Columbia Office Market Activity Accelerates into 2015

COLUMBIA, SC

Key Takeaways

• Rental rates are increasing significantly as the Columbia, SC office market continues to tighten.  Vacancy rates are on the decline and large blocks of contiguous Class A office space remain in low supply.  Effectively, quality space is scarce with prices increasing.
• Overall market rental rates are 5.3% higher than year-end 2013, reaching record highs averaging $16.15 per square foot at year-end 2014.
• Office market conditions closely mirror those of other Southeastern markets, such as Charlotte, Raleigh and Atlanta, which are also seeing record high rental rates and low vacancy.  New construction in recent quarters, though limited, has successfully attracted tenants in nearby markets.

 

Market Overview

2014 was a pivotal year for the Columbia office market as rental rates saw the greatest jump in the history of market statistics.  Average rental rates increased by 5.3% in one year alone.  Rental rates for office space in the overall market were up to historical rates at year-end 2014 and averaged $16.15 per square foot per year. Within the last two years, average rental rates have increased nearly 10%.  Class A rental rates for the overall market averaged $19.48 at the end of the fourth quarter of 2014, 3.3% higher than year-end 2013.    Rental rates have steadily trended upwards, especially in the Central Business District (CBD), over the past two years and are expected to climb further throughout the market.

Higher rental rates are the result of what has become a pro-landlord environment, with tightening availability as quality office space remains in low supply.  The vacancy rate for all classes of space within the market was reduced to 16.28% at the end of the fourth quarter of 2014, down from 16.77% at the end of the third quarter of 2014 and 17.55% at year-end of 2013.  The Class A vacancy rate for the overall market was down to 12.86% with less than 400,000 square feet of vacant space and a very limited supply of blocks of space over 20,000 square feet.  The suburban submarkets experienced greater leasing activity than the CBD in 2014 absorbing approximately 64,000 square feet of the total 121,517 square feet absorbed by the overall market in 2014.  The suburban submarkets are benefiting from a spillover effect of tenants unable to find space in the CBD, a trend which is expected to continue as new supply remains absent from the market.

Tenants are having difficulty finding space and are oftentimes forced into seeking space more than a year in advance of their lease expectations.  Increasing rental rates, limited options and virtually no concessions are the new norm in the Columbia office market. This era is proving to be shocking to tenants who are not accustomed to these shifts in the marketplace.  Without new supply, the market may lose prospective companies looking at Columbia to other markets and existing tenants will find they are limited in their choices, thus prohibiting job creation and slowing economic growth.  Although the demand for space is apparent, a challenge currently delaying new construction is the gap between current rental rates and those required for new office space.  Rising construction, labor and land costs are contributing to higher asking rental rates for new buildings.  However, as market rental rates continue to increase and at a faster pace, the gap will diminish making new speculative construction more feasible.

Similar conditions can be seen in nearby markets, such as Charlotte and Raleigh, North Carolina and Atlanta, Georgia.  Throughout 2014, the markets, like Columbia, welcomed historically high rental rates and the lowest vacancy rates in years, but have been quicker than Columbia to begin both speculative and build-to-suit office developments.

Horizon II, announced during the first quarter of 2014, will be home to the newest office space in Columbia. The approximately 130,000 square-foot University of South Carolina research office building will be located at the corner of Blossom and Assembly Streets and is anticipated to be completed in 2017.  Columbia Commons, the much talked about Bull Street redevelopment project, may be home to another speculative office building or build to suit.  The 181-acre site is the former state mental hospital campus.  Phase one of the redevelopment will include a new baseball stadium, to be called Spirit Communications Park, which is expected to break ground early in 2015.

The few office buildings under construction in 2014 in the Columbia market have been developed by the actual users. Some recent new projects include AllSouth Federal Credit Union’s new headquarters, McCrory Construction and Landtech’s new offices and South University School of Physical Therapy.

 

• AllSouth Federal Credit Union recently opened their new 60,000-square-foot headquarters at Elmwood and Gadsden Streets in Columbia’s CBD.
• An approximately 30,000 square foot building is undergoing renovations at the corner of Huger and Lady Streets in the CBD and will be home to McCrory Construction and Landtech.  The building will also offer 4,500 square feet of shell office space for lease.
• South University’s School of Physical Therapy building is nearing completion at the school’s Northeast campus at Carolina Research Park.  The two-story 22,236-square-foot building will include classrooms, offices and conference rooms.

 

 

Office-Using Employment

During the recent economic downturn employment levels dropped in major cities across the United States.  Once the recession ended, economic recovery began, and job creation and employment grew.  As of October 2014, all of the office-using jobs lost during the recession were recovered, with an additional 100 jobs created, bringing total office-using employment to 80,600 jobs for the Columbia, SC MSA.  As office-using employment continues to grow, companies will demand more office space leading to lower vacancy rates and a greater need for a new supply of office space.

Wage rates are also trending upwards and will help grow the workforce and talent present in the market by providing incentives for recent graduates to stay in Columbia and for other workers to relocate from other cities.  A skilled labor force is in turn appealing to leading companies, which may begin looking for office space in Columbia, likely leasing higher quality office space with higher rental rates.

 

Central Business District

Overall rental rates for the CBD are the highest they have ever been averaging $19.10 per square foot per year at the end of the fourth quarter of 2014, 5.91% higher than year-end 2013 and a 14.57% gain over year-end 2012.  Class A rental rates for the Central Business District averaged $21.38 per square foot per year at the end of the fourth quarter of 2014, setting a new record and increasing 2.3% over year-end 2013, 7.20% over year-end 2012 and 9.58% over year-end 2010.  Rental rates in the CBD are the highest rates in the market, and with less than 460,000 square feet of office space available for lease across all classes and the few large blocks of contiguous space available concentrated in just a handful of buildings, rental rates will likely continue to climb as landlords drive the rate upwards.

The vacancy rate was down to 9.81% for the CBD at year-end 2014, declining from 10.79% at the end of the third quarter of 2014 and 11.03% a year ago.  Class A and B vacancy rates were 10.63% and 7.51%, respectively, at year-end 2014.  Given the tight supply of available quality space, leasing velocity was slow through the fourth quarter with leasing activity primarily in smaller blocks of space.

Focus on the CBD remains apparent, but office building sales were limited throughout 2014.  One noteworthy sale is the mid-year acquisition by FLB Apartments LLC of the approximately 118,000 square foot former AgFirst Farm Credit Bank office building at 1401 Hampton Street. The Memphis-based company paid $3.8 million for the property and plans to repurpose the building into apartments.  The announcement follows the recent surge in multifamily and student housing projects planned for the CBD, which are geared towards the growing Gen-Y population.  Over the next several years, the CBD has the potential to gain an additional 4,200 residents.

 

Gen-Y’s Influence

Over the past year, the media has been flooded with announcements of new restaurants, retailers, hotels and planned residential and mixed-use developments throughout the CBD.  The idea of a live, play and work environment is heavily influenced by the growing Generation Y population and their preferences.

Most recently announced were plans to convert the former Carolina Properties building at 1321 Lady Street into a residential development to be called Thirteen 21 Lofts. The $22 million investment will be made by Capitol Places, Painite Capital, and Mashburn Construction. The development will have 130 units and offer one- and two-bedroom units.

Plans to redevelop the former Kline Iron and Steel Co. site, at the corner of Gervais and Huger Streets, into a mixed-use development were also recently announced. The redevelopment, to be called Kline City Center, will include approximately 120,000 square feet of office space plus additional retail space, a 280-unit apartment complex, a hotel and a 680-space parking garage. The residential portion of the development will be geared toward young professionals rather than students. Construction is projected to begin during the first quarter of 2015.

Columbia is growing and becoming more vibrant with such developments, which will help retail young talent and grow the office market.  As the Baby Boomers near retirement and Generation-Y take their place in the workforce, the work environments and their surroundings will adapt to meet their needs.  Offices will offer a more collaborative environment while housing developments and dining and entertainment districts will be within walking distance.

 

Suburban Submarkets

The suburban submarkets ended the fourth quarter of 2014 with a vacancy rate of 22.39%, holding steady over the third quarter vacancy rate, and down from the year-end 2013 rate of 23.68%, with much of the available space being in the Class B and C sector.  Rental rates for the suburban submarkets averaged $14.74 per square foot per year at year-end 2014, trending up from $14.73 the previous quarter and $14.22 a year ago.

In recent quarters the suburban submarkets have experienced increased activity and greater leasing and sales velocity than the CBD given the lack of space in the CBD creating a spillover effect into the suburbs.  The St. Andrews submarket, with its close proximity to the CBD and easy access to major highways, has shown the greatest improvement over the past year.  The submarket ended 2014 with a vacancy rate of 19.25%, down from 21.38% at year-end 2013.  The submarket holds the highest asking rental rates for Class A suburban space, averaging $17.87 per square foot per year, a 10.7% increase over the same time in 2013. Sales were slow during the last quarter of 2014 following the sale of two office parks in the St. Andrews submarket and a sale in the Northeast submarket earlier in the year.

• Hudson Advisors of Dallas, Texas acquired a portfolio of 5 office buildings, in excess of 440,000 square feet, in the St. Andrews submarket. Four of the buildings, Converse, Winthrop, Santee and Congaree, are located in Synergy Executive Park. The Stephenson Center was also acquired by Hudson Advisors.
• Three office buildings in Stoneridge Business Park, located at 220, 240 and 246 Stoneridge Drive, in the St. Andrews submarket, were acquired by Stoneridge Holdings, LLC. This marks a significant expansion for this investor that acquired Center Point I & II and the Atrium at Stoneridge, all located in the St. Andrews submarket, in 2013.
• Pinnacle Point, a 56,000 square foot building in Northeast Columbia was sold to an investor in mid-2014.  Within six months the building was sold again to a local investor and business who will occupy up to 20,000 square feet in the building.  The two-sale asset is indicative of the rapidly improving office market.

The Northeast Columbia and Forest Acres submarkets continue to offer the greatest amount of available space and the highest vacancy rates in the market of 28.92% and 26.23%, respectively, at the end of 2014.  The submarkets continue to struggle given the age and quality of the available inventory and due to state agency downsizing, leaving large blocks of space vacant.  The Forest Acres submarket, which is easily accessible from the CBD, offers an opportunity for redevelopment of repurposing of older, functionally obsolete buildings.  As the overall market continues to tighten and available space is almost nonexistent, landlords may benefit from investing in unfitting their buildings.

 

In the Months Ahead

The beginning of 2015 will likely bring further increases in rental rates, surprising many tenants who have yet to address lease renewals or decisions to relocate.  The landlord-driven market will continue to see significant issues of timing as tenants are not planning far enough in advance of their desired occupancy date.  Many of these tenants will be forced into holdover or will have to pay significantly more in rate or fees to obtain space due to limited time constraints.  The Columbia office market is experiencing new challenges like no one has seen before.  Leasing velocity in the CBD will be slow due to lack of supply, but rental rates will continue to climb.  New construction will become imperative for growth as tenants continue to have limited options for space.  Build-to-suits will likely gain momentum first, followed by speculative construction announcements later in the year.

 

AROUND THE STATE

 

CHARLESTON, SOUTH CAROLINA 

The Charleston, SC office market has experienced much growth over the past year, with the office market seeing declined vacancy rates and increasing rental rates.  As the market continues to grow, new office space will be required to support companies entering and expanding throughout Charleston.  With almost no blocks of contiguous Class A space over 20,000 square feet vacant in the market, existing tenants are often times finding themselves limited by the space they occupy, prohibiting growth and job creation.  Speculative office developments are essential for the future growth of the Charleston office market.

 

GREENVILLE, SOUTH CAROLINA 

The Greenville, SC office market remained steady through 2014 with focus spread across the Central Business District (CBD) and suburban submarkets.  Construction was still centered on multi-family developments in the CBD.  The Greenville News Building in the CBD is under contract for a planned mixed-use development.  Clemson University International Center for Automotive Research (CU-ICAR) broke ground on One Research Drive in November.  The four-story facility, located on the CU-ICAR campus, will offer approximately 80,000 square feet of Class A office space.

 

FOR MORE STATEWIDE COMMERCIAL REAL ESTATE NEWS CHECK OUT OUR MARKET REPORTS HERE.

 

 

To download the complete report click the link: Q4:2014 Columbia Office Market Report.