Traditional, large blocks of office space are in short supply in Charleston, and leasing costs have steadily increased, particularly in downtown Charleston, spurring employers to get creative in the office market, according to Colliers International – Charleston.
“The average asking rental rate for the market reached a record high of $24.14 per square foot per year at the end of the fourth quarter, an increase of 4.5% since the start of 2016,” the fourth-quarter report said.
“More impressively, the vacancy rate in the CBD (Central Business District) has remained low, fluctuating between 4.8% and 6.6%, throughout 2016. Rising occupancy and higher demand in the CBD have increased the average asking rental rate by 4.4% to $32.73 PSF/YR (per square foot per year) over the last 12 months, and by 13.6% over the last two years.”
Much of Charleston’s office market is buoyed by the region’s rapidly growing technology sector, Colliers said. Expanding companies need larger, more flexible office options and many prefer amenities like on-site food and exercise options.
Many employers have tried to maximize the space they already have by creating more open and dense floorplans, Colliers said. Some have opted to remove executive suites, office walls and cubicles to create larger communal areas and collaborative work spaces.
These changes typically lower the occupancy cost per employee and attract young professionals, the report said.
Others have moved repeatedly as their workforces have grown, including tech firms Good Done Great and BoomTown. Some companies have settled into larger, more modern office spaces, such as BoomTown’s recent move into Raven Cliff Co.’s new Pacific Box and Crate development along Upper King Street. Others opt to expand their campus footprints, like Blackbaud and Benefitfocus.
“Open, flexible and high-density office spaces will become more popular in the Charleston market as vacancy continues to fall and rents continue to increase,” Colliers said. “Although the initial cost to redesign the office may be high, an employer’s investment in these spaces will pay dividends in recruitment and retention of their employees, particularly from the incoming workforce of young professionals.”
Tight downtown market
CBRE said the overall office market in Charleston “continues to experience tremendous growth.”
The region’s office vacancy rate is rising as a result of new suburban construction and the movement of a few large tenants. Currently, 42,000 square feet of Class A space is under construction in Mount Pleasant, and several other projects are in the pipeline.
“While this rise in vacancy provides an opportunity for tenants in the suburban markets to secure space, it does little to alleviate the critical need for space on the peninsula,” CBRE said in its fourth-quarter report.
Class A vacancies on the peninsula remain tight, and few options are on the horizon, CBRE said. A 30,000-square-foot office will be available in 2018 when the redevelopment of 317 Meeting St. is completed.
A few larger spaces have become available as tenants have downsized or relocated, and developers have delivered some smaller office buildings on the peninsula.
“But it will do little to alleviate demand or the continued rise in asking rates, which are among the most expensive in the Southeast,” CBRE said.
Class B offices also remains scarce on the peninsula as many tenants tend to flock to the downtown area for its walkable amenities and the lifestyle it provides, the report said.
“With little space available for new product to develop, Class B vacancies will continue to remain tight. Continued redevelopment of existing product is more likely to take form. ... While the success of the Cigar Factory delivering 240,000 square feet of new office space downtown demonstrates the proof-of-concept for new office space, there are limited redevelopment opportunities available.”
Co-working office spaces are likely to continue gaining popularity while the market remains tight, and any new office spaces in the downtown market are expected to move quickly, the report said.
“A growing population and job market will lead to expanding and new emerging businesses needing space, as well as tenants in suburban markets looking to move downtown,” CBRE said. “Vacancy is likely to reverse its course in the coming quarters as rents continue their relentless rise.”
More to come
Newmark Grubb Wilson Kibler reported that Charleston’s office market grew by more than 300,000 square feet in 2016 and that 291,000 square feet had been absorbed by the end of 2016.
“Although the quarter saw a slight dip in net absorption rates, the year-over-year market asking rates increased by $0.94 to $20.78,” Newmark said in its report. “Combined with the fact that over 400,000 square feet of office space is currently under construction, this is a strong indicator that Charleston’s office market is headed for a bright 2017.”
Overall office vacancy rates remained mostly steady in 2016 as more jobs were created, Cushman & Wakefield Thalhimer said in its fourth-quarter report. More office product was delivered and under construction in the fourth quarter compared with the third quarter.
Cushman expects more office and mixed-use commercial developments to be built this year. A 152,000-square-foot, Class A building has been proposed for 22 West Edge, which would add 135,000 square feet of new office space downtown in summer 2018.
New product on the market would drive competition for much-needed, updated office space. Cushman expects outdated buildings to receive updates to attract tenants who might be deciding whether to expand or relocate.
Avison Young anticipates more office property construction in 2017 as the region’s population grows and businesses continue to move in to the area.
“Companies may continue to look further from the most expensive, historic downtown Charleston as they seek more affordable rents,” Avison said. “With so many strong economic drivers, Charleston is positioned for economic prosperity into 2017 and beyond.”
Lowcountry office market update:
Colliers International – Charleston
Cushman & Wakefield – Thalhimer
Lee & Associates – Charleston*
17.2 million square feet
Newmark Grubb Wilson Kibler
12.1 million square feet
*Data from a midyear report because the firm does not publish quarterly.
Source: Fourth-quarter market reports
This story originally appeared in the Feb. 20, 2017, print edition of the Charleston Regional Business Journal.