Colliers Report: Charleston’s office activity impeded by COVID-19

March 31, 2020

Research & Forecast Report
Q1-2020 CHARLESTON | OFFICE

Key Takeaways

  • The effects of COVID-19 on the office market will likely affect the employment sectors of tourism and professional and business services; however, the overall impact will not be known for several quarters.
  • There are currently 790,240 square feet of office buildings under construction throughout the Charleston office market; however, construction completion will be prolonged due to the Coronavirus set-backs.

Nexton mirrors national creative office trends

Over the past five years office trends have shifted from building “just a place to work” to constructing a lifestyle center where business is conducted. Creative office spaces are centered around a sense of community and team building by offering collaborative areas and flexible floorplans-adaptable for varying corporate functions. Professionals are increasingly environmentally conscious; therefore, their preferences are geared toward green workspace with offices in park-like settings for outdoor enjoyment. In addition, employees are no longer commuting via car; they are locating near their offices and walking or bicycling to work.

The Nexton development located in Summerville is adapting these trends as the new live-work-play area develops. When complete, the Nexton development will include medical centers, hotels, retail, multifamily and office spaces creating a regional community hotspot. Employees who do not already live onsite will find the commute to Nexton a pleasant one, thanks to the completion of Nexton Parkway and the Exit 197 interchange. Nexton is seeing office development in three stages, each more progressive than the last; however, construction completion dates will likely be pushed further into the future due to the impact of the Coronavirus. Phase 1 was completed in 2014 and is the site of a 98,225-square-foot traditional, multi-tenant office building located in the Front Street District. Phase 2 is the construction of WorkPlace at Nexton and is slated for completion in 2020. Upon completion, it will be a single-story, multi-building professional office park on Brighton Park Boulevard. Phase 3 of office development at Nexton is The Yard at Nexton, planned to be a fully-amenitized, modern office being delivered in 2021 within the Parkway District. The Yard mirrors the live-work-play office trends seen throughout the nation, offering a walkable location with collaborative workspace and onsite entertainment. In addition, the professional centers were built to be environmentally friendly surrounded by an abundance of green space and walking trails. The forward-thinking design of the entire Nexton development will aide employers with employee recruitment and retention due to an enhanced company culture promoting positive lifestyles.

Charleston’s economy

The onset of the Coronavirus will have immediate short term and long term impact on both the U.S. office market and the Charleston office market. While the overall economy in Charleston is bolstered by several employment sectors led by: trade, transportation and utilities, government, tourism and professional and business services, these sectors will be hit the hardest due to the outbreak of COVID-19 at the end of the first quarter of 2020. The long-term impact of the Coronavirus will not be fully realized for several quarters.

Prior to the outbreak, according to the U.S. Coast Guard there are plans to generate approximately 25 hulls in Charleston- the first of which is scheduled to deliver in 2022. The generation of the hulls will “ultimately comprise almost seventy percent of our (Coast Guard) offshore presence.” Changes of this magnitude will “position Charleston as one of the nation’s largest concentrations of Coast Guard assets and people,” according to the Coast Guard, and will provide a large economic boost throughout the region in all facets of the local economy. Although Charleston taxes are generally higher than the U.S. average: the sales rate is 8.9% and the income tax rate is 7.0%; the wages throughout the Charleston area are enough to compensate for the higher tax rates. Wages in Charleston averaged $88,296 in 2019 and income averages are projected to grow to $101,470 by 2024, 1.84% higher than the national wage average. In addition, a population boom is expected due to the healthy economy; however this population growth may be stalled for a few quarters as the economy recovers from the effects of the Coronavirus. The overall Charleston population is predicted to increase by 10.04% from 2019 through 2024. Therefore, with the economy poised to recover and then prosper in the next five years, the demand for office will increase as new businesses locate throughout Charleston-following the thriving economic growth.

Market Overview

Overall Charleston Market

The Charleston office market is comprised of approximately 14.13 million square feet and there are currently 16 office buildings under construction which, upon completion, will add 790,240 square feet to the office market. In addition, there are 13 proposed offices totaling 1.01 million square feet adding to the construction pipeline. There was one office buildings delivered to Charleston during the first quarter of 2020 adding 30,442 square feet to the Daniel Island submarket. Overall the Charleston market posted negative 130,071 square feet during the first quarter of 2020. Due to the negative absorption this quarter, the overall vacancy rate rose from 12.55% at the end of last year to 13.66% during the first quarter of this year. Overall Charleston rental rates were slightly lower at $26.14 per square foot during the first quarter of 2020, as new construction delivers the rental rate is expected to increase.

Central Business District

The central business district has 89 buildings totaling 2.93 million square feet in Charleston and there are currently 408,000 square feet of office buildings under construction. Downtown Charleston offices posted 14,008 square feet of negative absorption during the first quarter of 2020, 65 Gadsden Street posted 10,000 square feet of negative absorption and there were only nine other downtown buildings with tenant moves this quarter. Downtown Class A and Class B spaces posted positive absorption; however, Class C space posted negative 18,170 square feet. Likewise, the downtown vacancy rate increased from 15.15% during the fourth quarter of 2019 to 15.63% to begin 2020. The average weighted rental rate during the first quarter of 2020 was $37.72 per square foot for the remaining downtown availabilities

Suburban Conditions

The Charleston suburban office market is comprised of 11.21 million square feet and there are ten offices totaling 382,240 square feet under construction throughout the suburban submarkets. One 30,442-square-foot office was delivered at 297 Seven Farms Drive in Charleston. Overall, the suburbs posted a negative absorption of 115,079 square feet. The largest contributor to the negative absorption was at the Verizon building located at 2401 Mall Drive in lower North Charleston-it posted negative 150,000 square feet. Otherwise, four of the six suburban submarkets posted positive absorption. Due to the negative absorption, the vacancy rate in the suburbs rose from 11.87% last quarter to 13.13% during the first quarter of this year. The overall suburban average weighted rental rate for the remaining availabilities increased slightly to $22.47 per square foot this quarter.

Significant Transactions

According to Costar, there were 18 office sales varying from medical office buildings to office condos. The largest sale was of a medical office located at 2015 2nd Avenue for an undisclosed sale price. There were 58 leases executed during the first quarter of 2020, most of which were under 3,000 square feet and many were renewals.

Office-Using Employment

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, employment decreased throughout 2019; however, in December there were 333 office-using jobs added to the Charleston market from December 2018 through December 2019. In addition, total non-farm employment has increased by 4,000 jobs in the past 12 months. According to the Bureau of Labor Statistics, as of December 2019 the unemployment rate remains low at 2%, much lower than the national unemployment rate of 3.6%. Due to the Coronavirus, the unemployment rate is predicted to rise in the next few quarters.

Market Forecast

Due to COVID-19 and the restrictions posed on the entire state of South Carolina, office market activity stalled at the end of the first quarter of 2020. Offices within the tourism and professional and business sectors will likely be hit the hardest; however, the overall effects to the office market will not be known for several quarters. Despite the set-backs, Charleston’s overall economy is robust and will eventually bolster office demand, likely the beginning of next year, as the economy recovers and new office users locate to the market and regional population increases. Gearing up for a population increase, the Nexton development is entering Phase 2 of construction. Upon completion, the office complex will meet modern needs of professionals within a live-work-play atmosphere, which will be attractive to both area newcomers and nearby residents. Charleston’s business climate is positive for business owners and the unemployment rate will stay lower than the national average, despite the prediction of a temporary spike in unemployment. There will still be enough talent to fill jobs throughout the market. With Charleston continuing to receive accolades regarding booming business, positive job creation and attractive tourism sites; office demand will likely begin recovery during the third quarter and strengthen during the fourth quarter of this 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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