Healthy Market Conditions Continue into 2016

Key Takeaways

  • The Charleston, SC office market rang in the new year with healthy demand for space despite the flat vacancy rate during the first quarter of 2016.
  • Average asking rental rates, although among the highest in the Southeast, are flattening.
  • Strong demand for office space is driving speculative office construction.
  • New policy limits wetlands development and results in even fewer sites for construction.

Steady Start to 2016

2016 is off to a steady start following a very active, historic year for Charleston, South Carolina’s office market.  2015 was accompanied by declining vacancy rates, record high rental rates and the strongest construction activity in recent years, collectively paving the way for continued improvements into the new year.

The first quarter of 2016 ended with a total vacancy rate of 7.8%, unchanged from year-end 2015 but down from 10.5% one year ago.  Leasing velocity was slow during the first three months of the year despite robust interest in the market.  Tenants are seeking large blocks of quality space which are virtually nonexistent in the market, hindering leasing activity.  The slow quarter is not an indication of the market’s health but rather the result of strong demand for space leaving very few options for tenants looking to enter or expand within the market.

Occupiers are looking for quality space and are willing to pay higher rent for such space.  The Charleston office market has some of the highest rental rates in the Southeast, but rental rates are flattening after significant spikes over the previous year.  At the end of the first quarter, asking rental rates for the market averaged $23.30 per square foot per year (PSF/YR), holding steady over year-end 2015 but increasing 9.2% in just two years.  Asking rental rates for Class A space in the market averaged $27.18 PSF/YR with downtown and suburban Class A space averaging $35.51 PSF/YR and $25.17 PSF/YR, respectively.  Average asking rental rates held steady over the quarter and will likely remain stable through mid-year. 

Strong demand for space throughout the market coupled with rising construction costs have contributed to higher rental rates than the past.  Tenants are being faced with higher occupancy costs as construction costs contribute to higher tenant improvement costs, which tenants are oftentimes required to pay a portion of out-of-pocket.

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