Colliers Report: Office construction booms

Research & Forecast Report
Q1-2018 CHARLESTON | OFFICE

By Crystal Baker Research Coordinator | South Carolina

To download the complete report: 2018 Q1 Office Charleston Report

Key Takeaways

• Approximately 424,703 square feet of office product is currently under construction within the suburban markets of Charleston.
• As the Central Business District continues to absorb space and rental rates rise, tenants may move to the suburban markets.

Construction is intensifying

The Charleston market saw record low vacancy rates during 2017, prompting the market to move into an expansion cycle. All submarkets had an increase of new construction projects and proposed development of new office buildings. There were 614,989 square feet of new office buildings delivered in six submarkets during 2017, and there are currently 435,728 square feet under construction expected to deliver in 2018. In addition to the 1.05 million square feet being added to the Charleston office market from 2017 through 2018, another 1.34 million square feet of office projects are currently proposed across six submarkets! Previously, the high demand for office product within the Charleston market forced landlords to become creative with their buildings and repurpose storefront and retail space to be used for offices in order to satisfy the demand; now, due to the current construction boom, the Charleston office market may be heading toward an office supply surplus.

Market Conditions

The Charleston office market vacancy rate was 12.03% during the first quarter of 2018, which is considerably higher than 8.86% from the first quarter of 2017. This increase is due, in part, to the new buildings being delivered to the market with vacant space in the buildings. Charleston posted an annual absorption of -9,067 square feet despite 614,989 square feet of new product being added to the market; in addition, the office buildings within the Central Business District, Upper and Lower North Charleston, and Summerville/Goose Creek absorbed a total of 203,626 square feet over the past year. The overall average full-service market rental rates are $23.77 per square foot, which is lower than the first quarter 2017 rate of $24.54 per square foot; however, Class A rental rates are on the rise. Overall, average full-service Class A rents reached $27.83 per square foot this quarter, which is a slight increase over the rent of $27.74 per square foot from this time last year.

Central Business District

The Central Business District vacancy rate was 5.96% this quarter and has risen 10 basis points from the fourth quarter of 2017, when it was 5.86%. This market also posted a net negative absorption of 2,601 square feet during the first quarter of 2018; Class A absorption was -60,472 square feet, but Class C office buildings absorbed 51,142 square feet. The average full service Central Business District rental rate is $35.00 per square foot, up from $34.02 at the end of last year. Class C rental rates have increased considerably from $34.38 per square foot last quarter up to $36.52 per square foot during the first quarter of this year. The CBD submarket rental rates continue to rise because the downtown market is tightening; sublease vacancy is down to 2,876 square feet available, while only 160,049 square feet of direct vacancy remains. Most of the available space within the Central Business District submarket is within Class A office buildings.

Suburban Conditions

The suburban markets stand strong, with robust activity. Vacancy remains relatively low despite adding immense office product to the suburban markets over the past year. There have been 549,087 square feet of new offices added to the suburbs over the past 12 months, 424,703 square feet of offices are currently under construction and another 848,743 square feet of office projects are proposed within these markets. The overall suburban vacancy rate was 13.69% during the first quarter of 2018, 33.56% higher than it was last quarter; likewise, the Class A vacancy rate rose from 14.98% during the fourth quarter of 2017 to 17.04% this quarter. A net negative absorption of 344,301 square feet was posted this quarter, and the suburban markets have 1.367 million square feet of office space available, mostly due to new office building construction within the suburbs. The average full service suburban rental rate dipped to $22.49 per square foot from $24.70 per square foot at the end of last year. Class A rent is also lower this quarter at $25.72 per square foot, down from $26.93 per square foot during the fourth quarter of 2017.

Significant Transactions

Leasing activity was steady in Charleston during the first quarter.  According to CoStar, 76 office leases were completed, the majority of which were under 5,000 square feet and several which did not divulge the tenant name. Sales continue to be consistent in Charleston, during the first quarter CoStar reported 19 sale transactions.

Sales    

• Faber Place, located at 4400 Leeds Avenue in North Charleston, sold for $36.4 million. This 125,000-square-foot Class A office building was purchased as an investment and, according to CoStar, at the time of the sale it was 91% occupied.
• Coleman Executive Center, located at 222 West Coleman Boulevard, was traded for $5.1 million. This 16,887-square-foot office building is located in Mount Pleasant.
• 4016 Salt Pointe Parkway, located in North Charleston, sold for $3.05 million. This 16,006-square-foot office building was sold as an investment, with a 6.61% capitalization rate.

Leases

• Peoplease Corporation signed a renewal for 17,559 square feet at 210 Wingo Way in Mount Pleasant.
• Prudential Financial renewed a 6,650-square-foot lease at 503 Wando Park Boulevard in Mount Pleasant.
• DIGITALiBiz executed a new sublease in North Charleston for 4,324 square feet at 4360 Corporate Road.

Construction Pipeline      

Construction activity remains extremely high in the Charleston market, according to Costar there are currently 435,728 square feet under construction.

Under Construction 

• On Daniel Island, construction continues on Blackbaud’s 172,000-square-foot building.
• Ferry Wharf is under construction at 75 Port City Landing and when completed will be an 120,000-square-foot office building.
• Upon completion later this year, 235 Magrath Darby will be a 65,000-square-foot, Class A office building in Mount Pleasant.
• Carnes Crossroads currently has 27,832 square feet under construction and the new office is expected to deliver around the third quarter of 2018.
• 1034 Lansing Drive in Mount Pleasant is projected to complete the construction of a 14,871-square-foot, Class B office building during the second quarter of 2018.
• 363 Wando Place, within the Wando Place Business Park, currently has 12,000 square feet under construction.
• The Anniston Building, located at 229 Huger Street, is near completion. It is a 11,025-square-foot, Class B office building.

Completions

• A Class B 168,000-square-foot office building renovation was completed. This former K-mart was converted to an office building anchored by T-Mobile and is located at 8571 Rivers Avenue in North Charleston.
• 1435 Stuart Engals Boulevard in Mt. Pleasant, SC is now a completed 10,200-square-foot, Class A office building.

Office-Using Employment

Office-using employment, those jobs related to the professional and business services, financial activities and information sectors, is growing within the combined Charleston Metro Statistical Area (MSA). According to the most recent December 2017 data from the Bureau of Labor Statistics, there has been an increase of 2,000 office-using jobs over the last 12 months. Non-farm employment in the Charleston market has increased by 6,500 jobs over the last year.

Market Forecast

Rental rates are higher today than this time last year; however, they have decreased since the fourth quarter of 2017. This is largely due to the vast amount of new office building delivery and continued construction. Pre-leasing efforts will likely maintain the current overall market rental rate stability throughout 2018. The Central Business District office market is tight with a low vacancy and increasing rents, and that is expected to continue until the only options are for new construction, repurposing buildings into office product or CBD tenants beginning to move into the suburban markets where new office communities offer a live-work-play environment. Conversely, the suburban office market may see an office surplus if the 848,743 square feet of currently proposed buildings all come to fruition.

For additional commercial real estate news, check out our market reports here.

To download the complete report: 2018 Q1 Office Charleston Report

In January 2018, Colliers International benchmarked its office data set for South Carolina. The new standard includes: all office buildings 10,000 square feet or larger, except medical office and government-owned buildings; all single tenant office buildings; buildings in an expanded geography; data for all quarters beginning in Q4 2008; and excluding office condominiums. In addition, the submarkets are separated by class levels A, B and C (A being the highest quality space and C being of lesser quality), and are also divided into 2 divisions: Central Business District (CBD) and Suburban. The Central Business District submarket consists of a highly-populated business area with infrastructure and an office building/high-rise environment, which is often accompanied by heavy daytime foot traffic. A Suburban submarket is an area or town existing as a mixed-use community within commuting distance of a larger city. Due to the adjustments of the building inventory, comparison of data included in previously published market reports should be avoided.

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