Significant Demand Drives Capital Investments

Colliers International – South Carolina
Research & Forecast Report
Charleston: Office, Q3 2015

 

Key Takeaways

• Demand for office space in Charleston, South Carolina is strong, contributing to declining vacancy rates, soaring rental rates and capital investments.
• Vacancy rates are at historical lows and rental rates are rising as landlords seek control of the market.
• Construction activity is gaining momentum with several projects under construction and in the pipeline.
• Office-using employment is growing and is at an all-time high with 70,300 jobs in August 2015.

 

To download the complete report: Q3 2015 Charleston Office Market Report.

 

Vacancy Continues to Tighten

An improving economy and job market coupled with above average population growth is driving demand for office space throughout the Charleston, SC office market.  All office-using sectors are showing equal interest in the market with users seeking anywhere from 5,000 to over 100,000 square feet of office space.  While downsizing was a common trend during the recent economic downturn, companies are once again expanding and expressing a need for larger blocks of office space.  Numerous Fortune 500 companies belonging to the finance, insurance and technology sectors, among others, are showing interest with the potential of establishing headquarters in the market.

The overall vacancy rate for the office market was down to 9.4% from 9.9% at mid-year and 11.6% one year ago.  Interest is strong, but tenants are limited by the few remaining options for quality space.  Leasing velocity was strong throughout the third quarter contributing to a net absorption of approximately 267,000 square feet for the market.  The significant absorption is the combined result of two new buildings adding occupied space to the market’s existing inventory and several leases throughout the market.

 

Central Business District Submarket

Charleston’s Central Business District (CBD) continues to improve and ended the third quarter of 2015 with a total vacancy rate of 10.6%, down from 11.1% at mid-year 2015.  Construction recently completed on two downtown projects, Midtown and the Cigar Factor, which collectively add approximately 170,000 square feet of office space to the existing inventory.  Growing demand for space in the CBD continues to be reflected in rising rental rates, which averaged $31.75 per square foot per year at the end of the third quarter, increasing significantly from $28.68 per square foot one year ago.  Class A and B asking rental rates averaged $34.69 and $30.59, respectively, setting new record-high rates for the submarket.

 

Suburban Submarkets

Charleston’s suburban submarkets continue to welcome activity given the limited availability in the CBD and the growing suburban labor force.  A recent study by the University of Montreal found a strong correlation between employee commute time and job burnout.  Traffic is increasing along I-26, generating commute times of an hour and a half for some employees traveling from their home in Summerville to the CBD for work.  As traffic conditions worsen and the suburban population grows, office development and demand will likely expand towards Summerville where thousands of homes are currently under construction.

The third quarter of 2015 ended with a vacancy rate of 9.2% for the suburban submarkets, down from 9.7% at mid-year 2015.  The suburban submarkets appeal to a larger array of prospects as rental rates remain significantly lower than CBD rates despite increases over recent quarters.  Asking rental rates for suburban office space averaged $20.61 per square foot with Class A and B asking rental rates averaging $25.72 and $19.43, respectively.

The Mount Pleasant and Summerville submarkets are home to some of the highest asking rental rates in the suburban submarkets.  Rental rates averaged $26.84 per square foot and $22.11 per square foot, respectively, at the end of the third quarter of 2015.

 

Rental Rates on the Upswing

A strong sense of competition is becoming apparent as tenants are competing for space.  Tenants must consider space options well in advance of their anticipated move-in date.  Leases are being signed at a faster pace than the past as tenants fear losing their opportunity if they hesitate.  Landlords see the competition and have the upper hand, controlling rental rates and offering limited to no concessions.  Suburban rental rates for Class A space are expected to increase drastically in the upcoming quarters, and may near $30 per square foot.  Scarcity of available space in the CBD coupled with competition for land from hotel and retail developers, is pushing up rental rates, which are expected to exceed $40 per square foot in the near future.

 

Prime for Investment

As vacancy rates decline and occupancy costs increase with growing demand for space, the market is well positioned for various investment opportunities.

• Investment sales are receiving top dollar.  2015 office sales totaled more than $70 million at the end of the third quarter.  A 65,000 square-foot, Class A, suburban office building, 3955 Faber Place Drive, was acquired in August for roughly $13 million, or $196 per square foot.  The sale price per square foot is significantly higher than past suburban sale prices and is expected to increase further, exceeding $200 per square foot, as rental rates continue to increase.  A new threshold for sale prices and rental rates is expected to be witnessed throughout the market.  Given the tight market, returns on investments are secure and rewarding, attracting investors that once only looked at larger markets.
• Developers are investing in new construction.  Responding to the growing demand for space, developers are taking advantage of the tight market and investing in new speculative construction.  While still limited, development is expected to pick up as current projects prove successful in pre-leasing.
• Investors are redeveloping older buildings in adaptive reuse developments.  Markets across the nation are seeing adaptive reuse projects of older, outdated office and warehouse buildings as modern space with a cool-factor gains popularity.  Charleston is making a name for itself among the growing tech industry and has a growing Gen-Y population, driving interest to such adaptive reuse projects.  The projects generally offer open floor plans with work benches and collaborative spaces.
• Given the high lease rates in the market, some users are finding it more feasible to purchase older buildings for occupancy.  Some are investing in building renovations and up-fits while others are occupying the buildings with minimal changes.

 

 

New Development in the Pipeline

The evident demand for space is driving an uptick in construction, which remains limited to a few projects.  Current and recently completed projects do not offer a sufficient amount of space to meet the substantial demand for space, and thus additional construction is essential for growth.  Several planned and proposed projects are in the pipeline.

1. The Nexton development in Summerville is home to two of the market’s newest Class A office buildings.  The South Carolina Research Authority (SCRA) building delivered late in 2014.  The 75,000 square-foot office building experienced significant interest and is 100% occupied.  Building I at Nexton is also complete and offers up to 55,000 square feet of Class A space for lease.
2. Midtown, the cornerstone of Upper King Street, is ready for occupancy and offers 19,600 square feet of office space.
3. Holder Properties recently completed construction on 1 Central Island Plaza, located in the Daniel Island submarket.  The Class A, 75,000 square-foot office building delivered at approximately 75% occupancy and is expected to reach full occupancy.
4. Construction is underway on Faber Plaza in North Charleston.  The 5-story, 125,000 square-foot, Class A office building, located at 4400 Leeds Avenue in Faber Place, is being developed by Durlach Associates and Trinity Capital Advisors and is expected to deliver Spring 2016.
5. Renovations are underway at the former U.S. Naval office building at 2260 Noisette Boulevard in North Charleston.  The 6-story building will offer 156,000 square feet of office space for lease.
6. Phase I of Courier Square, a mixed-use development to include office space and ground-level retail is under construction.  The 5-story, 90,000 square-foot building is located at Columbus and Meeting streets downtown.  A 644-space parking deck is planned to accommodate tenants.
7. WestEdge is among the newest proposed projects in the market.  The development, formerly known as the Horizon Project, will be located near the Medical University of South Carolina.  Plans involve a long-term, multi-phase project to be completed in 12 to 15 years.  10 WestEdge, the first of two buildings at the campus, will be an 8-story building to include a grocery store, retail and restaurant space on the ground floor, approximately 350 apartment units and a 5-story parking garage.  22 WestEdge will be an 8-story, 151,000 square-foot research and office building.  The development is likely to target the growing biotechnology industry.

The Upper Peninsula area, also known as “The Neck”, is transforming into a growing tech hub motivating development of projects such as Flagship 3 and Half Mile North.  Tech companies look for flexible lease terms and are drawn to modern, collaborative work spaces.  Old warehouses along the upper peninsula offer great opportunities for redevelopment into tech spaces.  The sector is growing in the market and receiving National recognition.  Milliken Institute’s Best-Performing Cities 2014 report ranked Charleston number 4 behind Portland, Oregon, San Francisco and Merced, California for fastest-growing technology areas based on gross domestic product over the past 5 years.

8. Redevelopment is proposed for 1505 Monrovia, a 125,000 square-foot building, which will offer office and retail space.  A tech firm leased approximately 45,000 square feet of the building.
9. Flagship 3 is a planned 4-story, 50,000 square-foot tech incubator part of the Charleston Digital Corridor, which is home to Flagship 1 and 2 on Morrison Drive.  Construction is expected to commence by year-end 2015 and complete in June 2016.
10. Renovations are underway at Half Mile North along Morrison Drive.  Overall the buildings total 90,000 square feet with 18,600 square feet available for lease.  Blue Acorn, an e-commerce company for retailers, is an anchor tenant in the development, which offers open floor plans and an industrial appearance appealing to tech companies.

 

 

 

Office-Using Employment

Office-using employment makes up 21.3% of total non-agricultural employment in the Charleston-North Charleston, SC MSA.  Approximately 3,100 jobs were added to the office-using sector from August 2014 to August 2015, a 4.6% increase over the twelve month period.  As of August 2015, approximately 70,300 individuals were employed by an office-using job.  The sector is significant growing, with a gain of approximately 41,000 jobs over the past 25 years.

 

Market Outlook

The Charleston, SC office market is poised for continued success through the last quarter of 2015 and into 2016.  Rental rates will continue to increase as the market tightens and space remains difficult to find.  Redevelopment and new development projects will likely be announced as investors aim to benefit from current market conditions.  The growing tech sector will continue to transform the upper peninsula, which may spur multifamily and mixed-use developments in the area.   A growing residential population will drive suburban office growth as employers aim to locate near the expanding labor force and offer convenience for employees.

 

Around the State

A growing demand for office space throughout South Carolina is contributing to tightening markets and soaring rental rates.

 

Columbia, South Carolina

Market conditions are tighter than ever in the Columbia, SC office market as vacancy continues to decline and rental rates increase.  Concessions are on the decline and tenants are incurring higher occupancy costs as rental rates, parking rates and construction costs increase.

Construction is in demand, but remains limited to two projects in the CBD, Innovation Center and BullStreet, which will collectively add 253,000 square feet of Class A office space to the market’s existing inventory.

 

Greenville, South Carolina

The Greenville, SC office market is strengthening given the growing demand for space in the market.  Rental rates are climbing as vacancy declines and quality space becomes difficult to find.  The suburbs are benefiting from tight market conditions in the CBD.  Office construction is beginning to gain momentum with several build-to-suits, which will likely be followed by future speculative developments.  Construction continues at One Research Drive on the Clemson University International Center for Automotive Research (CU-ICAR) campus in suburban Greenville.  The 80,000 square-foot building is expected to be delivered in December 2015.

 

For more statewide commercial real estate news check out our market reports at: www.colliers.com/southcarolina/insights

 

To download the complete report: Q3 2015 Charleston Office Market Report.