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Commercial real estate market slowing but steady

Melinda Waldrop //October 1, 2020//

Commercial real estate market slowing but steady

Melinda Waldrop //October 1, 2020//

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While many segments of the commercial real estate market are seeing little activity, the industrial and investment sectors remain strong, area experts say. (Photo/Melinda Waldrop)

The effect of the pandemic on Columbia’s commercial real estate market is still playing out, industry experts say, with some segments holding steady while others suffer.

One thing, though, is clear: Transactions during the COVID-19 health crisis have not fallen off a cliff like they did in the Great Recession of 2007-2009.

“I recall very vividly in ’08 and ’09, in a lot of cases, it was just a literal turning of the spigot off,” said Bruce Harper, managing partner at Trinity Partners’ Columbia location. “Activity ceased; deals fell apart. In this go-round, we’ve seen some deals have fallen out, (but) we’ve seen things a lot worse.”

While the retail and hospitality sectors are bearing the brunt of closings and uncertainty, other markets are maintaining and, in some cases, growing.

“Industrial, because of the pandemic, accelerated into warp speed,” said David Lockwood, executive vice president and COO of Colliers International South Carolina. “The need for warehousing, logistics, manufacturing space, and companies who are moving operations back to the United States from foreign companies — that is the wildest, craziest active market.”

While investment sales also remain strong, an area where the pandemic is beginning to affect decisions — or a lack thereof — is in the office market. With many workers working from home for the past six or seven months, companies are “second-guessing how much space they lease and what sort of physical footprint they need,” Harper said. “They’ve discovered that working from home with technology is actually doable and productive in many regards.”

Lockwood said while companies may be deciding whether new floorplans with more distance between employees is necessary and would require expansion, “that’s probably a 2021-type issue. Most tenants are really just trying to get back into the office to make sure that they have the productivity they need to keep their company running.”

In early March, Harper said, “we were approaching record levels of office rents, very low vacancy rates. Some of those decisions moving forward have slowed. There’s still good activity there, but a lot of those would-have-been long-term lease decisions companies were contemplating, maybe an expansion and looking at a five-year or a 10-year commitment, a lot of those decision have veered toward shorter-term situations. … The historically low interest rates are motivating a lot of office investors or office users to get out there and identify and acquire a product and renovate the product, (but) we’re still in a stage of pretty darn limited product, particularly on the front of buying office properties.”

While the numbers from the third quarter of 2020 are still being crunched, Trinity Q2 data showed vacancy rates trending upward in office (7.6%), retail (4.7%) and student housing sectors (occupancy rate 84.7%) but decreasing in industrial (4%) and multi-family (7.6%).

Preliminary Q3 Colliers figures indicate a drop in overall absorption of 14,818 square feet, with the central business district projected to be down by 8,660 square feet and suburban markets dipping by 6,158.

“What I see is a very lethargic, nothing happening, stay-in-place third quarter of the year,” Lockwood said. “There’s very little absorption, not a lot of activity. … It’s a pandemic, so a lot of businesses were focused on employee health, employee safety. They were not in the office. So they didn’t have in mind, what am I going to do when my lease expires next year, in a year and a half, or two years?

“There’s no expansion taking place by tenants. Everybody is sitting still right now.”

Rents are also not yet dipping noticeably to keep existing or lure new tenants, with annual rate growth trending upward in office (1.6%), industrial (3.1%), retail (0.7%), multi-family (3.7%) and student housing (2.5%), according to Q2 Trinity figures. 

“We’re beginning to see, in the office leasing arena, some concessions thrown out there by landlords to try to induce tenants to go ahead and make that decision to expand or to renew,” Harper said.

Demand for small, self-contained office buildings and single-level flex space with separate entrances has noticeably increased, Lockwood said.

“Some tenants may choose to move out of larger, downtown buildings, and if they have the ability to buy a small building, they will, because then they’re controlling their own environment,” Lockwood said. “They don’t have to go into common areas. They don’t have to get on an elevator. And so our brokers who are working with small properties that are for sale are seeing the most activity in the market.”

While tenants may be weighing whether to return to office spaces full-time in the future, they are not willing to sacrifice parking options in the interim. An August report from Colliers found that the city’s overall parking garage occupancy rate remains high, decreasing slightly from 83.86% during the second quarter of 2019 to 81.62% during the second quarter of 2020.

“To me, that’s an indication that most — the key word is most — companies are wanting to get back into the office, (but) it’s not totally happening,” Lockwood said.  “Everybody is taking a very conservative approach.”

Like Lockwood, Harper is awaiting more data to get a better idea of how the market is shaking out, especially as commercial clients exhaust the federal pandemic relief funding that may have keep some afloat in recent months.

“I think the PPP funding was certainly advantageous to a lot of small businesses to kind of weather the storm, and a lot of businesses might have had cash reserves that they’ve been relying on in addition to PPP funds,” Harper said. “As we move out of Q3 into Q4, I think, is where we’ll kind of see some more actual data on exactly how things have softened and what damage was done. … I would suggest that we’ll likely see a softening across the board in all of our submarkets.”

Lockwood doesn’t foresee an impact in Columbia like those faced by larger cities such as New York or Washington, D.C., where he said big corporations may never resume office operations at pre-pandemic levels.

“When you get down to a Columbia, South Carolina, a tertiary, small market, we are dominated by local companies and businesses,” he said. “That would be our local law firms, our local finance companies, our local real estate companies, our local ad agencies, our local stockbrokers — you name it. Those are people that are dying to get back into their office. When we have a presence in our market by a national company, and the ones that come to mind are banks, we could lose occupancy and footprint because banks and other national companies say corporate-wide, U.S.-wide, we’re going to go to some hybrid remote work strategy or we’re going to downsize.

“I think we will see some vacancy occurring because of that. But it’s going to be spread out over the next one to three years. … This will be small blip in the trend line in Columbia. I think it will recover very quickly. 2021 might be a recovery year, but we will come out of it pretty well in 2022, I think.”

Echoed Harper: “None of have been through this situation with a global pandemic, so it’s all new territory for us. All I can do is gauge what we’ve been able to accomplish thus far for our customers and clients, and gauge activity levels. In our business, what you close year-to-date is great, but if that pipeline is not getting refilled every single day, it can absolutely be devasting six, nine, 12 months down the road.

“If I judge what that pipeline and that activity level looks like today, as we sit here, it’s a much different picture compared to what we all went through in ’08 and ’09.”

This article first appeared in the Sept. 28 print edition of the Columbia Regional Business Report.