Colliers Report: Tight Charleston office vacancy prior to new construction deliveries

October 3, 2019

Research & Forecast Report Q3-2019
CHARLESTON | OFFICE 

Key Takeaways

  • Despite 107,921 square feet of new suburban construction deliveries, the overall Charleston office market absorbed 284,129 square feet.
  • The overall vacancy rate dropped from 12.20% last quarter to 10.36% this quarter.
  • Rental rates in the upper and lower peninsula are expected to rise due to demand and building upgrades. The rental rates during the third quarter of 2019 averaged $24.72 per square foot in the lower peninsula and $17.72 per square foot in the upper peninsula.

For additional commercial real estate news, check out these market reports here.

Two distinct development types in the peninsula

There are two distinctive types of office development occurring within the Charleston peninsula. The upper peninsula office development has a modern feel with a live-work-play option catering to the Millennial and Gen Z population. High tech businesses tend to locate in this region due to quality amenities and technology-focused suites. The rental rates are trending upward within the upper peninsula due to limited supply, upgraded features and convenience of location. This region has a low vacancy rate and absorption is expected to continue to be positive through 2019.

The lower peninsula development differs from the upper because it has a historic flare that is distinctly Charleston. The buildings have extraordinary characteristics unique to each tenant. In response to increased demand, owners are upgrading amenities and interiors within the lower peninsula office buildings while maintaining its unique southern charm. Due to amenity upgrades coupled with historic appeal, the rental rates in the lower peninsula are predicted to rise in the coming quarters.

Charleston economy

Due to aerospace, automotive, advanced manufacturing and technology businesses booming in Charleston, additional supply-chain providers are choosing to locate within the region. Tourism in Charleston also continues to be a flourishing aspect of the economy. Commercial real estate is prosperous within every sector thanks to low interest rates and high demand. According to the U.S. Bureau of Economic Development, the GDP within the region grew 50% from 2010 through 2017 and reached $42 billion. Charleston’s job growth is positive and has increased 0.7% over the past year. As of July of this year, the unemployment rate is 2.8% – lower than the national average of 3.7%. Population is predicted to increase by more than 10% by 2024, and households in Charleston are projected to average an income of $88,296 by 2019 – 1.03% higher than the national household average income of $87,398. Therefore, Charleston business owners, tenants and residents alike are set up to thrive due to high office demand, increasing wealth and population and a positive Charleston economy – all while enjoying a high quality of life.

Market Overview

Overall Charleston Market

The Charleston office market is comprised of approximately 13.64 million square feet in 393 office buildings within seven Charleston submarkets. There are currently 16 office buildings under construction or renovation throughout the Charleston market. When completed, these buildings will add approximately 1.02 million square feet to the office inventory. Despite an increase in sublease availabilities this quarter and new construction deliveries, the overall Charleston office market absorbed 284,129 square feet during the third quarter of 2019 and the overall vacancy rate dropped from 12.20% last quarter to 10.36% during the third quarter of 2019. The average weighted rental rates increased this quarter to $24.92 per square foot. Likewise, the overall average Class A weighted rental rate also increased from $28.05 per square foot during the second quarter of 2019 to $29.14 per square foot this quarter.

Central Business District

The central business district has 86 buildings totaling 2.72 million square feet in Charleston and there are currently 475,000 square feet of office buildings under construction. No new construction was delivered to the downtown sector during the third quarter of 2019. Office activity in the central business district, while minimal, was positive during the third quarter of 2019. Downtown offices absorbed 13,739 square feet and the vacancy rate dropped from 8.51% last quarter to 7.71% during the third quarter of 2019. The average weighted rental rate for the remaining downtown availabilities, during the third quarter of this year, were $33.06 per square foot.

Suburban Conditions

The Charleston suburban office market is comprised of 307 office buildings totaling 10.19 million square feet. There are ten offices, totaling 481,740 square feet, under construction throughout the suburban submarkets and one building is under renovation at Garco Mill in Lower North Charleston. Also, four office buildings were delivered to the suburban submarkets adding 107,921 square feet during the second quarter of 2019. Overall, the suburbs absorbed 270,390 square feet this quarter; Class A office space absorption of 179,702 square feet accounted for more than half of the total market absorption. Upper North Charleston is the submarket that absorbed the most square feet this quarter, and it was not attributable to only a few large leases, many buildings added tenants contributing to the positive absorption. Due to the positive absorption and continued high demand, the suburban office vacancy rate dropped from 12.70% during the second quarter of this year to 11.03% this quarter. The overall suburban market average weighted rental rate for the remaining availabilities remained at $23.39 per square foot from the second quarter of 2019 to this quarter.

Significant Transactions

According to CoStar, during the third quarter of 2019 leasing activity accelerated, there were 102 office leases executed in the Charleston market. The largest leases were signed by undisclosed tenants. CoStar also reported 18 office sale transactions from July 2019 through September 2019.

Leases

  • Pulte Home Corporation leased over 18,000 square feet at River Oaks Center in the Faber Place office park in North Charleston.
  • USI Insurance Services leased 7,328 square feet, and JMT leased 6,683 square feet at Gateway Mount Pleasant bringing the building to full occupancy.

Sales

  • Asana Partners purchased the Midtown 15,860-square-foot office located at 550 King Street as part of a $14.4 million, four-property portfolio.

Construction Pipeline

Construction activity continues to be positive in the Charleston market. Currently, there are 1,052,738 square feet of office space under construction.

Delivered

  • The Ingleside Gateway building completed the 60,000-square-foot office building.
  • 1070 Jenkins Road is the site of a 20,000-square-foot office building within the West Ashley submarket.
  • Building 5 in Live Oak Square now has a 15,053-square-foot office building.
  • Tract A-2-1 at 3700 Ingleside Boulevard is the site of a single-tenant 12,868-square-foot office building.

Under Construction 

  • 22 Westedge Street continues construction on a 138,000-square-foot office building located within the central business district.
  • Ferry Wharf construction continues at 75 Port City Landing and, when completed, will be a 125,000-square-foot office building.
  • The Belvidere began construction on a 110,000-square-foot office located at Meeting Street and Algoquin Road.
  • 4920 Ohear Avenue has a 110,000-square-foot Class A office building under construction within the Upper North Charleston submarket.
  • The Jasper is a mixed-use development with 75,000 square feet of office under construction on Broad Street in the Charleston central business district.
  • Charleston Tech Center (formerly Flagship 3), located at 999 Morrison Drive in Charleston, began construction on a 92,000-square-foot office building within the central business district.
  • The Lumberyard, located at 1859 Summerville Avenue, is the site of a 60,000-square-foot office building transformation.

Office-Using Employment

Office-using employment covers jobs related to the professional and business services, financial activities and information sectors. According to the most recent August 2019 data from the Bureau of Labor Statistics, there were 1,600 fewer office-using jobs during August of 2019 than there were in August of last year. Despite less office jobs this year, total non-farm employment has increased by 7,300 jobs in the past 12 months. The top 3 employment sectors within Charleston are Trade, Transportation and Utilities, Government and Professional and Business Services. According to the Bureau of Labor Statistics, as of July 2019 the unemployment rate remains low at 2.8%, much lower than the national unemployment rate of 3.7%.

Market Forecast

Charleston’s market is poised for optimal office market activity throughout 2019. A variety of employment sectors are leading to increased wages and rising employment rates, despite continued population growth. The demand to locate to the region is high due to a robust business climate and continual accolades given due to the high quality of life in Charleston. Millennial and Gen Z professionals are drawn to the city because of the live-work-play environment and modern, high-tech office options. More office product is predicted to be completed in the next few quarters, but absorption is anticipated to remain positive. Upgrades to office buildings will raise the rental rates of the remaining availabilities.

For additional commercial real estate news, check out our market reports here.