location, strong economic drivers, economic and employment expansion, workforce readiness, and population growth.

Accessibility plays a key factor in many employers’ location decisions. Columbia is encircled by three major interstates: I-20, I-26 and I-77. The CBD is centrally located and easily accessible in relation to Columbia’s most desirable residential markets. In addition, Columbia’s base of strong economic drivers include some of the region’s largest employers, such as the State of South Carolina, Palmetto Health, the University of South Carolina, Blue Cross Blue Shield, Lexington Medical Center, Fort Jackson, Colonial Life, Amazon, Aflac and AgFirst Farm Credit Bank. Strong economic contributions create a robust market, which is critical to growing the local economy. During 2017, six major Columbia office buildings traded within 10 months, which is an indication investment is thriving in Columbia and has the attention of national institutional investors. Also, as of April 2018, the national economic growth is in its 106th month of recovery and consumer confidence is strong. According to the Bureau of Labor Statistics, Columbia office-using employment has increased 3.5% from December 2016 to December 2017, and there have been 2,900 office-using jobs added over the same 12-month period. As major global employers locate throughout South Carolina, they strive to hire employees who have the skillset to fill the positions needed. Apprenticeship Carolina and readySC are partnered with a network of five technical colleges within the Midlands area that provide workforce training and apprenticeship programs to ensure when employers locate in Columbia, they are provided capable, skilled employees. Finally, the optimism surrounding Columbia is attracting a growing population of millennials and young professionals. The Columbia population has grown 28.41% from 2000 to 2017 and, according to the Business Analyst Online demographics, is projected to reach a population of 878,113 by 2022. Despite the slow pace of rental rate increase, the Columbia market is development-ready in every other aspect due to its central location, strong economic drivers, workforce readiness, a growing economy and employment base, and increasing population.

Market Conditions

The Columbia office market is healthy with gradual rental increases and tenants moving around within the submarkets. The overall market absorption was negative 31,892 square feet which was mostly due to a Class A net negative absorption posting of 90,827, largely consisting of the 52,000 square feet which became available within one office building during this quarter. The Class B office market posted a net negative absorption of 11,862 square feet, while the Class C office market absorbed 70,835 square feet. The Forest Acres submarket posted an overall positive absorption of 25,262 square feet, of which, 46,744 square feet was absorbed within the Class C office sector; likewise, the St. Andrews Class C submarket absorbed 43,698 square feet. The overall market vacancy rate in Columbia remains stable at 11.74% which is only 3 basis points lower than the 2017 fourth quarter vacancy of 11.77%. The overall market average full-service rental rate increased slightly from $16.75 per square foot at the end of 2017 to $16.78 per square foot this quarter.

Columbia Business District (CBD)

The overall vacancy rate in the Central Business District dropped during the first quarter of 2018 to 11.56%, down from 12.07% at the end of the fourth quarter of 2017; Class A vacancy rate is also lower at 11.21%. While there is 93,912 square feet of sublease space available within the Central Business District, 41,092 square feet of the sublease space is within one building. At first glance it appears Columbia has a variety of sublease options, however, the space is limited and offers few possibilities. The overall quarterly absorption in the CBD is -5,989 square feet this quarter; Class A posted a net negative absorption of 18,129 square feet, but Class B office tenants absorbed 25,049 square feet. The overall average Central Business District market rental rate is $20.44 per square foot, which is higher than the rate at the end of last year of $20.36 per square foot. Similarly, average full-service office rental rates within the CBD increased from $22.92 per square foot at the end of last year to $22.97 per square foot this quarter and are expected to continue rising.

Suburban

Overall vacancy in the suburban submarkets is 11.85% and Class A vacancy is only 8.77%. The Class C office sector absorbed 83,744 square feet of space this quarter, while the Class A absorption posted a net negative 72,736 square feet which is mostly due to 52,000 square feet becoming available within the St. Andrews submarket. The suburban Class A average full service rental rate has remained steady at $19.07 per square foot, up just two cents from the fourth quarter of 2017; however, the overall average suburban full-service market rental rate has increased 46 basis points, from $14.61 per square foot last quarter up to $15.07 per square foot during the first quarter of 2018.

Significant Transactions

According to CoStar, the first quarter of 2018 began with 74 lease transactions and, of those transactions, renewals only comprised five of the leases while there were 69 new leases signed; most of the leases were under 10,000 square feet. There were also 22 building sales in Columbia, most of which were from 2,000 square feet to 10,000 square feet, from January through March of 2018.

Sales

• In January, the 10,000-square-foot office building located at 1911 Gadsden Street sold for $950,000.
• In February, 19 Technology Circle was sold for $1.65 million. It is a 12,996-square-foot, Class B office building within the Carolina Research Park in Northeast Columbia.
• 140 Dutchman Boulevard, a 7,500-square-foot office building, was sold in January for $550,000.

Office-Using Employment

Office-using employment, those jobs related to the professional and business services, financial activities and information sectors, is growing within the Columbia Metro Statistical Area (MSA). According to the most recent December 2017 data from the Bureau of Labor Statistics, there has been an increase of 2,900 office-using jobs over the last 12 months, which is a 3.5% annual increase.

Market Forecast

The Columbia market has tightened to the point of necessary change. Both the workforce and population continue to grow in Columbia. It is expected that Columbia landlords will upgrade current office spaces with considerable amenity additions and improvements in order to retain tenants looking to grow their workforce.

Trending amenities among millennials are: lounge areas, coffee and/or juice bars, healthy cafes, collaboration areas and fitness centers. This group of young professionals are ambitious, tech-savvy health-conscious and creative and do not value privacy and isolation as much baby boomers; therefore, office suite and amenity upgrades must appeal to those preferences in order to compete. In addition to enhanced amenities, a new trend in larger cities regarding office building maximization is the creation of spec suites. Spec suites are a new concept where landlords create several ready-to-move-in spec suites around a central, high-end, shared amenity. This enables suites to be quickly leased because they are move-in ready and tenants have access to a quality amenity they would normally be unable to afford. Once several spec suites lease, a business community is created within the building as the amenity is shared by neighboring businesses. This environment is attractive to young professionals and the way they prefer to work. No matter what amenity landlords choose to use as an upgrade, one thing is certain; adding building amenity upgrades will force rental rates to move upward.

As Columbia landlords upgrade their office buildings, the rent will steadily rise each quarter. Climbing rental rates are necessary before new development becomes feasible.

For additional commercial real estate news, check out our market reports here.

To download the complete report: 2018 Q1 Office Columbia Report

In January 2018, Colliers International benchmarked its office data set for South Carolina. The new standard includes: all office buildings 10,000 square feet or larger, except medical office and government-owned buildings; all single tenant office buildings; buildings in an expanded geography; data for all quarters beginning in Q4 2008; and excluding office condominiums. In addition, the submarkets are separated by class levels A, B and C (A being the highest quality space and C being of lesser quality), and are also divided into 2 divisions: Central Business District (CBD) and Suburban. The Central Business District submarket consists of a highly-populated business area with infrastructure and an office building/high-rise environment, which is often accompanied by heavy daytime foot traffic. A Suburban submarket is an area or town existing as a mixed-use community within commuting distance of a larger city. Due to the adjustments of the building inventory, comparison of data included in previously published market reports should be avoided.

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