Columbia office market begins 2016 with modest slowdown

Key Takeaways

• The Columbia, SC office market experienced a modest slowdown in activity during the first quarter of 2016 but still posted a slight increase in occupancy.
• Asking rental rates increased slightly during the first quarter.
• Construction is limited to two projects in the Central Business District.  Both are expected to be completed during the second quarter of 2016.
• Limited options for quality space and stagnant employment contributed to a slow quarter.

 

To download the complete report: Q1 2016 Columbia Office Market Report.

 

Limited Options for Quality Space Hinder Activity

The Columbia, SC office market has few options for tenants seeking quality, large blocks of contiguous space.  The vacancy rate for the office market declined slightly to 15.7% during the first quarter of 2016 and was down from 17.6% one year ago.  Less than 350,000 square feet of Class A office space remain vacant in the market, reflected in the low vacancy rate of 11.3%.  Given the scarcity of available space, leasing velocity during the first quarter of 2016 was limited to lease signings of smaller space.  The lack of available space is actually creating a void of leasing opportunities.

The Central Business District (CBD) and St. Andrews submarkets are the market’s two focal points.  While the CBD is traditionally popular for occupiers, the St. Andrews submarket is gaining popularity due to its close proximity to the CBD, greater options for space and more affordable occupancy costs with free parking.

The total vacancy rate for CBD office space was 10.1% at the end of the first quarter of 2016, holding steady over the previous quarter but down from 11.6% one year ago.  Class A and B space is in greatest demand in the CBD contributing to vacancy rates of 10.5% and 8.2%, respectively.

St. Andrews has shown the greatest improvement over the past two years compared to other suburban submarkets.  The first quarter vacancy rate was 20.2%, down from 28.0% in 2013.  The submarket is home to recently renovated office space that is successfully attracting tenants.  Additionally, the St. Andrews submarket is the only suburban submarket that contains a majority of its inventory in true office parks.  As space continues to be absorbed in the submarket, an opportunity will exist for landlords in other suburban submarkets such as Northeast Columbia and Cayce/West Columbia to attract tenants who cannot find suitable options in St. Andrews.

 

Slowdown in Employment Contributes to Flat Market

In addition to limited availability contributing to limited activity during the first quarter of 2016, stagnant employment likely plays a role as well.  Rising employment levels typically are strongly correlated to declining vacancy rates.  The correlation between the two variables is evident when examining historical data.  Approximately 1,900 office-using jobs were added to the Columbia, SC metropolitan statistical area’s (MSA) labor force from September to December 2013.  During that same time, the office market vacancy rate declined 100 basis points.

According to the most recent data from the Bureau of Labor Statistics, office-using employment in Columbia remained virtually unchanged from November 2015 to January 2016 with approximately 82,200 jobs.  The finding mirrors past trends, indicating that stagnant employment levels correspond to limited change in vacancy.  While there are some exceptions to the rule and other factors that may affect office vacancy, the correlation usually exists.

It is also worth noting that many companies are changing their floorplans to accommodate higher employee density and thus require less square footage per employee.  As a result, greater job creation is required to impact vacancy and demand for space.  The shift comes as collaborative work environments gain popularity among millennial employees and traditional office work changes to be more technology based.

 

Record High Rental Rates

Rental rates held steady during the first quarter of 2016, averaging $16.40 per square foot per year (PSF/YR).  Asking rental rates have increased significantly over historical rates, up 10.8% since 2013.  The market has shifted in favor of landlords who are raising rates in response to demand.  Occupiers are also expressing desire for quality space and are willing to payer higher rent to secure their space in the market.

Tenants in the CBD are seeing the highest rates in the market, averaging $19.39 PSF/YR.  Class A CBD space is even more costly, averaging $21.10 PSF/YR, 4.1% higher than it was three years ago.  Asking rental rates for Class B and C CBD space averaged $17.98 PSF/YR and $17.08 PSF/YR, respectively, at the end of the first quarter of 2016.

Suburban office space remains more feasible for a wider scope of occupiers.  Asking rental rates averaged $14.96 PSF/YR at the end of the first quarter of 2016.  St. Andrews is home to the highest suburban rental rates with asking rental rates averaging $15.40 PSF/YR.  Asking rental rates for Class A and B St. Andrews office space averaged $18.41 PSF/YR and $15.98 PSF/YR, respectively.  Rental rates in St. Andrews began increasing in 2013 following building renovations and growing demand for space in the submarket.

 

Construction is Limited to Downtown Projects

Despite strong demand for space and limited options for large blocks of contiguous Class A space, construction remains limited to two mid-sized projects in the CBD.  The First Base Building at Bull Street and Innovation Center on the University of South Carolina’s campus are both expected to be completed during the second quarter of 2016.

The First Base Building at BullStreet, the redevelopment of the former 180-acre South Carolina Department of Mental Health campus, is under construction and expected to deliver in May 2016.  The 72,000 square-foot, Class A office building has attracted its first tenant.  The First Base Building offers tenants a downtown location with ample parking and will be located at the first base side of Spirit Communications Park, which is also under construction.  The 8,000-seat, $37-million baseball park is expected to be completed in the spring of 2016.  Office space at the building is being marketed at $28.00 full service.

Construction is nearing completion at Innovation Center, a 5-story, 110,000 square-foot, Class A office building in the University of South Carolina’s Innovista District.  The building has approximately 40,000 square feet available for lease at an asking rental rate of $18.50 NNN, which may equate to $26.50 full service.

 

 

Market Outlook

The Columbia office market is poised for continued improvements and strengthening through 2016.  Tight market conditions, favorable cap rates and low interest rates provide an ideal investment sales environment.  Vacancy rates will continue to decline but may experience a slight temporary uptick in vacancy if the First Base Building and Innovation Center deliver with vacancy.  Upon completion of the two buildings, office construction will be absent from the market.  Significant construction is not expected to appear for at least 12 to 18 months.

Asking rental rates will steadily increase given demand and the absorption of space.  Occupancy costs for tenants are rising as a result of both increased rental rates and construction costs.  Downtown tenants may be faced with additional cost increases as parking facilities raise their monthly rates.

 

 

Around South Carolina

A growing demand for office space throughout South Carolina is contributing to tightening markets and soaring rental rates.  Activity was strong and healthy through 2015 but slowed during the early months of 2016, largely a result of the limited availability of space.

 

Charleston, South Carolina

Tenants continue to show interest in the Charleston office market and demand for space is evident.  However, a limited existing and vacant supply is creating challenges for tenants looking for space.  Leasing activity was limited during the first quarter of 2016, which ended with a total vacancy rate of 7.8%.  Several office and mixed-use developments are currently proposed and under construction and will add much needed Class A space to the market’s inventory.  The buildings are successfully preleasing and attracting tenants.  Courier Square is one of the larger mixed use developments currently under construction and will include an 87,500 square-foot, Class A office building.  Charleston is home to the highest rental rates in South Carolina with asking rental rates for Class A office space averaging $27.18 PSF/YR.

 

Greenville, South Carolina

The Greenville office market has shown great improvement and strengthening over the past 12 months.  Consequently, vacancy is on the decline and rental rates are escalating.  The market’s total vacancy rate was down to 17.4% at the end of the first quarter of 2016.  Two significant leases include Endeavor backfilling 20,000 square feet of former CertusBank space at the ONE development in the CBD and Concentrix leasing a 143,000 square-foot suburban office building.  Tenants in the market are facing higher occupancy costs due to rising rental rates as well as increasing construction costs.  Tenant improvement (TI) allowance is virtually unchanged although costs are rising.  As a result, tenants are oftentimes paying the difference out of pocket.  The market welcomed a new office building early in 2016.  One Research Drive, an approximately 80,000 square foot, Class A office building, is complete at Clemson University International Center for Automotive Research (CU-ICAR).

 

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

 

To download the complete report: Q1 2016 Columbia Office Market Report.