Tenants Prepare for Rate Escalations

Key Takeaways

  • Asking rental rates remained constant during the third quarter but tenants should anticipate increases in the coming quarters.
  • Local office tenants rather than corporate tenants were most active in the market this quarter. 
  • Owners of downtown office towers will begin to see more interest in first floor retail space.

Rental Rates to Rise in Growing CBD

Rising occupancy in the CBD has led to the rise of asking rental rates. At the same time costs for tenant improvements are rapidly increasing. The average asking rental rate remained relatively unchanged from the previous quarter but rates are expected to increase significantly within the next year. Other markets in the southeast with similarly high occupancies in the Central Business District are  already experiencing rapid increases in rental rates.

Additionally, increases in construction costs and rising parking costs mean that tenants will be paying more to be located in the downtown market. The rise in occupancy costs is causing some tenants to begin their relocation or lease renewal process far in advance of their lease expiration date to take advantage of the current asking rental rates which may be at the lowest point for the next two years. Tenants choosing to renew their leases are focusing on maximizing their usage of space to avoid significant escalations in occupancy costs. By reducing space, tenants are increasing employee density. Utilizing lesser space will offset the rising rental rates. The trend is most common among financial services firms, law firms and non-profit entities in Columbia.

As a result, there may be an increase in the amount of Class A, shadow space in Columbia as tenants’ leases mature. The absence of any appreciable amount of new construction indicates that many landlords will raise rates at a faster pace than before, capitalizing on a growing CBD market.

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