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Demand for office space outpaces supply

Real Estate - Commercial
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Charleston’s growth has spurred commercial development in formerly unlikely locations, according to Avison Young’s first-quarter market report.

Skyrocketing rents, parking constraints and limited office options in the peninsula’s historic district have all contributed to developers making investments in areas not traditionally seen as hot commercial spots.

An empty warehouse on Charleston’s Eastside has been converted into the Cigar Factory, a high-end office and restaurant space. WestEdge, a mixed-use development focused on the medical research sector, is under construction in Charleston’s Westside neighborhood.

The Upper Peninsula continues to see new office developments — mostly driven by the tech sector — such as Raven Cliff’s Co.’s new Pacific Box and Crate development on Upper King Street.

“With rising rents and vacancy rates at an all-time low throughout the Charleston tri-county area, developers are seeking new sites across the region to accommodate the increased demand for office space,” Avison Young said.

Many companies are flocking beyond Charleston and Mount Pleasant to other submarkets, seeking available footprints and more affordable rental rates, the firm said.

Kingfisher Investments VI LLC converted the former Albemarle Elementary School at 720 Magnolia Road in Charleston into an office development for multiple tenants. The space has small office suites with a shared conference room, showers, bathrooms and parking. Avison Young said the space is now fully leased. (Photo/Provided)

Some are locating farther out from city centers in an effort to shorten commutes for their employees — a major issue for many Lowcountry residents. A former school in West Ashley has been converted into an office development for multiple tenants, for example, and the Nexton development in Summerville will bring new office space to that market.

“With rents climbing and a parking shortage in the central business district, industries are exploring options in submarkets historically void of office space. ... As companies continue to add to their workforce, they will be seeking additional office locations in markets closer to where their employees live, which includes areas such as Summerville and other northern suburbs,” Avison Young said.

CBRE echoed this, noting that rising rental rates and dwindling vacancies are likely to continue in downtown Charleston over the next few years as the city attracts more businesses and residents each year.

If the peninsula cannot quickly accommodate large office tenants, office activity will likely increase in Summerville, North Charleston, Daniel Island and West Ashley, the firms said.

In high demand

Space constraints are not the only challenge facing office development on the peninsula.

Although developers are interested in bringing additional office space to the city, the continued successes of multifamily and hotel projects have driven up land prices, CBRE said in its first-quarter office report. The rising costs of land and construction, coupled with existing asking rates, make it harder to justify building office projects in the city.

“With little new construction underway, new tenants will compete for remaining Class A space, pressuring further rise in asking rates, which remain among the most expensive in the Southeast,” CBRE said.

Space for Class A remains tight, and Class B space on the peninsula is mostly occupied, accelerating the need for new office construction.

“If space was available, tenants would be willing to pay higher rates to secure space that provides employees with access to downtown Charleston,” CBRE said.

The WestEdge development and the 317 Meeting St. redevelopment would bring a combined 186,000 square feet of space to the market. Significant new space will likely not be delivered on the peninsula before 2019, CBRE said.

Mount Pleasant is seeing a similar supply-and-demand issue, CBRE said. The 42,000-square-foot 101 Coleman office development brings much-needed space to the market, but no space will be available upon the building’s delivery.

“This project is a perfect example of the demand for Class A office space in the East Cooper submarket, proving that tenants are willing to secure available space as soon as construction begins,” CBRE said.

Cushman & Wakefield Thalhimer said Daniel Island is ripe for new construction along Clements Ferry Road. The firm also said the Charleston region will see the redevelopment of vacant Class B and C sites, as well as the repurposing of former big-box retail locations into large office sites with ample parking to help meet demand.

New opportunities

Road projects near Charleston International Airport and Boeing’s 787 Dreamliner campus are likely to spur speculative office development and new office projects in North Charleston, according to Colliers International – Charleston.

The planned Airport Connector Road project at Montague Avenue and the repurposing of International Boulevard for Boeing employees “will create new opportunities in the suburban office market by improving access and visibility to the few remaining developable office sites in the area,” Colliers said in its first-quarter office report.

Colliers said traffic is increasing in the area as more employers move to or expand within the North Charleston market, as well as from the Charleston airport’s record 3.7 million travelers in 2016. The road projects will separate airport traffic from Boeing traffic to alleviate congestion, according to Charleston County. 

The increase in activity has caused rental rates to rise in the North Charleston submarket, and developers are taking notice. Charleston-based Durlach Associates and Charlotte-based Trinity Capital Advisors developed the 125,000-square-foot Faber Plaza building, and Holder Properties plans to build a 106,000-square-foot office building, both of which are in Faber Executive Park.

Colliers expects more speculative construction and build-to-suit projects in the next few years as the Lowcountry office market struggles to supply enough space to meet the demand.

Avison Young agreed: “As industry and the population continue to grow, there will be changes in the office market, but all signs are positive in Charleston. Industry remains robust, submarkets are emerging and the demand for office space is accelerating.”

Reach Liz Segrist at 843-849-3119.

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