Rental Rates Approaching Record Highs and Still Climbing

KEY TAKEAWAYS

>    The Columbia, SC office market vacancy rate continues to decline.  Rental rates are on the rise and expected to reach record levels.

>    Residential and student housing developments drive the Central Business District.

>    Office-using employment nears pre-recession levels in Columbia.

>    Gen-Y is starting to shape the Central Business District.

 

To download the complete report click the link: Colliers International | South Carolina: Q3-2014 Columbia Office Market Report

 

MARKET OVERVIEW

Improvements continued through the third quarter of 2014 for the Columbia, South Carolina office market.  The vacancy rate was down to 16.24% from the second quarter vacancy rate of 16.92% and third quarter 2013 vacancy rate of 18.4%.  Rental rates averaged $16.03 for the entire market at the end of the third quarter, a 2.8% increase from $15.59 at the end of the second quarter of 2014.  Rental rates averaged $15.20 a year ago.  As vacancy rates decline and rental rates increase due to increased office demand, landlords are becoming the dominant players in the market.  With landlords currently in control of market rental rates, tenants can expect to see higher rates in the future, especially in the Central Business District where significant increases are expected.  Concessions, while limited, are still available in the market but are expected to decline as incentives are no longer needed to attract tenants, especially in the Central Business District submarket.

 

 

CENTRAL BUSINESS DISTRICT SUBMARKET

The Central Business District (CBD) ended the third quarter of 2014 with a vacancy rate of 10.50%, down from 10.82% at mid-year 2014.   Leasing activity was primarily in smaller blocks of space as the supply of 20,000 square foot or larger of contiguous space remain limited throughout the CBD.  CBD Class A and B vacancy rates were 10.74% and 9.03%, respectively.

Vacancy rates are low throughout the Columbia market, but the CBD is the tightest submarket offering the least amount of available space.  With less than 500,000 square feet of office space available for lease in all classes and the few large blocks of contiguous space available concentrated in just a handful of buildings, rental rates are likely to spike in the near future as landlords drive the rate upwards.

As occupancy increases and CBD growth continues, a strong demand for new office space and construction will exist.  Horizon II will be home to the newest office space Columbia will see.  The approximately 130,000 square-foot USC research office building will be located at the corner of Blossom and Assembly Streets and is anticipated to be completed in 2017.

Additionally, the University of South Carolina was recently awarded a $1.9 million grant for a new 50,000 square-foot incubator to be located at 707 Catawba Street.  Construction the new building is expected to begin in 2015.  The incubator will serve as a host for startup companies and entrepreneurs.  Technology incubators are gaining popularity as the technology industry and support for entrepreneurs grows.  The University’s Columbia Technology Incubator is currently located at 1225 Laurel Street, but has outgrown its space.

 

GEN-Y’S INFLUENCE

Over the past year, the media has been flooded with announcements of new restaurants, retailers, hotels and planned residential and mixed-use developments throughout the CBD.  The idea of a live, play and work environment is heavily influenced by the growing Generation Y population and their preferences.

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.

Columbia is growing and becoming more vibrant with such developments, which will help retain young talent and grow the office market.  As the Baby Boomers near retirement and Generation-Y take their place in the workforce, the work environments and their surroundings will adapt to meet their needs.  Offices will offer a more collaborative environment while housing developments and dining and entertainment districts will be within walking distance.

 

SUBURBAN SUBMARKETS

The suburban submarkets ended the quarter with a vacancy rate of 21.64%, down from 22.66% at mid-year 2014 and 25.02% at the end of the third quarter of 2013.  Rental rates were up from the second quarter 2014 average of $14.33 to $14.61 per square foot.  Sales velocity was down during the third quarter following the sale of two suburban office portfolios at Synergy Executive Park and Stoneridge Office Park in the St. Andrews submarket earlier in the year.

The Northeast and Forest Acres submarkets hold the highest vacancy rates in the market, 29.83% and 25.03%, respectively.  The submarkets have struggled in recent quarters due to the lack of quality Class A space.

The St. Andrews submarket, once a struggling suburban submarket, has recently shown great improvements and was down to a vacancy rate of 17.21% at the end of the third quarter of 2014.  Just one year ago the vacancy rate in the submarket was 23.83%.  Upgrades to properties are proving beneficial in attracting tenants to the submarket, which is in close proximity to the CBD and has easy access to major interstates.  The St. Andrews Class A vacancy rate was down to 6.38% at the end of the third quarter of 2014 from 13.28% at mid-year 2014.  Class A asking rental rates averaged $18.35 per square foot at the end of the quarter, up from $17.27 per square foot at mid-year 2014.

 

RENTAL RATE TRENDS

Rental rates are moving along an upward trend and are expected to continue on the path for the remainder of 2014 and into 2015.  Occupancy is high throughout Columbia for Class A and B space, specifically in the CBD, and tenants competing for quality office space are willing to pay the higher rents.

The market experienced lower leasing velocity and declined rental rates during the recent economic downturn with rental rates dropping to $14.71 per square foot at its lowest point.  Today, the market asking rental rate averages $16.03 per square foot, a 9.0% gain from the lowest average rate seen over the past 4 years.

The CBD has experienced the greatest increase in asking rental rates reaching record high rates.  At the end of the third quarter of 2014, the CBD asking rental rate averaged $18.69 per square foot, a 3.0% increase over the previous quarter and a 10.7% gain from year-end 2010 when the asking rental rate averaged $16.88 per square foot.  Asking rental rates for Class A space in the CBD averaged $21.15 per square foot at the end of the third quarter of 2014, a record high for the market.

 

IN THE MONTHS AHEAD

The remainder of 2014 is likely to be accompanied by declining vacancy, positive absorption and higher rental rates.  The market can expect to see rental rates never before seen in Columbia, especially in the CBD.  Landlord concessions will decline as the availability of space tightens.  As rates increase and demand for office space continues to grow, new construction will gain momentum.  The growing downtown residential population and office-using employment will attract some companies looking for space in the vibrant submarket, but others will favor the suburbs for lower rent and increased options.

 

AROUND THE STATE

CHARLESTON, SOUTH CAROLINA 

The Charleston, SC office market has experienced much growth over recent quarters with the office market seeing declined 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.   With almost no blocks of contiguous Class A space over 15,000 square feet vacant in the market, existing tenants are often times finding themselves limited by the space they occupy prohibiting growth and job creation.  Speculative office developments are essential for the future growth of the Charleston office market.

GREENVILLE, SOUTH CAROLINA 

The Greenville, SC office market remained steady through the second quarter of 2014 with focus spread across the Central Business District (CBD) and suburban submarkets.  Construction was still centered on multi-family developments in the CBD.  The Greenville News Building in the CBD is under contract for a planned mixed-use development.  Construction in the suburbs is still absent from the market.

 

To download the complete report click the link: Colliers International | South Carolina: Q3-2014 Columbia Office Market Report