Charleston Office Vacancy Hits Lowest Level in Over a Decade

Colliers International, South Carolina Research & Forecast Report: Charleston – Office Q1 2015

 

Key Takeaways

• Rental rates reach new record highs as vacancy rate continues downward trend.
• The tightest office market Charleston has seen since 2002.
• Downtown development embraces the growing tech industry.
• Construction activity is on the rise throughout the market.
• Suburban residential growth to drive the future office market.

 

To download the complete report: Q1 2015 Charleston Office Market Report.

 

Market Conditions

2015 is off to a great start for the Charleston, South Carolina office market, which experienced positive absorption, declining vacancy rates and record high rental rates during the first quarter of the year.  Tightening market conditions and a limited inventory of existing quality space is attributing to top rental rates, which averaged $22.15 per square foot per year for the overall market at the end of the quarter.  Asking rental rates increased 7% in just one year and are expected to further increase as demand for office space continues to grow and new supply delivers to the market.  Class A and B asking rates for the market averaged $27.34 and $21.59, respectively, at the end of the first quarter.

The total vacancy rate for the overall market was down to 10.2% at the end of the quarter, the lowest rate the market has seen in over 10 years, when the vacancy rate was 11.1%.  The first quarter rate is down from 11.5% at year-end 2014 and 11.3% a year ago.  Large blocks of contiguous quality office space are growing increasingly scarce, while the demand for such space remains strong throughout the market.  Tenants are finding themselves competing for space as extremely high occupancy rates and a lack of options influence their decision making.  The apparent need for new supply is motivating build-to-suit and speculative construction, which remains limited, but will likely pick up in the future.

 

Central Business District

The Central Business District (CBD) remains in low supply of office space despite a slight increase in vacancy over the quarter.  The slight negative absorption is due to AT&T leaving its former headquarters at 385 Meeting Street.  The building was acquired for $15.6 million by a local investment group with plans to improve the building in an effort to attract a new tenant.  Given the high occupancy of the market, the space is likely to backfill quickly.  The overall vacancy rate for the CBD was 9.9% at the end of the quarter with Class A and B vacancy rates at 10.0% and 12.4%, respectively.

Rental rates are on the rise in the CBD, reaching historical highs and averaging $29.87 per square foot per year.  Asking rental rates for Class A and B office space in the CBD averaged $33.28 and $28.66, respectively, at the end of the first quarter.

 

Suburban Submarkets

Activity picked up in the suburban submarkets through the quarter bringing the vacancy rate down to 10.3% from 11.8% one year ago.  Class A and B vacancy rates are 8.1% and 10.3%, respectively.  Rental rates are on the rise throughout the suburbs, averaging $20.64 per square foot per year, increasing 7.8% over one year.  Asking rental rates for Class A suburban space averaged $25.60 at the end of the quarter.

Mount Pleasant is home to the highest suburban rental rates, averaging $25.25 for all office classes, with Class A office space averaging $29.87 per square foot per year.  The submarket also has the lowest vacancy rate among suburban submarkets at 3.4%, down from 4.6% a year ago.  Options currently do not exist for certain tenants within Mount Pleasant.

 

A New Kind of Office

Downtown Charleston is embracing the growing tech industry, which has thus far proven successful in the market.  The Charleston Digital Corridor currently is home to Flagship 1 and Flagship 2, which offer non-traditional office space with open floorplans and short-term leases.  The Flagship facilities are intended to accommodate new tech companies in their early phases until they are ready to occupy larger, more permanent office space.  Flagship 1 launched in 2009 and Flagship 2 launched in 2011.  Collectively, the facilities have graduated over 75 companies, motivating the development of Flagship 3.  The proposed 50,000 square-foot facility, to be located at 995 Morrison Drive, is expected to open in June 2016 and will offer approximately 30 offices.  Offices are fully furnished and leased on a monthly basis.  The tech industry brings higher paying jobs to the region and marks significant improvements for the market.  The offices offer a collaborative work environment appealing to a younger, talented generation.

 

New Development

High occupancy and rising rental rates have motivated construction throughout the market.  New office space is gaining attention and leasing successfully.

 

• Midtown, the cornerstone of Upper King, is under construction and will offer 14,000 square feet of office space upon completion in September 2015.
• Construction continues on 1 Central Island Plaza on Daniel Island.  The four-story 75,000 square-foot Class A office building is being developed by Holder Properties and is expected to deliver in June 2015.  The building is approximately 35% pre-leased.
• The Cigar Factory, which is undergoing redevelopment, is pre-leasing successfully and recently signed another tenant, SnapCap, which will be moving into 3,200 square feet at the development.  Other tenants include Garden & Gun magazine, The Indigo Road restaurant group, Exceed Physical Culture Gym, design firm Fritz Porter and EnviroMix, among others.
• The South Carolina Research Authority (SCRA) building at Nexton delivered late in 2014.  The 75,000 square-foot Class A office building offers approximately 15,000 square feet of office space for lease in the Summerville submarket.
• Also recently completed in the Summerville submarket is Building I at Nexton, a 100,000 square-foot building offering up to 55,000 square feet of Class A office space.
• Benefitfocus recently completed construction on its Customer Success Center on Daniel Island.  The building is the company’s third on its campus, which is undergoing expansion and will be tripled in size.  The four-story 145,800 square-foot Class A office building offers open and connected work spaces.  The company plans to break ground soon on a 30,000 square-foot welcome center.
• Construction on Courier Square in Downtown Charleston is expected to begin Spring 2015.  The mixed-use development will offer 226 apartment units, retail space, 80,000 square feet of office space and a 6-story, 600-space parking garage.

 

Improving Economy

The economy, at both the national and local level, regained strength and momentum over the past year, adding the most jobs in years.  As of February 2015, approximately 11,500 non-agricultural jobs were added to Charleston-North Charleston-Summerville, SC MSA over the year.  Job growth was seen among various sectors, specifically the office-using employment sector, which has surpassed pre-recession employment by 5,500 jobs.

 

Residential Growth to Shape the Future

Much of the Charleston employee base currently lives in Daniel Island, Goose Creek, Summerville and West Ashley, all of which are predicted to experience significant population growth over the next five years.  These areas, however, currently have a shortage of office space, contributing to long commute times for employees traveling Downtown or to Mount Pleasant, among other office submarkets.  An estimated 30,000 to 40,000 homes are expected to be developed north of I-526, adding to a growing demand for office space in the region.  These areas have high projected annual population growth rates with new developments offering attractive master planned communities at an affordable cost.

 

Highlighted Residential Developments

• Brighton Park Village, Phase I of residential development in Nexton, will have homes ready for occupancy in Spring 2015.  The master planned community will offer parks and an elementary school scheduled to open Fall 2015.  Carolina Ale House is already open at the development along with office space, a Marriott hotel and multifamily development.
• Carnes Crossroads is a master planned community, which will eventually house as many as 15,000 people.  The community will have traditional neighborhoods, parks, a school, church and a commercial district that may offer office space.
• Cane Bay Plantation is growing and will offer 10 neighborhoods, three schools and commercial retail space.
• The Ponds will offer 1,950 homes, an outdoor amphitheater, pool complex and multi-purpose sports field.
• The first homes at Summer’s Corner are expected to complete Spring 2015 with new schools to open in 2016.  The master planned community will have parks, a lake and a walkable village center offering shopping and dining.

To support the growing employee base and demand for office space, it is likely that the next era of office construction will be seen along I-26 towards Summerville.  Office tenants will benefit from the suburban environment, offering various amenities and shorter commute times to their employees.  The lower rental rates found in the suburbs are also likely to attract developers and both corporate and local office tenants.  Downtown rental rates are headed towards the upper $30s to low $40s range given rising land and construction costs and high occupancy, becoming too costly for many office tenants, which will turn to the suburbs for space.  Additionally, the suburbs offer greater land and allow for the construction of larger buildings accommodating corporate offices and regional headquarters, while downtown construction is limited to smaller projects.

 

 

Market Outlook

Charleston will continue to see significant activity supported by a growing population and employee base.  Record high rental rates will make new construction a feasible option as the former gap between market rates and those required for new construction diminishes.  Build-to-suit construction will remain strong while speculative construction gains momentum.  More tenants will look to the suburbs for office space, wanting to be closer to their employees and avoiding high downtown rental rates.  Rental rates will continue to increase as vacancy remains low and tenants find themselves competing for quality office space.

 

Around the State

Improving conditions are likely to continue throughout South Carolina, bringing record-high rental rates, specifically for Class A and B space, led by increasing occupancy rates and new construction.  The growing tech industry will attract a younger demographic, motivating further multifamily and mixed-use development, while benefiting office market occupancy.    Redevelopment and repositioning of older office-buildings will continue, adding Class A space to the existing inventory.

 

Columbia, South Carolina

High occupancy and increasing rental rates in Columbia make new construction a feasible option for tenants looking for space but at significantly higher rental rates.  As a result, the market is welcoming its first wave of new construction, which has thus far been largely concentrated in the CBD.

 

• Holder Properties recently broke ground on the University of South Carolina’s Innovation Center located in the CBD.  IBM, Fluor Corporation and the University are teaming up to create a research facility that will be a fully operational IBM delivery center and will also serve as a working laboratory for students.

 

Greenville, South Carolina

Construction picked up in Greenville following the completion of ONE Greenville in the CBD.  Today, plans are underway for the former Greenville News site and a new office building is under construction in the suburbs at the CU-ICAR campus.

 

• One Research Drive is under construction at the Clemson University International Center for Automotive Research (CU-ICAR) campus.  The building will offer approximately 80,000 square feet of Class A office space.
• Plans for the Greenville News Site in the CBD include a hotel, two office buildings, retail space, a parking deck, dine-in theatre and fitness center.  The development is to be called Camperdown.

 

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

 

To download the complete report: Q1 2015 Charleston Office Market Report.