Columbia Office Market Marks Q1 2015 with Construction and Growth

Colliers International, South Carolina Research & Forecast Report

Key Takeaways

• The Columbia, South Carolina office market continues to see significantly higher rental rates and tighter vacancy than previous quarters.  Occupancy is on the rise and large blocks of contiguous vacant Class A and B office space remain scarce throughout the market.
• The University of South Carolina and Holder Properties broke ground on USC’s Center for Applied Innovation, located at Assembly and Blossom Streets.
• Employment levels in the Columbia, SC MSA are reaching record highs as the unemployment rate remains low at 6.1%.  Office-using employment surpasses pre-recession levels.

 

Market Overview

2015 is off to a great start following a year full of expansion announcements, historical rent growth and substantially declining vacancy rates.  Asking rental rates in the market continued to increase during the first three months of 2015, averaging $16.20 per square foot per year, up from $16.15 at year-end 2014 and $15.57 one year ago.  Rental rates are rapidly climbing, increasing 8% in just two years.  High occupancy and growing competitiveness among prospective tenants is providing landlords a competitive edge, allowing them to raise rental rates to levels never before seen in the market.

Despite slow leasing velocity in the first quarter, the total vacancy rate was down to 17.2% for the Columbia, SC office market from 17.3% at year-end 2014 and 17.5% a year ago.  Slow leasing volume during the first quarter of 2015 is attributable to the lack of available space in the market.  Class A office space is in low supply throughout the market and large contiguous blocks of quality office space are becoming increasingly difficult to find.  With a Class A total vacancy rate of 13.6% and less than 430,000 square feet of Class A space remaining available in the market, rental rates are holding steady at a record high rate of $19.42 per square foot per year.  However, rental rates are forecasted to escalate in the remaining quarters of 2015.

High occupancy and increasing rental rates make new construction a feasible option for tenants looking for space but at significantly higher rental rates.  As a result, the market is welcoming its first wave of new construction, which has thus far been largely concentrated in the Central Business District (CBD).  Last year, AllSouth Federal Credit Union opened their new 60,000 square-foot headquarters at Elmwood and Gadsden Streets in Columbia’s CBD.  Additionally, construction continues on an approximately 30,000 square-foot building undergoing renovations at the corner of Huger and Lady Streets in the CBD.  The building will be home to McCrory Construction and Landtech.

Holder Properties recently broke ground on the University of South Carolina’s Innovation Center located in the CBD.  IBM, Fluor Corporation and the University are teaming up to create a research facility that will be a fully operational IBM delivery center and will also serve as a working laboratory for students.  The five-story academic office building will be approximately 100,000 square feet and is under construction at the corner of Assembly and Blossom Streets.  The center is likely to create 100 new jobs and will have the potential to attract further tech companies to the market as the available skilled labor pool increases.  Construction is expected to complete in 2016 and the building will deliver 40,000 square feet for lease.

The limited but growing construction activity mirrors conditions in other office markets throughout the nation.  While the majority of markets are experiencing increasing occupancy and record high rental rates, new construction is concentrated in a small number of leading markets throughout the U.S.  Rather than new construction, many markets are seeing repositioning and renovating of older office buildings, a common occurrence in Columbia.  The most recently announced redevelopment was that of the former AgFirst Farm Credit Bank office building at 1401 Hampton Street in the CBD, which is being transformed into residential units for young professionals.  Additionally, landlords are investing capital and improving Class B and C office buildings in hopes of attracting new tenants, a technique which is proving very beneficial throughout the market.  The St. Andrews submarket has several such success stories, including improvements at the Atrium at Stoneridge.

 

 

Economic Trends

The economy at both the national and local level regained strength and momentum over the past year, adding the most jobs in over 10 years.  Over 12,000 jobs were added to the Columbia, SC MSA since January 2014, the greatest annual increase experienced in years.  Job growth was seen among various sectors, specifically the office-using employment sector, which has surpassed pre-recession employment by 2,500 jobs.   The unemployment rate is holding steady and was 6.1% in January 2015, down from 7.6% two years ago.  The South Carolina unemployment rate was 6.6% in January 2015.

 

Central Business District

Activity was limited in the Central Business District (CBD) throughout the first quarter of 2015.  The vacancy rate was 10.56% at the end of the quarter, holding steady over year-end 2014, but well below the vacancy rate of 12.11% a year ago.  Rental rates are at historically high rates throughout the CBD and increased further during the first quarter.  Asking rental rates averaged $19.25 per square foot per year, increasing 7% over the past 12 months.  Class A asking rental rates averaged $21.25 per square foot per year at the end of the first quarter.

 

Suburban Submarkets

The suburban submarkets experienced the majority of the activity during the first quarter of 2014 and ended the quarter with a total vacancy rate of 23.43%, down from 23.69% at year-end 2014.  Rental rates held steady at the record-high $14.85 per square foot per year.  Class A and B rental rates averaged $16.97 and $15.41 per square foot per year, respectively.

 

In the Months Ahead

Declining vacancy rates are likely to continue, but at a slow pace given the limited options available in the market.  Rental rates will continue to skyrocket as the market favors landlords and tenants find themselves competing for quality space.  Construction is expected to pick up, with build-to-suit developments gaining popularity before speculative construction.  The completion of the Center for Applied Innovation in the University of South Carolina’s Innovista District will likely attract new companies to the market looking to locate near a growing talented labor force.  Redevelopments and repositioning of older office buildings is projected to continue as investors reap the benefits of the highly occupied market, top rental rates, possible tax incentives and a growing downtown residential population.

 

Around the State

A growing demand for office space throughout South Carolina is attributed to tightening markets and soaring rental rates, creating a need for new office construction.  Major markets around the state, such as Charleston and Greenville, are beginning to see build-to-suit and speculative office construction.  ONE in Downtown Greenville and Building I at Nexton in Summerville were among the early completed developments.  Several other projects have since broken ground in the markets.

 

Charleston, South Carolina

Activity in Charleston has been on the rise in recent years, a trend that is expected to last for a while.  A growing population and increasing office occupancy is creating a demand for new office space.

• SCRA at the Nexton Office Campus, a 75,000 square-foot Class A office building, delivered late in 2015.  The building currently offers up to 15,000 square feet of office space in the growing Summerville suburban submarket.
• Downtown developments include Midtown, the cornerstone of upper King Street, which will offer approximately 20,000 square feet of office space and 17,000 square feet of retail space.  The project is anticipated to complete in May of 2015.

 

Greenville, South Carolina

Construction picked up in Greenville following the completion of ONE Greenville in the CBD.  Today, plans are underway for the former Greenville News site and a new office building is under construction in the suburbs at the CU-ICAR campus.

• One Research Drive is under construction at the Clemson University International Center for Automotive Research (CU-ICAR) campus.  The building will offer approximately 80,000 square feet of Class A office space.
• Plans for the Greenville News Site in the CBD include a hotel, two office buildings, retail space, a parking deck, dine-in theatre and fitness center.

 

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

 

To download the complete report: Q1 2015 Columbia Office Market Report.