Historically High Occupancy and Rental Rates

Colliers International | South Carolina, Research & Forecast Report – Columbia, Office, Q2 2015

Key Takeaways

>        Office space continues to be absorbed throughout the Columbia, South Carolina office market, which ended the second quarter of 2015 with the lowest vacancy rate in over half a decade.

>        The average asking rental rate for office space in Columbia, SC increased for a tenth consecutive quarter, reaching historically high levels.

>        Some tenants are opting for suburban office space as options in the Central Business District remain limited.

>        Employment is growing throughout the Columbia, SC MSA with office-using employment surpassing pre-recession levels.

 

To download the complete report: Q2 2015 Columbia Office Market Report.

Market Overview

The Columbia, SC office market is setting records, embracing the highest occupancy in over half a decade along with the highest rental rates ever witnessed.  The market ended the second quarter of 2015 with a total vacancy rate of 16.6%, down from 17.3% at the end of the first quarter of 2015 and 17.4% one year ago.  Large blocks of contiguous Class A office space are becoming increasingly difficult to find.  The Central Business District and St. Andrews submarkets, which have seen the greatest amount of activity in recent quarters, hold the lowest Class A vacancy rates at 10.5% and 9.0%, respectively.

Asking rental rates averaged $16.12 per square foot per year for the market, increasing 8.1% in two years.  Asking rental rates for Class A and B office space averaged $19.72 and $16.11, respectively, for the market, increasing 6.0% and 4.5% since mid-year 2013.

Given the high occupancy and rental rates throughout the market, landlords are taking control of the market offering very few concessions, if any.  Tenants are competing for available space while landlords push rates upwards.  The days of offering incentives to attract prospective tenants are in the past.

Despite high occupancy throughout the market, construction has been limited in recent years.  New office space requires rental rates greater than average market rates, which developers worry tenants are not willing to pay.  However, as market rents continue to climb, the gap between rates for new and existing space is shrinking making new construction a feasible option for developers and tenants.

Holder Properties broke ground earlier this year on the University of South Carolina’s Innovation Center located in the Central Business District.  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.  Construction is expected to complete in 2016.

Similar to other secondary and tertiary markets nationwide, the Columbia, SC office market is receiving growing interest from both investors and tenants.  A first quarter 2015 report from EDR’s ScoreKeeper model ranked two South Carolina metropolitan areas, Columbia and Charleston, among the top 10 high-growth metros for property due diligence.  EDR’s ScoreKeeper model monitors the environmental due diligence industry and assigns ranking based on the volume of Phase I environmental site assessments.  Findings closely mirror commercial real estate trends as primary markets are becoming saturated and increasingly competitive with foreign capital investment often forcing investors into secondary and tertiary markets.

As of mid-year 2015, office building acquisitions throughout the market totaled more than $70 million for the year.  A significant sale was the acquisition of the Meridian office building at 1320 Main Street in the Central Business District.  The 335,000 square-foot, Class A office building was acquired for $65.6 million as part of a portfolio acquisition by California-based Hertz Investment Group.

 

Central Business District

Continuing to excel, the Central Business District (CBD) is nearing 90% occupancy with asking rental rates averaging $19.14 per square foot per year, the highest rates ever witnessed in the submarket.  Overall, CBD asking rental rates are 20% higher than 2010 rates.  Asking rental rates for Class A and B office space in the CBD averaged $21.48 and $17.40, respectively, at mid-year 2015, increasing from $19.90 and $16.29 at mid-year 2010.

Vacancy has significantly tightened over the past five years dropping to 10.5% from 15.4% at mid-year 2010.  Banks, law firms and finance companies are among the major CBD office users with the technology industry making up a growing sector.

While the CBD has traditionally been the focal point of the market and seen the greatest activity, limited options for space remain with rental rates too high for some tenants. As a result, some new tenants looking to enter the market are opting for space in the suburban submarkets, specifically the St. Andrews submarket, which is within close proximity to the CBD.

 

Suburban Submarkets

The suburban submarkets contributed to the majority of activity during the second quarter of 2015, largely due to the CBD’s high occupancy and rising costs.  Approximately 48,000 square feet of office space were absorbed throughout the suburban submarkets during the second quarter of 2015, which ended with a vacancy rate of 22.5%, down from 23.5% the previous quarter.

Asking rental rates for suburban office space averaged $14.76 per square foot per year, increasing from $14.29 at mid-year 2014.  Asking rental rates for Class A and B space averaged $17.14 and $15.50.  The St. Andrews submarket is home to the most expensive suburban office space, attributable to the quality and attractiveness of the available inventory.  Asking rental rates for St. Andrews office space average $15.04 with asking rates for Class A and B space averaging $18.54 and $15.72, respectively.  Rental rates have significantly increased over the past two years with rent gains of $1 to $2 per square foot per year.

The St. Andrews submarket has positively benefited from tightening market conditions resulting in a declining vacancy rate from 28.0% in 2013 to 21.0% at mid-year 2015.  Tenants find the submarket attractive given various factors.

 

Factors Driving Suburban Success 

>        Abundant, free parking gives suburban office parks a competitive edge as finding parking is becoming a costly challenge for CBD office tenants.

>        With the CBD running low on large blocks of contiguous Class A and B office space, tenants are turning to the suburban submarkets to meet their space needs.

>        Recent suburban sales have provided opportunity for new landlords to invest in building renovations and improvements, transforming Class B buildings into B+ and A buildings.  For instance, lobby and common area improvements in the Stoneridge Office buildings in the St. Andrews submarket proved successful in attracting new tenants.

>        Although rental rates are increasing throughout the market, rental rates in the suburban submarkets remain below CBD rental rates, offering an affordable option for tenants.

 

Office-Using Employment

Office-using employment makes up 22.3% of total non-agricultural employment in the Columbia, SC MSA.  Although the sector was negatively impacted during the recent economic downturn, all 9,300 jobs lost were regained as of May 2015 with an additional 4,000 jobs created.  Of all the jobs added from May 2014 to 2015, 46% belonged to the office-using sector, mostly the professional and business services sector.  As of May 2015, 84,500 individuals were employed by an office-using job, a 3.3% increase over the previous year.  Office-using employment is growing, but at a slower pace than the peak annual growth rates experienced late in 2012.

 

Market Outlook

The second half of 2015 is likely to be accompanied by further improvements throughout the market.  The suburban submarkets, especially St. Andrews, will continue to thrive given the tightening CBD submarket.  The St. Andrews submarket provides a quality alternative to tenants looking for space but unable to locate in the CBD.  Rental rates will remain on their upward path.  As the few remaining large blocks of available space are absorbed, new construction and adaptive reuse will be necessary for future growth.  The remaining months of the year are optimal for investors looking to benefit from the current low interest rates, high occupancy and elevated rental rates.  It is speculated that the Federal Reserve is waiting until later this year to raise interest rates, which may generate a spike in investments during the upcoming months.  Columbia’s economy and office market are poised for future growth supported by recent economic announcements throughout South Carolina such as major investments from Volvo and Mercedes-Benz Vans.

 

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.

 

Charleston, South Carolina

>        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.

 

Greenville, South Carolina

>        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.

 

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

 

To download the complete report: Q2 2015 Columbia Office Market Report.