Colliers Report: Summerville Office Submarket Awakens

Key Takeaways

• The conditions are in place for the Summerville office market to grow rapidly.
• Tenants are looking for twenty-first century office space.

To download the complete report: Q2 2017 Charleston Office Market Report.

Summerville is Poised to Capture Office Growth

The Summerville area has all the right preconditions to become the next hot office submarket in Charleston. First, the area is an established residential growth market. Next, it has a regionally unparalleled supply of entitled residential land in desirable public-school districts, guaranteeing future residential growth. Already, 2.5 million square feet of office space is entitled around the US 17 and Sheep Island/Nexton Parkway interchanges. Finally, it is in an area with many new and established manufacturing, warehouse and retail employers.

Office markets depend on workers, and Summerville is an established residential area. The three Summerville zip codes plus the Moncks Corner zip code represented 22% of the total metropolitan statistical area (MSA) population in 2010. In the last seven years, that same area has grown by 30,235 people, according to ESRI population estimates – an increase of 4,319 people per year. The bulk of the growth was in the two southernmost zip codes, 29483 and 29485, because those areas have desirable public schools and land available for residential growth (population change 2010-2017).

Going forward, the most rapid growth is expected to shift to the 29486 zip code because of three factors. First, the area is within the Cane Bay High School attendance zone of the Berkeley County School District. Second, it has many road improvements either underway or recently completed (US 17 widening, Sheep Island Interchange, Nexton Parkway), vastly improving transportation access to the area. Third, there are tens of thousands of entitled single family lots within master planned communities that have all the basic road and utility infrastructure in place.

There is an existing base of employers in and around the Summerville area, which will attract other employers to the submarket. To the southeast is Comcast, Mercedes (Daimler), Roper St. Francis and Boeing’s aircraft interior facility area within Palmetto Commerce Park. Boeing’s aircraft production facility is located further towards town, at the airport. Volvo is constructing its first North American manufacturing facility to the northwest in Ridgeville. Google, Santee Cooper and Century Aluminum are north in Goose Creek and Moncks Corner, while Gerber, Fruit of the Loom and TBC have major warehouse distribution facilities within the study area. When combined with 3.5 million square feet of retail, the area has established itself as a place to do business.

The final piece of the puzzle is 2.5 million square feet of office space entitled in the submarket. The first two office buildings opened in Summerville’s Nexton community in 2014, and another 156,000 square feet are planned, with ground breaking in 2019. Office growth should accelerate with the opening of the Sheep Island interchange and the development of the Nexton Town Center. These will provide greater access to the north side of the interstate, which has a more attractive entrance, and will draw more activity to the area.

 

 

 

In summary, the Summerville office submarket is about to awaken from its long slumber. The area has long been a desirable residential market. This trend should accelerate and shift north towards Nexton, Cane Bay and Carnes Crossroads over the next decade as new transportation improvements vastly improve access to the area. Major employers like Volvo, Mercedes and Google already call the area home. With an abundance of office buildings entitled, others will be enticed to join them, making the market poised to capture more office growth over the next several years.

Tenants Seek 21st-Century Workspaces

Any company’s most important assets walk in and out of their door every day. As such, forward-thinking office tenants view their office as a strategic tool for growth instead of an amortized asset, and now seek space that best balances several requirements. It must be configured with a modern mix of space. The building should be in a mixed-use, walkable environment. It should be in a location accessible to most of their staff, and it should minimize the cost per square foot per employee. Finding the right balance is complicated, as current market conditions include low vacancy and steadily increasing rental rates.

One item that office tenants seek is the ability to configure a modern mix of space. Today’s tenants want a variety of shared, coworking, private, meeting and public spaces. These spaces attempt to maximize “employee collisions” or interactions so that different portions of the workforce can interact.

Second, tenants seek space that is in a mixed-use, walkable environment. Downtown Charleston is fortunate that nearly every building fills that qualification. In the suburbs, many office developments are either being retrofitted with amenities or are incorporated in mixed-use districts like Nexton in Summerville or Daniel Island.

Office users also look for a location that is easy for many of their workers to reach by car and has free on-site parking. This has become especially difficult in Charleston because rapid residential growth has outpaced the transportation infrastructure, and the region has several bodies of water that funnel all traffic onto bridges, which become chokepoints during the morning and evening commute. Parking, especially downtown, is very difficult to secure for some areas due to the success of regional tourism.

Finally, tenants seek space that minimizes their employee cost per square foot. This has become more challenging over time, with Class A rents downtown approaching $37 per square foot and suburban rents nearing $27 per square foot. Several office buildings are proposed and four are under construction – but only one is larger than 100,000 square feet. Consequently, it appears the current rental rates are likely to become the norm.

In summary, office-using tenants are seeking a balance of a few factors. Meeting the challenge of striking this balance has driven many tenants like Blue Cross Blue Shield of South Carolina and Cummings to relocate, while others, like Chernoff Newman, have chosen to relocate to re-purposed office buildings offering character and amenities. Going forward, new construction will create some opportunities, but given the region’s rapid economic growth, striking the right balance between the competing factors will endure.

 

 

Market Conditions

The vacancy rate at the end of the first quarter of 2017 was 7.6%, down from 8.0% 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 second quarter of 2016 was $22.95 PSF/YR. At the end of the second quarter of 2017, the average asking rental rate was $26.62, a 16% increase in one year. Many tenants signed leases between 2007 and 2008, which will begin to expire in 2017 and 2018. They will find it challenging to relocate to new spaces or renew their existing lease without paying a significant increase in rent.

Downtown Conditions

The vacancy rate in the CBD was 6.6% at the end of the second 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 $34.53 PSF/YR at the end of the first quarter, up from $30.93 PSF/YR in the second quarter of 2016. Class A space saw even higher asking rental rates, with an average of $36.48 PSF/YR, an increase of 11.6% from a year ago.

Suburban Conditions

The suburban vacancy rate was 7.8% at the end of the second quarter and is continuing to trend down as the available space in the market is absorbed. Over the last twelve months, the full-service average asking rental rate has increased by 9.7% from $21.93 PSF/YR to $24.05 PSF/YR.

• The 48,000-square-foot building at 4221 Faber Place sold for $11.3 million in June of 2017. MUSC sold the fully leased property in the Upper North Charleston submarket to an investor for a 7% capitalization rate.
• The two largest leases consummated during the quarter were 25,000 and 19,809 square feet, respectively. Benefitfocus leased 25,000 square feet of space at 5935 Rivers Avenue in the Upper North Charleston submarket, and Southeastern Institute leased 19,809 square feet at Aviation Business Park in May.

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 May 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 upward trend, increasing by 1.3% over the last year, adding a total of 4,600 new jobs. Office-using employment as of May 2017 accounts for 21.0% of total non-farm employment in the Charleston-North Charleston MSA and accounted for 35% 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 newoffice-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

• Landlords are taking advantage of the market conditions and paucity of new construction to renew existing tenants, upgrade their properties and lock in long-term rental income to prepare for the next economic down cycle.

Greenville, South Carolina

• The addition of new supply over the past year combined with downsizing by some of the largest tenants has created favorable conditions for tenants in the market.

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

 

To download the complete report: Q2 2017 Charleston Office Market Report.