Speculative Development Imperative for Future Office Market Growth

KEY TAKEAWAYS

• Average asking rental rates for Class A space continued to increase to $27.52/SF full service, a record high.
• Vacancy rates continued to decrease to 11.12% at the end of the first quarter and will continue to trend downward throughout 2014.
• Four out of six suburban submarkets have a Class A vacancy rate under 6%.
• Tenant activity in downtown Charleston appears stationary, but this will change as planned redevelopments commence construction.
• Some construction is underway, however, the market needs more speculative development in order for continued growth.

FIRST QUARTER 2014 RECAP

The Charleston office market continued to grow as reflected in the 85,753 SF of positive net absorption the market reported in the first quarter. Vacancy rates for the region decreased to 11.12 % from 11.97% at year-end 2013. Vacancy rates for Class A space plummeted to 6.75% from 9.29%, leaving very few options for tenants. Average asking rental rates for Class A space in Charleston reached a record high of $27.52/SF full service. New developments and construction are underway with over 241,000 SF under construction in the first quarter. However, more construction is imminent for the market to continue to grow.

DOWNTOWN

Vacancy rates increased slightly in the first quarter 2014 to 9.41% from 9.18% at year-end 2013 in downtown Charleston.  The vacancy rate for Class A remained flat; decreasing slightly to 9.33% at the end of the first quarter from 9.36% at the end of the previous quarter. Tenants renewed their leases due to the limited options of quality space available. Large blocks of contiguous space 10,000 SF or greater remained hard to find, however, more construction is expected to come online in the future. Cigar Factory, Courier Square and Midtown are new planned re-developments currently in the pipeline and all located in the Upper Peninsula area. Average asking rental rates decreased in the first quarter 2014 to $29.29/SF full service from $29.62/SF full service at year-end 2013. Class A average asking rates also decreased to $33.28/SF full service from $33.79/ SF full service. Vacancy rates and average asking rental rates downtown will remain volatile until more inventory is added to the market.

SUBURBAN

More activity was seen in the suburban submarkets compared to downtown. Vacancy rates decreased in the first quarter 2014 to 11.51% from 12.62% at year-end 2013. Vacancy rates for Class A dropped to 6.04% from 9.27%. The sharp decrease in vacancy was due to numerous smaller transactions occurring for what limited Class A and B space was available. Over 121,000 SF of suburban Class A and B space was absorbed in the first quarter. Four out of the six suburban submarkets have Class A vacancy rates below 6%. Class A space continued to command substantial rent premiums. Average asking rental rates for Class A space increased to $24.41/SF full service at the end of the first quarter 2014 from $23.87/SF full service the previous quarter. Rental rates for the overall suburban market decreased to $17.78/SF from $18.72/SF.

Two buildings delivered in the first quarter of 2014 and added approximately 114,000 SF to the inventory. Building I at Nexton Office Campus added 100,000 SF of inventory to the Summerville submarket. MeadWestvaco (MWV) has occupied 25,000 SF of the building and an additional 75,000 SF available for lease. 2424 City Hall Lane is 14,880 SF and is occupied by the American Red Cross and approximately 4,000 SF remains available for lease. In addition, a handful of new build-to-suit projects are under construction and expected to be completed later in 2014. These projects include:  SCRA’s 80,000 SF office building in Nexton Office Campus, College of Charleston’s 50,000 SF Lowcountry Graduate Center, a 10,000 SF new office building for the Charleston Trident Association of REALTORS®, and a 15,000 SF facility for SCE&G.

OUTLOOK

With only five Class A buildings with 10,000 contiguous square feet and greater available for lease in the region, Charleston’s market conditions appear to be healthy enough to support further construction of speculative development. Vacancy rates will continue to decrease gradually throughout 2014 due to the limited amount of speculative construction. As new construction commences, average asking rental rates will continue to move further north.

Click here to download the complete report.