Strong Demand Will Absorb New Construction
Key Takeaways
Due to high demand, absorption will continue to be positive; however, due to new construction growth, the vacancy rate is expected to rise in the next few quarters.
Charleston overall market rental rates are higher relative to the last quarter and are expected to rise as new office construction is completed.
As the suburban office demand increases, so do the rental rates. Suburban rental rates rose to $22.56 per square foot this quarter.
2018 Market Recap
Throughout 2018, the vacancy rate in Charleston continues to rise quarter-over-quarter. The rise is vacancy is most likely due to 11 office buildings delivering to the market throughout 2018 that totaled 433,024 square feet of new construction. Therefore, the Charleston office market also posted a net negative absorption of 77,251 square feet. This negative absorption and rise in vacancy rate is not an indication of a weak office market; however, it will take a few quarters for the demand to catch up to the supply. The overall average weighted rental rate in Charleston is also lower than it was this time last year; however, as high-quality space continues to be delivered to the market, that rental rate is expected to increase with the quality of office space being offered.
Market Conditions
The Charleston office market is comprised of 13,185,338 square feet in 379 office buildings within seven Charleston submarkets. Five new office buildings delivered to the market this quarter, adding 174,181 square feet to the office market and the overall office market absorbed 122,810 square feet during the fourth quarter of 2018; however, the office vacancy rate rose from 12.78% during the third quarter of 2018 to 13.10% this quarter. The rise is vacancy is most likely due to the new office construction delivering to the market this quarter; in addition, the vacant sublease office space increased to 173,291 square feet. There are currently 11 buildings under construction throughout the market which, when completed, will add 602,972 square feet to the market. Due to increasing office market availabilities, the overall average market weighted rental rate dropped from $24.13 per square foot during the third quarter of 2018 to $23.55 per square foot this quarter; likewise, the overall average Class A weighted rental rate decreased from $27.75 per square foot last quarter to $25.43 per square foot during the fourth quarter of 2018.
Central Business District
The central business district has 86 buildings totaling 2,727,015 square feet in Charleston, and the submarket absorbed 10,910 square feet during the fourth quarter of 2018. Since no new construction was delivered to the downtown Charleston office market this quarter, the central business district vacancy rate dropped from 6.86% during the third quarter of 2018 to 6.66% this quarter. The average weighted rental rate for the remaining downtown availabilities decreased by 1.37% from the third quarter to the fourth quarter and was $32.29 per square foot.
Suburban Conditions
The Charleston suburban office market is comprised of 293 office buildings totaling 10,458,323 square feet and five new office buildings were delivered to the suburban submarkets; one 48,000-square-foot office building in Daniel Island and four offices totaling 126,181 square feet in the Mount Pleasant submarket. The vacancy rate in the suburbs rose from 13.36% during the third quarter of 2018 to 14.78% during the fourth quarter. However, the Charleston suburban office market demand continues to be in high, the market absorbed 111,900 square feet during the fourth quarter of 2018, half, of which, was Class B office space. As the demand increases in the suburbs, so do the rental rates. The overall suburban market average weighted rental rate for the remaining availabilities is on the rise; during the third quarter of 2018 the average rental rate was $22.05 per square foot and this quarter it increased to $22.56 per square foot.
Significant Transactions
According to CoStar, during the fourth quarter of 2018, 102 office leases were executed in the Charleston market, including two undisclosed tenants within the Southpark Center in Charleston. CoStar reported 16 sale transactions from October 2018 through December 2018.
Sales
A 49,692-square-foot Class B office building located at 85-87 Broad Street in Charleston was purchased for $24 million as part of a three-property portfolio sale. The other two properties included in the sale were located in Baton Rouge, LA and Bakersfield, CA.
89 Broad Street is a 3,833-square-foot office building purchased for $24 million by EGP 85 Charleston LLC.
Within the Faber Place Executive Park in North Charleston, a 104,610-square-foot Class A office located at 4390 Belle Oaks Drive was purchased by LRC Properties.
JEMA, LLC purchased a three-property portfolio totaling 139,060 square feet for the purchase price of $23.02 million.
Bennett Hospitality purchased the Harborview Tower, located at 19 Hagood Avenue in Charleston, for $18.6 million.
Leases
Cambridge International Systems subleased a 16,633-square-foot, fourth-floor office at 2000 Daniel Island Drive in Charleston.
MUSC Community Training Center leased a 14,800-square-foot, fourth-floor space at 1 South Park Circle in Charleston.
The David J. Joseph Co. signed an 11,164-square-foot office lease at 885 Island Park Drive on Daniel Island.
Construction Pipeline
Construction activity is robust in the Charleston market. Currently, there are 602,972 square feet of office space under construction.
Under Construction
22 Westedge Street continues construction on a 153,358-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. A 93,000-square-foot office is under construction on Broad Street in the Charleston central business district.
4854 Ohear Avenue is the 60,000-square-foot site of the ongoing redevelopment at Garco Mill. Truluck Center, located at 1012 Saint Andrews Boulevard in West Ashley, has a 32,000-square-foot Class A office building under construction. A 30,000-square-foot office on Rose Drive is under construction in Summerville. A 26,400-square-foot Class B office building is currently under construction on Ingleside Boulevard in the Lower North Charleston submarket. 297 Seven Farms Drive has a 25,500-square-foot Class A office under construction in Daniel Island.
108 Benton’s Lodge Road in the Summerville/Goose Creek submarket has a 20,000-square-foot, Class B office building under construction. 1070 Jenkins Road has a 20,000-square-foot, Class B office building under construction in the West Ashley submarket. A 17,714-square-foot Class B office building located at 730 West Coleman Boulevard is currently under construction in Mt. Pleasant.
Completions
On Daniel Island at 65 Central Island Drive, construction completed Phase I on Blackbaud’s new 172,000-square-foot headquarter building.
Carnes Crossroads completed a Class A, 27,832-square-foot office building located at 2015 2nd Avenue.
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 October 2018 data from the Bureau of Labor Statistics, there were 500 fewer office-using jobs during October of 2018 than there were in October of last year. However, total employment has increased by 7,500 jobs in the past 12 months, and the unemployment rate of 2.8% is the lowest it has been in over 10 years.
Market Forecast
Due to high demand, absorption will continue to be positive; however, due to new construction growth, the vacancy rate is expected to rise in the next few quarters. There is currently 602,972 square feet of office buildings under construction in the 713,585 square feet of proposed office construction. Weighted rental rates are projected to continue rising into 2019 as high-quality office space becomes available in Charleston. Capital investment interest will be strong in the coming quarters due to Charleston’s low unemployment, strong livability amenities, optimistic economic growth and positive business climate.
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To download the complete report: 2018 Q4 Office Charleston Report
