Colliers Report: New Roads Spur New Office Development

Key Takeaways

• Road improvements surrounding the Charleston International Airport and Boeing will spur new speculative office development.
• A wave of speculative construction is underway.

To download the complete report: Q1 2017 Charleston Office Market Report.

 

New Roads Bring New Opportunities

The area bound by the Ashley and Cooper Rivers, Ashley Phosphate Road and Interstate 526 has the bulk of the region’s major employers, several cultural attractions and the Charleston International Airport. It also represents nearly 40% of the area’s total office market inventory. The new Airport Connector Road Project at Montague Avenue, a new interchange and the repurposing of International Boulevard will create new opportunities in the suburban office market by improving access and visibility to the few remaining developable office sites in the area.

Traffic in this area is increasing, with the growth of the regional economy and employers in the submarket. Airport traffic has grown substantially in Charleston over the past 10 years, with arrivals at the Charleston Airport reaching 1.9 million people, twice the number from ten years earlier. Major employers such as Joint Base Charleston (22,000 employees), Boeing (8,000 employees) Charleston County Government and South Carolina Ports Authority all have operations along this segment of I-526. Employment at Boeing has increased by 21.2% since 2014, and they have several hundred acres of land around their campus reserved for future expansions. Other major employers in the submarket include Robert Bosch (1,800 employees) and Verizon Wireless (1,200 employees). Also on the I-526 corridor are the 358,000-square-foot Tanger Outlets, the Charleston Area Convention Center and Coliseum and more than 3,000 hotel rooms.

This area of the Lower North Charleston submarket has seen positive absorption, bringing the vacancy rate to 8.6% this quarter. Prior to the delivery of the new 125,000-square-foot Faber Plaza building in the Faber Executive Park, the vacancy rate was only 5.4%. Asking rental rates are between $25 -$30 PSF/YR, well above the suburban market average of $23.15 PSF/YR. Escalating rental rates have created a market suitable for new office development. To take advantage of the demand and opportunities in the growing office corridor, Holder Properties is building a 106,000-square-foot building on one of the last remaining developable sites in the Faber Executive Park.

To accommodate existing traffic and projected growth, the new Airport Connector Road is planned in conjunction with the dedication of International Boulevard exclusively for Boeing traffic. According to the Charleston County Transportation Development Department, the project will separate Charleston International Airport traffic from traffic generated by Boeing’s employees and suppliers, which should relieve traffic congestion. The final alignment of the Airport Connector Road will be chosen later this year with an anticipated start of construction soon after. The new road, coupled with a new interchange that is planned for I-526 at Montague Avenue, will improve traffic flow and provide additional access to the area.

Speculative Construction Underway

Speculative office development is increasing to meet sustained demand. Over the last six years, the Charleston market has experienced substantial growth in population and employment, leading to greater demand for office space. The population is expected to grow at a rate of 48 new residents a day over the next five years to 810,000 residents. Employment in the region is increasing, reaching 350,600 non-farm employees in January of 2016, a 2.6% increase in one year. Office using employment comprises 21.2% of total non-farm employment at 74,500 jobs, adding 6,400 jobs to the sector in just two years, according to the Bureau of Labor Statistics. This has raised occupancy and rental rates across the market, bringing them to levels sustainable for new development.

Rising occupancy and higher demand in the market have increased the average asking rental rate by 6.7% to a record high of $24.64 PSF/YR at the end of the first quarter. More impressively, the vacancy rate in the market, although fluctuating slightly, has remained low. This quarter, the vacancy rate was 8.0%, down from 8.8% last quarter and 10.4% from two years ago. These strengthening market conditions have made new speculative development a viable option in Charleston.

Due to increasing land costs, regulations and development on the Peninsula (downtown), new construction is focused in the surrounding suburban submarkets along I-526. Since 2012, nine office buildings delivered in the Charleston market totaling 555,600 square feet. Today, there are six buildings under construction and 15 buildings proposed to begin construction this year, which will add over 1 million square feet of office space to the market upon delivery.

In addition to speculative construction, build-to-suit activity has increased in the last five years, mostly from technology companies such as SPARC, Blackbaud, Blue Acorn, Benefitfocus, Google and Comcast. Blackbaud has started the first phase of their new headquarters campus with a 172,000-square-foot office building. SPARC’s new 41,400-square-foot office building delivered this quarter. Meanwhile, Comcast delivered in the second quarter of 2016 and Benefitfocus delivered in the first quarter of 2015. Investments from these companies further showcase the strength and diversity of the Charleston economy.

The Charleston office market can support new development due to the booming population, increasing employment, strengthening market fundamentals and the growth of existing companies. As construction levels continue to rise, the cost is expected to increase to levels that limit further growth.

Market Conditions

The vacancy rate at the end of the first quarter of 2017 was 8.0%, down from 8.5% at the end of last quarter. A vacancy rate below 10.0% is a sign of a strong and tight market. The average asking rental rate at the end of the fourth quarter was $24.64 PSF/YR. At the end of the first quarter of 2016, the average asking rental rate was $23.09, a 6.7% increase in one year. Tenant leases signed at eight- to ten-year terms between 2007 and 2008 will begin to roll over throughout 2017 and 2018. These tenants will find it challenging to relocate to new spaces in the market without paying a significant increase in rent.

Downtown Conditions

The vacancy rate in the CBD was 6.7% at the end of the first quarter. Office space in the downtown submarket is in such high demand that new spaces coming available are expected to be absorbed quickly. The full-service average asking rental rate in the CBD reached $33.88 PSF/YR at the end of the first quarter, up from $32.21 PSF/YR at the start of 2016. Class A space saw even higher asking rental rates, with an average of $36.77 PSF/YR, an increase of 4.1% from a year ago.

Suburban Conditions

The suburban vacancy rate was 8.3% at the end of the first quarter and is continuing to trend down as the available space in the market is absorbed. Since the start of 2016, the full-service average asking rental rate has increased by 8.7% from $21.30 PSF/YR to $23.15 PSF/YR.

 

 

Recent Transactions

• 3450 Ingleside Boulevard is an 80,000-square-foot Class B office building in the Upper North Charleston submarket. The building is occupied by Comcast and sold for $21.1 million, or $263.75 PSF/YR, this quarter to Capri EGM.
• The 67,400-square-foot Class B office building at 1064 Gardner Road in Mount Pleasant sold as part of a 1031 exchange for $5.7 million, or $84.49 PSF/YR, in January.

Office-Using Employment

Office-using employment, those jobs related to the professional and business services, financial activities and information sectors, are growing within the Charleston-North Charleston Metropolitan Statistical Area (MSA). Per the most recent February 2017 data from the Bureau of Labor Statistics, 3,000 office-using jobs were added over the last 12 months. Non-Farm employment is also showing a positive upwards trend, increasing by 4.2% over the last year, adding a total of 10,200 new jobs. Office-using employment as of February 2017 accounts for 21.1% of total non-farm employment in the Charleston-North Charleston MSA and accounted for 29% of all new jobs added to the MSA over the last 12 months. Employment growth, especially growth of office-using employment, is a good indicator of market vacancy as additional jobs correlate with a greater demand for office space and lower vacancy rates. As the employment sector continues to grow, the market will experience additional demand for space.

Market Forecast

Continued growth of employment, population and developments across the market will continue to expand the number of new office-using tenants locating to Charleston in the future. Construction levels are at record highs across all property types, making room for new employers in the area. Increased leasing activity will remain strong in the coming quarters and is expected to increase absorption, occupancy and asking rental rates.  As these market characteristics continue and interest rates remain low, Charleston’s office market will continue to favor investment sales.

Around South Carolina

Columbia, South Carolina

• Lack of large blocks of traditional office space has encouraged a wave of office users to utilize and repurpose older buildings in the Main Street District and other downtown corridors such as the Vista, North Main and Devine.

Greenville, South Carolina

• Activity from value add investors will push the expansion of the I-385 / I-85 submarket.
• Experiential workplaces are a popular trend in the national office market and are growing in the Greenville market.

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

 

To download the complete report: Q1 2017 Charleston Office Market Report.