Tight Office Market Forecasts Higher Occupancy Costs for Tenants

Key Takeaways

  • The market continues to maintain a low vacancy rate despite the sluggish leasing velocity in the second quarter. Low vacancy leaves limited options of quality space for tenants requiring more than 15,000 square feet of space.
  • The St. Andrews submarket remains the most active submarket due to more available options for large, contiguous, blocks of space, the submarket’s proximity to the central business district, and ample free parking.
  • Investment sales in the Columbia office market are expected to accelerate due to favorable market conditions including an abundance of capital, low interest rates, moderate capitalization rates, steadily increasing asking rental rates, and high occupancy. Investors are turning to smaller markets like Columbia due to the competitiveness of investments in larger markets
  • The next three years will be active in the Columbia office market as a wave of tenant leases are up for renewal offering office users an opportunity for expansion or upgrades within the market.

Overview

Columbia’s tight office market is leaving limited options for tenants who are in search of large blocks of quality space typically defined as Class A or Class B space. Scarcity of large blocks of space limits these tenants looking to locate within the market. As a result, the market saw more activity from small to midsized tenants during the second quarter. The office market in Columbia is driven by job growth, the University of South Carolina, insurance technology jobs and government, but new types of occupiers are moving into the market. This quarter saw considerable activity from local and regional law firms opening offices within the market.

Although overall transactions were limited in the second quarter of 2016, they were up from the first quarter of 2016. The market’s total vacancy rate was 16.5% at the end of the second quarter of 2016, up slightly from 15.8% the previous quarter, but remains well below the vacancy rate of 17.2% one year ago. The slight increase in the market vacancy rate is not an indicator of the overall health of the market, but rather the result of the delivery of two buildings in the downtown market which added additional vacant space to the market.  Market conditions continue to tighten, increasing average asking full service rental rates over recent years to $22.22 per square foot per year (PSF/YR) at the end of the second quarter, an increase of 11.9% over the last two years.  These rates should be taken into account by all tenants as they consider future rentable spaces.

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