Robust Demand for Space Outpaces Supply Despite Strong Construction Activity

Key Takeaways

  • The results of the Brexit vote and the upcoming United States presidential election are creating uncertainty in markets worldwide. In the coming months, it is expected that tenants will be more cautious with decisions on expansion within the market.
  • Charlestons’s market remains favorable for investments. Landlords and investors are capitalizing on the tight market conditions by renovating Class B and C buildings to attract new tenants and higher asking rental rates.
  • Robust demand for large blocks of quality office space in the Charleston market is driving asking rental rates higher. Although construction continues with several buildings close to completion, supply is not meeting the current demand.

Limited Space and Higher Rents Lead to Higher Density

Charleston, South Carolina’s office market continued to be in high demand at the end of the second quarter of 2016 reflected in the rise of average asking rental rates, despite an increase in the market vacancy rate.  This increase was due to the delivery of Faber Plaza in the Lower North Charleston submarket, adding 66,250 vacant square feet to the market at a higher than average asking rate.  Construction remains visible with several projects in the downtown and suburban submarkets. Currently tenants are facing limited options for large space. In response, average asking rental rates continue to increase for all building classes. Class A space increased from $25.48 per square foot per year (PSF/YR) a year ago to $27.58 PSF/YR at the end of the second quarter of 2016.

Limited options for large blocks of space have led many tenants to get creative with ways to use the space they occupy. Tenants are creating dense collaborative workspaces and occupying non-traditional office buildings. Although the trend is more common in the technology and marketing sectors, other companies, like Volvo, have followed suit. Three true Class A office buildings in Charleston’s office market offer space larger than 20,000 square feet for lease, the Nexton Office Building located in Summerville, Faber Plaza in Lower North Charleston and 1460 Tobias Gadson Boulevard located in West Ashley. This makes conditions well positioned for the next wave of speculative construction. Although more construction is expected, the recent decision of the United Kingdom to leave the European Union, the upcoming United States presidential election, and an expected shift in interest rates are creating uncertainty in all markets. This uncertainty will cause tenants to be cautious in the coming months when making decisions within the Charleston market.

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