New Construction Essential for Future Growth

Key Takeaways

  • Vacancy rate is trending downwards. 
  • Rental Rates are on the rise. 
  • Speculative office construction is imperative for future growth.
  • Office-using employment surpasses pre-recession levels. 

Market Overview

Charleston, SC has experienced significant growth over recent quarters with job creation and the office market seeing declining vacancy rates and increasing rental rates. As the market continues to grow, new office space will be required to support companies entering and expanding throughout Charleston. The overall market vacancy rate at the end of the third quarter of 2014 was down to 11.0% from 11.5% at mid-year 2014 and 12.0% at the end of the third quarter of 2013. Class A and B overall vacancy rates were 7.7% and 12.4%, respectively, at the end of the third quarter of 2014. Vacancy rates are projected to continue along their downward paths, with an increasingly limited supply of quality office space and a growing demand for new speculative office buildings. 

New office space will have the ability to support new companies looking for space in the market and will allow existing tenants to expand. With almost no blocks of contiguous Class A space over 15,000 square feet vacant in the market, existing tenants are oftentimes finding themselves limited by the space they occupy, prohibiting growth and job creation. Speculative office developments, while in high demand, face a challenge in that local banks are reluctant to lend money for construction until a building meets specific pre-leasing criteria, which could require a building be 50% committed for preleasing to receive a loan. The market is hopeful that lending conditions will soften and speculative developments will gain momentum. This is essential to support the health of the Charleston office market and overall economy.

Increasing rental rates accompany declining vacancy rates as tenants compete for the few available Class A and B spaces throughout the market. Landlords are in control of rental rates, which are climbing upwards. At the end of the third quarter of 2014, overall rental rates averaged $21.03 per square foot full service, up from $20.71 at mid-year 2014 and $20.36 at the same time last year. Due to the higher rental rates, tenants will be more likely to pay the asking rates required for new office buildings, which are often higher than the market average given construction and land costs.

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