Rising occupancy and rental rates continue to set new records

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

Key Takeaways

>        The Charleston, SC office market continues to tighten with occupancy and asking rental rates reaching record-highs.  Occupancy was over 90.0% for the first time in over a decade at mid-year 2015.

>        Asking rental rates in Charleston, averaging $22.59 per square foot, are among the top rates in the Southeast, surpassing those of Atlanta, GA and Charlotte, NC.

>        Construction activity is at its highest point since the recent recession with several office buildings under construction throughout the market.

>        Office-using employment in the Charleston-N. Charleston, SC MSA is at an all-time high with 70,700 jobs.

 

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

 

 

Tightest Market in Over a Decade

Charleston’s vibrant economy, growing tech industry, educated labor force and increasing popularity are driving demand and contributing to the market’s success.  Occupancy in the Charleston, South Carolina office market continued along its upward path through the second quarter of 2015, which ended with a vacancy rate of 9.8%, the market’s lowest vacancy since 2002.  The vacancy rate is down from 10.2% at the end of the first quarter of 2015 and 12.0% two years ago.

Virtually all large blocks of Class A office space have been absorbed creating the tightest conditions ever.  Few options remain for large Class A and B spaces.  Tenants are finding themselves competing for space and are oftentimes limited by the space they occupy preventing expansion.   The Class A vacancy rate for the market was 7.6% at mid-year 2015 with less than 370,000 square feet of Class A office space remaining vacant throughout the market.  The “flight-to-quality” trend that started several years ago has significantly benefited Class A buildings throughout the market as tenants aim to get higher quality space for their investment.  Demand for such space has been apparent in the Class A vacancy rate, which has remained below 10.0% since 2011.

 

Central Business District Submarket

Charleston’s Central Business District (CBD) remains the focal point of the market for both investors and certain high-profile tenants looking for prime visibility.  The CBD vacancy rate, which remains consistently low, ended the second quarter of 2015 at 11.5%, increasing slightly from 8.8% at year-end 2014.  The increased vacancy is largely the result of AT&T vacating its former headquarters at 385 Meeting Street.  The building was acquired earlier this year for $15.6 million by a local investment group with plans to improve the building in an effort to attract new tenants.  Given the tight market and limited availability of Class A and B space, the approximately 82,000 square-foot, Class B building is expected to lease quickly.  Less than 80,000 square feet of Class A office space remains vacant Downtown with a vacancy rate of 7.7%, the lowest in over a year.

 

Suburban Submarkets

The suburban submarkets experienced the greatest activity throughout the second quarter of 2015 given the limited options in the CBD.  Some tenants are choosing to locate in the suburban submarkets taking advantage of free parking, closer proximity to employees, more options for space and lower rental rates than the CBD.  Mt. Pleasant’s close proximity to the CBD has proven successful in attracting tenants.  The growing demand and interest in the suburbs yielded a vacancy rate of 9.4% at mid-year 2015, down from 10.3% the previous quarter and 13.0% two years ago.

 

Record-High Rental Rates

Rising occupancy rates have been accompanied by faster growing rental rates, which are seeing levels never before witnessed in the market.   With tenants competing for space, landlords are able to raise rents in what has essentially become a landlord’s market.  Concessions and free rent are increasingly rare as the days of needing incentives to attract tenants are long past.

Asking rental rates for the overall market averaged $22.59 per square foot per year at mid-year 2015, increasing from $22.10 at the end of the first quarter of 2015 and $20.38 one year ago.  Rental rates throughout Charleston are at the highest rates ever, increasing 19.0% over the last decade.   Asking rental rates for Class A and B space averaged $27.10 and $22.91, respectively, increasing from $26.92 and $21.79 over the previous quarter.  Class A and B asking rental rates have increased 5.7% and 14.5%, respectively, in just two years.

CBD office space is significantly more expensive than suburban space, although both continue to increase.  Asking rental rates for CBD office space averaged $30.11 per square foot per year at mid-year 2015, up from the first quarter average of $29.86.  These are the highest rates CBD landlords have ever received and the rates are likely to continue to rise as occupancy tightens further.  CBD rental rates have increased 32.3% in just 10 years when rental rates averaged $22.76.  Class A and B asking rental rates averaged $32.60 and $29.67, respectively, at mid-year 2015.

Suburban asking rental rates averaged $20.61 per square foot per year at mid-year 2015.  Class A and B asking rental rates averaged $25.79 and $19.82, respectively.  Mt. Pleasant is home to the most expensive suburban office space with asking rental rates for Class A and B space averaging $31.71 and $23.76, respectively.  Asking rental rates for Class A and B office space average over $20.00 in each of the submarkets  with the exception of Upper North Charleston and West Ashley, where asking rental rates for Class B office space average $19.48 and $18.79, respectively.

When people think of Southeastern office markets, Atlanta, GA or Charlotte, NC might come to mind, but Charleston, SC is what should come to mind.  While the Charleston, SC office market is significantly smaller than its Southeastern counterparts, it holds one of the highest rental rates and lowest vacancy rates among the markets.  A recent office study showed only two southeastern markets, Ft. Lauderdale and Miami, FL, with average asking rental rates for Class A CBD office space greater than those of Charleston.  Similarly, only four markets, Miami, Ft. Lauderdale, West Palm Beach, FL and Nashville, TN, reported average asking rates for Suburban Class A office space higher than Charleston.  The highest rental rates in the southeast are in Miami, FL where asking rates for Class A CBD and Suburban office space average $40.93 and $31.95, respectively.

Charleston’s suburban vacancy rate ranks second behind Nashville, TN, which reported a vacancy rate of 2.9%.  Raleigh and Charlotte, NC CBDs beat Charleston’s CBD with vacancy rates of 4.9% and 8.4%, respectively.

Declining vacancy and growing demand for space is driving up rents throughout the Southeast, but asking rents in Charleston are reaching higher levels than comparable, neighboring markets for various factors.

 

Why is Rent in Charleston so Expensive?

>        The inventory of available, existing space is running scarce.  While new construction is in the pipeline, the actual square footage that will be added to the inventory falls short of demand.

>        Landlords are in control of the market.

>        Developable land in Charleston is expensive and difficult to find.  As Charleston continues to rank a top tourist destination, office developers find themselves competing for land with multifamily, hotel and retail developers.

>        Development costs are high due to the nature of the land on the peninsula.

>        Construction costs are increasing at a time when lending conditions are not favorable.  Banks are requiring speculative office buildings to be 50% pre-leased prior to approving loans, limiting the amount of new speculative projects in the market.

 

Construction Gains Momentum

Demand for office space is strong throughout the market, far exceeding existing Class A supply.  Construction activity is picking up, but even upon completion, the added supply will fall short of the growing demand.  Further construction is needed for the market to grow and allow room for existing tenants to expand.

>        Midtown, the cornerstone of Upper King, is nearing completion and will offer 14,000 square feet of office space upon delivery in September 2015.

>        Construction continues on 1 Central Island Plaza on Daniel Island.  The four-story, 75,000 square-foot, Class A office building is being developed by Holder Properties and is expected to complete early in July of 2015.  Gallagher Risk Management Services recently signed a 6,000 square foot lease at the building, which will deliver approximately 50% leased.

>        WestEdge, formerly known as the Horizon Project, will be among Charleston’s newest developments.  The development, located near the Medical University of South Carolina, will be a long-term, multi-phase project to be complete in 12 to 15 years.  10 WestEdge, the first of two buildings at the campus, will be an 8-story building to include a grocery story on the ground floor, retail and restaurant space, approximately 350 apartment units and a 5-story parking garage.  22 WestEdge will be an 8-story, 151,000 square-foot research and office building.  The development is likely to target the biotechnology industry.

>        Durlach Associates and Trinity Capital Advisors recently broke ground on a 125,000 square-foot, 5-story, Class A office building to be known as Faber Plaza in North Charleston.  The building is located in Faber Place and construction is set to complete Spring 2016.

>        The former Navy office building in North Charleston has been vacant for more than a decade, but may soon see new life.  Anchor Center Investors LLC plans to acquire the 6-story, 156,000 square-foot building with plans to redevelop the building into Class A commercial space.

>        The South Carolina Research Authority (SCRA) building at Nexton delivered late in 2014.  The 75,000 square-foot, Class A office building offers approximately 15,000 square feet of office space for lease in the Summerville submarket.

>        Building I at Nexton is also complete in the Summerville submarket and offers up to 55,000 square feet of Class A space.

 

Office-Using Employment

Office-using employment makes up 21.5% of total non-agricultural employment in the Charleston-N. Charleston, SC MSA.  As of May 2015, office-using employment was at an all-time high with 70,700 jobs, a gain of 13,800 jobs since the recent recession.  From May 2014 to 2015, 4,200 jobs were added to the office-using sector, the greatest annual change since September 2007.   Office-using employment is growing and at a faster pace than recent years.

 

Market Outlook

The remainder of 2015 appears promising for the Charleston, SC office market.  Vacancy will continue to decline, but at a slower pace given the limited available space throughout the market.  Rental rates will climb further breaking more records and will remain among the top in the Southeast.  New construction is vital for future growth.  Lending conditions must soften for speculative construction to be a viable option for many developers.  Recent announcements by Mercedez-Benz Vans and Volvo to open new plants in Charleston will have a positive effect on the overall economy and office market.

 

Around the State

A growing demand for office space throughout South Carolina is contributing to tightening markets and soaring rental rates in major office markets such as Columbia and Greenville.  Investors are responding with new construction as well as redevelopment and renovation of existing office buildings.

 

Columbia, South Carolina

Office space continues to be absorbed throughout the Columbia office market.  Average asking rental rates increased for the tenth consecutive quarter, reaching historically high levels.  Some tenants are opting for suburban office space as options in the CBD remain limited.  Suburban parks offer free parking and lower rental rates than the CBD.

>        Holder Properties broke ground earlier this year 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.

 

Greenville, South Carolina

Demand is exceeding existing supply for Greenville’s office market, specifically in the CBD, driving new construction and adaptive reuse projects.

>        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.

>        504 Rhett, located one block from South Main Street and Fluor Field, is being redeveloped and will offer approximately 14,000 square feet of office space with modern finishes.

>        Camperdown, the proposed redevelopment of the Greenville News Site, will include a six-story, 130,000 square-foot, Class A office tower and a four-story office-building with approximately 24,000 square feet of office space and ground-level retail.

 

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 Charleston Office Market Report.