New Construction Essential for Future Growth – Charleston Office Market Report
October 3, 2014
KEY TAKEAWAYS
> Vacancy rate is trending downwards.
> Rental Rates are on the rise.
> Speculative office construction is imperative for future growth.
> Office-using employment surpasses pre-recession levels.
To download the complete report please click the link: Colliers International: South Carolina – Q3-2014 Charleston Office Market Report
MARKET OVERVIEW
Charleston, SC has experienced significant growth over recent quarters with job creation and the office market seeing declining 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. The overall market vacancy rate at the end of the third quarter of 2014 was down to 11.0% from 11.5% at mid-year 2014 and 12.0% at the end of the third quarter of 2013. Class A and B overall vacancy rates were 7.7% and 12.4%, respectively, at the end of the third quarter of 2014. Vacancy rates are projected to continue along their downward paths, with an increasingly limited supply of quality office space and a growing demand for new speculative office buildings.
New office space will have the ability to support new companies looking for space in the market and will allow existing tenants to expand. With almost no blocks of contiguous Class A space over 15,000 square feet vacant in the market, existing tenants are oftentimes finding themselves limited by the space they occupy, prohibiting growth and job creation. Speculative office developments, while in high demand, face a challenge in that local banks are reluctant to lend money for construction until a building meets specific pre-leasing criteria, which could require a building be 50% committed for preleasing to receive a loan. The market is hopeful that lending conditions will soften and speculative developments will gain momentum. This is essential to support the health of the Charleston office market and overall economy.
Increasing rental rates accompany declining vacancy rates as tenants compete for the few available Class A and B spaces throughout the market. Landlords are in control of rental rates, which are climbing upwards. At the end of the third quarter of 2014, overall rental rates averaged $21.03 per square foot full service, up from $20.71 at mid-year 2014 and $20.36 at the same time last year. Due to the higher rental rates, tenants will be more likely to pay the asking rates required for new office buildings, which are often higher than the market average given construction and land costs.
DOWNTOWN SUBMARKET
Office space within Charleston’s Downtown submarket continues to decline, and with a vacancy rate of 8.5%, tenants’ options for space are very limited. Downtown Class A, B and C vacancy rates are each below 10% with the Class A vacancy rate at just 7.7%. Overall Downtown rental rates held steady and averaged $29.50. Downtown Class A and B asking rental rates averaged $32.81 and $28.96 per square foot, respectively. Leasing activity was limited through the quarter given the low vacancy rate. One noteworthy transaction was a lease for 15,000 square feet by a new high-tech company called ATLATL at 174 Meeting Street. The 52,000 square foot office building, which delivered in 2013, is now 90% occupied.
The Cigar Factory, a 244,000 square foot mixed-use redevelopment to include office, retail and restaurant space, gained heightened attention and attracted new tenants during the third quarter of 2014. Garden & Gun was one of the first to announce plans earlier this year to locate in the complex and will occupy 19,700 square feet. Several tenants, including Exceed Physical Culture, Fritz Porter, Midland Mortgage Corp., EnviroMix Inc., The Law Office of M. Brooks Derrick LLC, and Strategic Risk Solutions, recently announced plans to locate in the complex, as well. Construction is underway at the complex and is anticipated to complete in the second quarter of 2015.
Construction continues on Midtown, which will offer approximately 20,000 square feet of office space in March of 2015.
SUBURBAN SUBMARKET
The majority of the activity occurred in the suburban submarkets, which ended the third quarter of 2014 with a vacancy rate of 11.5%, down from 12.2% at mid-year 2014. Overall suburban asking rental rates averaged $19.50 per square foot full service, up from $19.21 per square foot at mid-year 2014.
The suburban submarkets are anticipated to benefit from the low vacancy rate and growth of the Downtown submarket. Employers may choose to locate in the suburbs due to more options, lower rental rates and access to employees wanting to avoid Downtown traffic.
Mount Pleasant ended the quarter with a vacancy rate of 6.4%, the lowest among the suburban submarkets. Summerville, home to Nexton Office Campus, had a vacancy rate of 15.0% at the end of the third quarter. Building I at Nexton, which delivered in February 2014, offers up to 55,000 square feet, one of the few large blocks of Class A office space available in the market.
IN THE MONTHS AHEAD
The remainder of 2014 is anticipated to bring further declines in vacancy and higher rental rates. Given the limited availability of space throughout the market, leasing velocity will be slow. Landlords will continue to control the market and we may see continued increase in rental rates. Speculative construction will begin, but new office space will not be available until mid-year 2015.
AROUND THE STATE
COLUMBIA, SOUTH CAROLINA
Improvements continued through the third quarter of 2014 for the Columbia, South Carolina office market. The vacancy rate was down to 16.24% and asking rental rents for the entire market averaged $16.03 per square foot. Rental rates are reaching record highs throughout the market, especially in the CBD, and are expected to further increase. Columbia’s CBD is transforming with new mixed-used and residential developments.
> 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 office and 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.
GREENVILLE, SOUTH CAROLINA
The Greenville, SC office market remained stable through the third quarter of 2014, but activity is likely to gain moment through the remainder of 2014 and into 2015.
> Erwin Penland plans to develop a new eight-story office building at Falls Street and Broad Street in Greenville’s CBD. Plans include a three-story parking garage with five floors of office space above. Erwin Penland plans to occupy space in the building upon completion.
> Clemson University International Center for Automotive Research (CU-ICAR) will soon break ground on One Research Drive. The building will offer 80,000 square feet of Class A office space in the ICAR/Verdae Submarket.
To download the complete report please click the link: Colliers International: South Carolina – Q3-2014 Charleston Office Market Report
