Research & Forecast Report
Q4-2020 CHARLESTON | OFFICE
- Sublease and anticipated office deliveries in 2021 afford tenants the opportunity to upgrade from their current office space. Furthermore, out-of-market businesses can relocate headquarters or start a new business in Charleston.
- Rental rates will be likely be lowered throughout the market until the Class A office sublease space is absorbed.
Commercial development follows residential boom
Charleston saw an uptick in residential sales beginning last year and continuing into 2020 as residents desired more space to work remotely and stay further away from communal environments. The need for distance has led to an uptick in single-family home sales throughout Charleston. Year-to-date home sales have increased over the home sales through November of 2019 by 12.9% in Berkeley County, 14.8% in Charleston County and 19.6% in Dorchester County. In addition, homes throughout the Charleston region are sold within two months or less from the time they are listed, proving the residential market is maintaining momentum. New homes were built in 2019 anticipating an increase in population, and then in 2020 growth was fueled by the pandemic and need for personal space therefore boosting overall Charleston residential sales. Residential growth bodes well for commercial real estate because it allows out-of-town business owners new home choices throughout the region. Commercial real estate tends to follow residential development trends by providing offices to be filled by businesses new to the region. The Charleston office market is proving this trend to be true. In addition to new residents desiring to live in Charleston, new businesses are drawn to the area based on the region receiving multiple accolades for having a positive business climate and high livability standards. Charleston also offers enticements for business owners to relocate to the region based on workforce and business incentives. The South Carolina Department of Commerce has become proficient at offering a rapid permitting process, proactive workforce development and tax incentives to enhance job creation and operational investments.
Opportunity for local tenants to upgrade and new tenants to locate to Charleston
This year the pandemic has enhanced the importance of personal distance. That coupled with the population expected to increase by 8.89% from 2020 through 2025, presents a growing need for additional commercial space. While some businesses are choosing to work remotely into next year; others are returning to the office, but feel the need for ongoing social distance translates to a need for new or upgraded space. There are currently 751,381 square feet of office sublease space and 669,240 square feet of offices under construction in the Charleston market with anticipated deliveries throughout 2021. These availabilities afford tenants the opportunity to upgrade to a larger or higher quality space. Furthermore, out-of-market businesses can relocate headquarters to Charleston or start a new business.
2020 Charleston Annual Office Recap
Due to the pandemic during 2020, the most significant change within the Charleston office market was a significant annual increase in sublease space from 166,377 square feet during the fourth quarter of last year to 751,381 square feet currently. The reason behind so much available space is many companies have opted to work from home due to uncertainty surrounding the COVID-19 pandemic. The majority of the sublease space is available within Class A suburban office space. The central business district offices absorbed 82,763 square feet over the past year; however, the suburban offices posted a negative annual absorption of 445,183 square feet. The overall office market posted an annual negative 362,420 square feet due to this amount of space becoming available. In addition, over the past year there were six office buildings delivered to the market adding 193,561 square feet. The overall weighted rent for the Charleston office market has decreased from $27.25 per square foot last year to $23.98 per square foot this quarter. The decrease is most likely tied to owners decreasing rental rates in order to compete with the newly available office space
Overall Charleston Market
The Charleston office market is comprised of approximately 14.47 million square feet and there are currently 11 office buildings under construction which, upon completion, will add 669,240 square feet to the office market. In addition, there are 15 proposed offices totaling 1.18 million square feet within the construction pipeline. No new offices were delivered to the Charleston office market during the fourth quarter of 2020. Overall, the Charleston office market posted a negative absorption of 281,773 square feet. Sublease space increased from 220,248 square feet last quarter to 751,381 square feet this quarter, most in Class A office space. It is estimated that approximately 20% of all Charleston office employees have returned to the office; however, the majority have continued a remote working status. The overall negative absorption forced the vacancy rate upward from 15.02% during the third quarter of 2020 to 16.97% this quarter. Charleston overall office market rental rates were slightly higher at $23.98 per square foot during the fourth quarter of this year due to an increase within the central business district. The submarkets which had an increase in sublease space have lower rental rates as owners compete to attract tenants to fill vacant space.
Central Business District
The central business district has 88 buildings totaling 3.03 million square feet in Charleston and there are currently 448,000 square feet of office buildings under construction. Downtown offices absorbed 13,420 square feet during the fourth quarter of 2020, most of which was Class A space. Due to the positive absorption, the overall vacancy rate dropped from 13.17% during the third quarter of this year to 12.73% this quarter. Weighted rental rates increased marginally from $33.06 per square foot last quarter to $33.30 per square foot during the fourth quarter of 2020.
The Charleston suburban office market is comprised of 11.44 million square feet and there are six offices totaling 221,240 square feet under construction throughout the suburban submarkets. The overall suburban office posted a negative absorption of 295,193 square feet, mostly due to Daniel Island having a total of 532,256 square feet of sublease space available this quarter. The large amount of sublease space presents a unique opportunity for tenants in the market to decide if they want to upgrade to larger or nicer space. In addition, out-of-market businesses have many options to choose from when locating to Charleston. The suburban vacancy rate increased from 15.51% last quarter to 18.09% during the fourth quarter of this year. The overall suburban average weighted rental rate for the remaining availabilities remained steady at $22.07 per square foot from the third quarter of 2020 to the fourth quarter.
According to Costar, there were 23 existing office sales within the Charleston market this quarter, including two portfolio sales. In addition, there were 74 leases executed during the fourth quarter of 2020.
Office-using employment covers jobs related to the professional and business services, financial activities and information sectors. According to the most recent data from the Bureau of Labor Statistics, the amount of office-using jobs is normalizing. In just six months, during the period from April 2020 through October 2020, the number of jobs lost in Charleston decreased from 8,408 to 2,357. This is a positive sign that employers are rehiring, working remotely and/or reopening following the lifted quarantine restrictions. It is also estimated that approximately 20% of the office employees have returned to their offices on a full-time basis. The Charleston-North Charleston-Summerville employment rate was 95.3% as of September 2020 and is expected to increase further as more companies open for business.
This is an unprecedented time to be a tenant in the Charleston office market. There is an unusually higher amount of Class A sublease space available, so current tenants will likely take advantage of this and absorb it quickly. Also, this unique opportunity allows large out-of-town businesses to set up in Charleston to get a feel for the region and business climate before signing a long-term lease.
Tenants looking for a place to conduct business with a longer commitment can lease an office in one of the 11 office buildings currently under construction with a 2021 delivery expected. It is probable rental rates will be lowered throughout the market until sublease space is absorbed, then new construction will likely drive the prices up by the end of next year.
A Note Regarding COVID-19
As we publish this report, the U.S. and the world at large are facing a tremendous challenge, the scale of which is unprecedented in recent history. The spread of the novel coronavirus (COVID-19) is significantly altering day-to-day life, impacting society, the economy and, by extension, commercial real estate.
The extent, length and severity of this pandemic is unknown and continues to evolve at a rapid pace. The scale of the impact and its timing varies between locations. To better understand trends and emerging adjustments, please subscribe to Colliers’ COVID-19 Knowledge Leader page for resources and recent updates.
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