Record-Setting Year for Charleston Office Market

Research & Forecast Report

Q4 2015 CHARLESTON, SC | OFFICE

 

Key Takeaways

• Vacancy rates in the Charleston, South Carolina office market are at historical lows and rental rates are rising as landlords maintain control of the market.
• Office-using employment is growing and is at an all-time high with 70,300 jobs in August 2015.
• Demand for office space is strong, contributing to declining vacancy rates, soaring rental rates and capital investments.
• Construction activity is gaining momentum with several projects under construction and in the pipeline.

 

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

 

Tightest Market in Over a Decade

Companies are expanding quickly in the Charleston, South Carolina office market, contributing to positive net absorption and the tightest market in over a decade. Occupancy in the Charleston, South Carolina office market continued along its upward path through 2015, ending the year with a total vacancy rate of 7.8%, the market’s lowest vacancy rate in over 10 years. The vacancy rate is down from 9.4% the previous quarter and 11.7% one year ago.

The “flight-to-quality” trend that began several years ago is contributing to significant declines in Class A vacancy. At the end of the fourth quarter of 2015, the Class A vacancy rate for the market was 6.7%, down from 9.8% one year ago and 14.5% in 2010. Less than 325,000 square feet of Class A space remain vacant in the market with virtually no large blocks of contiguous space available for lease. As a result, tenants are finding themselves competing for space and oftentimes limited by the space they occupy.

Downtown Charleston remains the focal point of the market and ended 2015 with a total vacancy rate of 6.4%, down from 8.8% one year ago. New leasing velocity for Class A Downtown space has been limited given the few available options for quality space. Less than 60,000 square feet of Class A space remain vacant downtown contributing to a Class A vacancy rate of 5.4%. Class B and C vacancy rates were 7.8% and 4.9% at year-end.

The suburban submarkets welcomed greater leasing activity than Downtown Charleston given the greater options available. Approximately 550,000 square feet of suburban office space was absorbed in 2015. The vacancy rate for the suburban submarkets was down to 8.2% at year-end 2015 from 9.1% the previous quarter and 12.4% one year ago.

 

Record-High Rental Rates

Current market conditions favor landlords who have significantly increased rental rates over the past year. With heightened competition for space, landlords are also offering fewer concessions as incentives are not required for securing new leases. Asking rental rates are at record-high levels and continue to increase.

Asking rental rates for the market averaged $23.17 per square foot (PSF) at year-end 2015, increasing 6.4% over year-end 2014 when rental rates averaged $21.77 PSF. Class A and B asking rental rates averaged $27.06 PSF and $22.61 PSF, respectively.

Rental rates in Downtown Charleston are the highest in the market and averaged $31.29 PSF at year-end, increasing from $28.82 PSF one year ago and $25.45 PSF in 2012. Asking rental rates for Class A downtown space averaged $34.93 PSF, up 6.4% over the previous year.

Asking rental rates for suburban office space are also increasing but continue to be more affordable than Downtown space, appealing to a wider range of tenants. Asking rental rates averaged $21.33 PSF for suburban office space, increasing from $20.64 PSF the previous year. Daniel Island is home to the most expensive suburban office space with asking rental rates averaging $22.55 PSF.

 

Development Activity

Construction activity began to pick up last year and continued to gain momentum through 2015 as companies show a strong desire to locate in the market.

• Construction is complete at Midtown on Upper King Street in Downtown Charleston. The mixed-use development includes a dual-branded Hyatt House and Hyatt Place Hotel, retail space and 19,600 square feet of office space.
• 1 Central Island, which delivered earlier this year, is ninety percent leased. The Class A, 75,000-square-foot office building is located in the Daniel Island submarket.
• Faber Plaza in North Charleston, a 5-story, 125,000-square-foot, Class A office building, is being developed by Durlach Associates and Trinity Capital Advisors and is expected to deliver Spring 2016. The first tenant, Sonepar North America plans to occupy 25,000 square feet where it will establish its North American headquarters.
• Construction recently broke ground at 101 Coleman, an approximately 43,000-square-foot, Class A office building expected to deliver in Spring 2016.
• Courier Square, a mixed-use development to include office space, ground-level retail, and luxury apartments is under construction. The 5-story, 90,000-square-foot building is located at Columbus and Meeting streets downtown.

Significant demand for additional construction exists in the market, but developable land is expensive and community approvals are becoming more challenging. Additionally, rising construction costs coupled with further increases in interest rates will contribute to higher development costs.

 

Prime for Investment

The market’s declining vacancy rate and increasing rental rates provide a prime environment for investments. Soaring sales prices and low yields in traditional core markets in the U.S. are motivating investors to look at secondary and tertiary markets where strong market fundamentals generate a higher return with limited risk.

• Investment sales are trading at top dollar. A recent sale was that of 3955 Faber Place, an approximately 65,000-square-foot, Class A suburban office building, which traded for approximately $13 million, or $196 per square foot. Sales prices are on the rise and are significantly higher than historical rates, averaging $200 per square foot for suburban space and anywhere from $275 to $375 per square foot for downtown buildings.
• The market is beginning to see investors and developers place capital in older, lower quality office buildings. Various factors pose challenges for new office development and consequently some developers are turning to value-added investments. Investments in building upgrades and renovations are proving successful, transforming Class C office buildings into Class B or B+ buildings. The upgraded space is more attractive to tenants and is leasable at a higher rental rate than before.
• Some users are opting for ownership of older office buildings given the current high rental rates in the market.

 

Office-Using Employment

Office-using employment, which consists of professional and business services, financial services, and information employment sectors, continued to grow in 2015. Approximately 69,200 individuals were employed by an office-using job in the Charleston- North Charleston, SC metropolitan statistical area (MSA) in September 2015, a gain of 1,600 jobs over the previous year. The sector accounted of approximately 20.9% of total non-agricultural employment in September 2015, increasing from 14.3% twenty-five years ago.

 

2016 Outlook

Charleston’s office market is poised for continued growth and improvement in 2016. Tight market conditions will remain as interest in the market continues. Vacancy will continue to decline and rental rates will inch upwards as tenants compete for vacant space and landlords maintain control of the market. New construction will continue to gain momentum, but developers will face challenges securing developable land sites. Older, lower quality buildings will provide an opportunity for investors and landlords to invest in building upgrades in an attempt to attract new tenants at higher rental rates. A growing suburban population will likely drive new office construction north along I-26 towards Summerville, where a majority of the region’s new residential development is occurring.

 

Around South Carolina

A growing demand for office space throughout South Carolina is contributing to tightening markets and soaring rental rates. Market conditions are optimal for investment as occupancy rates are high and interest in the market remains strong.

Columbia, South Carolina

Market conditions are tighter than ever in the Columbia, SC office market as vacancy continues to decline and rental rates increase. Concessions are on the decline and tenants are incurring higher occupancy costs as rental rates, parking rates and construction costs increase. The market favors landlords who are taking advantage of strong demand and pushing up rental rates.

Few large blocks of contiguous space larger than 20,000 square feet remain available in the market. As a result, tenants are competing for space and lease renewals are being considered well in advance of lease expiration dates in an attempt to secure their space as well as obtain lower rental rates than those of the future.

Construction is in demand, but remains limited to two projects in the CBD. Upon completion, Innovation Center in the Innovista District and the First Base Building at BullStreet will collectively add 182,000 square feet of Class A office space to the market’s existing inventory.

Greenville, South Carolina

The Greenville, SC office market continued to improve through 2015, ending the year with record-high rental rates and declining vacancy. Development activity is gaining popularity in the market with several new, redevelopment and adaptive reuse projects in the works.

One Research Drive is nearing completion on the Clemson University International Center for Automotive Research (CU-ICAR) campus in suburban Greenville. The approximately 80,000-square-foot, Class A office building has 27,000 square feet remaining for lease. JTEKT recently announced that it will locate its North American headquarters in the building and plans to be fully operational during the first quarter of 2016. The announcement comes as a testament to the pro-business environment and talented labor force available in the region.

Downtown developments are mostly mixed-use developments with the exception of Erwin Penland 360, a 6-story, 125,000-square-foot Class A office building. Future downtown developments may be limited to redevelopment as land prices skyrocker. Office developers are competing with hotel and multifamily developers willing to pay top dollar for development sites.

 

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