Colliers Report: Office construction pushes vacancy upward

Research & Forecast Report
Q2-2018 Charleston | Office

Key Takeaways

• As more office buildings are delivered to the market, vacancy is expected to rise for the next couple of quarters until the demand catches up to the supply.
• There are currently 688,047 square feet of office properties under construction and 996,290 square feet of proposed office buildings to be constructed.
• Depending on the ease of permitting, Flagship 3, located within the digital corridor, will finally begin construction no later than the first quarter of 2019.

Flagship 3 to begin construction by the first quarter of 2019

The Charleston Digital Corridor (“CDC”) was formed in response to the request of Charleston citizens to grow a diversified, high-wage economy. It is currently home to Flagship 1 and Flagship 2, which offer non-traditional office space with open floor plans and short-term leases. According to the CDC website, “the CDC is focused on creating the business, education and social environment that is attractive to tech and tech-related companies. The CDC leverages its carefully nurtured relationships, program elements, legislative access, and contacts, to assist companies with integrating them into community. This integration is accomplished through four pillars – community, talent, spaces and capital.” The success of the digital corridor has prompted an additional need for Flagship 3. This office building was first announced several years ago; however, there have been minor set-backs due to commercial development restrictions. According to the Charleston Digital Corridor group, depending on the ease of permitting, construction on Flagship 3 will be underway by the first quarter of 2019.

Market Conditions

The Charleston office market is comprised of 12,793,870 square feet in 372 office buildings within seven Charleston submarkets. Two new office buildings became available this quarter, adding 29,025 square feet to the office market. The office market vacancy rate during the second quarter of 2018 was 12.53%, which is slightly higher than the first quarter vacancy rate of 12.30%. The market posted a net negative absorption of 4,323 square feet. The Class A office market absorbed 63,995 square feet of office space. The average full service weighted rental rate is slightly higher this quarter, increasing from $23.77 per square foot during the first quarter of this year to $23.79 per square foot this quarter.

Central Business District

The central business district has 86 buildings totaling 2,727,618 square feet in Charleston, and the submarket posted a net negative absorption of 14,814 square feet during the second quarter of 2018. However, an 11,025-square-foot building was added to the market this quarter. The central business district vacancy rate was 6.86% during the second quarter of 2018 and, while low, was higher than the first quarter vacancy rate of 5.94%. This quarter, available sublease space rose to 23,035 square feet in the central business district, whereas during the first quarter, only 2,876 square feet of sublease space was available. In addition, the average full service weighted rental rate within this submarket dropped from $35.39 per square foot during the first quarter of 2018 to $33.90 per square foot during the second quarter for the remaining available space.

Suburban Conditions

The Charleston suburban office market is comprised of 286 office buildings totaling 10,066,252 square feet. The market is positive with robust leasing activity. The overall suburban vacancy rate was 14.07% during the second quarter of 2018, only marginally higher than the vacancy rate of 14.02% during the first quarter of 2018, despite 18,000 square feet being added to the Daniel Island submarket. The overall suburban absorption was 10,491 square feet, with 59,419 square feet of Class A office space absorption. The full service average weighted rental rate was $22.27 per square foot in the remaining suburban office available space and $25.40 per square foot in Class A office space.

Significant Transactions

Leasing activity was strong during the second quarter of 2018, and according to CoStar, 115 office leases were completed, the majority of which were under 10,000 square feet. CoStar reported 37 sale transactions during the second quarter.

Sales                

• The 30,000-square-foot API Building, located at 735 Johnnie Dodds Boulevard in Mount Pleasant, was purchased for $7.8 million.
• 1090 Newton Way, a 61,316-square-foot office building located in the Jedburg Commerce Park in Summerville, sold for $6 million.
• A 25,676-square-foot Class B office building located at 1800 Reynolds Avenue in North Charleston sold for $4.8 million in April.
• Bridgewater Center, located at 966 Houston Northcutt Boulevard in Mount Pleasant, was purchased for $4.56 million.
• 4925 Lacross Road, within Corporate Square II in North Charleston, is a 32,577-square-foot office building that sold for $3.65 million in June.

Leases

• 21,105 square feet of third floor office space was leased in North Charleston at 4401 Belle Oaks.
• Infrastructure Consulting and Engineering leased 11,640 square feet at 115 Fairchild Road on Daniel Island.
• An 11,000-square-foot space was leased by Student Transportation of America at 880 Island Park Drive in Charleston.
• A 10,800-square-foot office lease was executed by Motely Rice at 28 Bridgeside Boulevard in Mount Pleasant.
• Sprinturf signed a 10,450-square-foot lease at 146 Fairchild Street in Charleston.

Construction Pipeline

Construction activity is robust in the Charleston market. Currently, there are 732,161 square feet under construction.

Under Construction 

• On Daniel Island, construction continues on Blackbaud’s new 172,000-square-foot building.
• 22 Westedge Street continues construction on a 153,358-square-foot office building located within the central business district.
• Ferry Wharf construction continues at 75 Port City Landing and, when completed, will be a 125,000-square-foot office building.
• Upon completion later this year, 235 Magrath Darby will be a 60,000-square-foot, Class A office building in Mount Pleasant.
• 4854 Ohear Avenue is the 60,000-square-foot site of the ongoing redevelopment at Garco Mill.
• 2278 Clements Ferry Road is the construction location of a 48,000-square-foot office building.
• Carnes Crossroads currently has 27,832 square feet under construction and the new medical office is expected to deliver around the third quarter of 2018.
• 350 West Coleman Boulevard in Mount Pleasant has a 14,968-square-foot Class B live-work office building with an expected delivery date of 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 third quarter of 2018.
• 363 Wando Place, within the Wando Place Business Park, currently has 12,000 square feet under construction.

Completions

• The 18,000-square-foot office building located at 145 River Landing Drive on Daniel Island is complete.
• The Anniston Building, an 11,025-square-foot Class B office building located at 229 Huger Street, is now complete.

Office-Using Employment

Office-using employment are jobs related to the professional and business services, financial activities and information sectors. According to the most recent April 2018 data from the Bureau of Labor Statistics, there are a total of 357,300 jobs within the combined Charleston Metro Statistical Area (MSA); and there have been 6,000 new jobs added over the past 12 months. However, office-using employment totals 74,800, which is 800 less office-using jobs than one year ago.

Market Forecast

The Charleston office market vacancy rate is expected to gradually rise as more office development is completed. There are currently 732,161 square feet of office properties under construction, 337,458 square feet, of which, began construction this quarter. In addition, there are also 996,290 square feet of office buildings proposed to be constructed. If construction continues to deliver at this rapid frequency, it will take a few quarters for the market to catch up and, in the meantime, vacancy will continue to climb. However, the demand for office property is high and preleasing is still prevalent; therefore, the higher vacancy rates are expected to be temporary. Most of the office activity will take place within the thriving suburban markets as more residents move to the area and live-work-play communities flourish.

 

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