Construction and Occupancy Costs Drive Up Asking Rental Rates

Key Takeaways

  • The cost to construct and operate an office tower in the Central Business District is rapidly increasing, impacting the asking rental rate for office space in these buildings.
  • The office market continues to see a trend of tenants moving to the Central Business District.

Rising Costs, Rising Rents

Landlords are increasing the asking rents on office space by three to five percent every year in downtown Columbia. Since the fourth quarter of 2012, the overall average asking rental rate for downtown office space has increased 28.2% to $21.06 PSF/YR. Over the next four-year period, average asking rates are organically expected to increase between 12% and 20%. The increase can also be attributed to two factors, rising operating costs and the higher cost to construct or up-fit space for new and renewing tenants.

The cost to operate an office building is included in the full service asking rental rate a landlord offers to tenants. This portion of the rent can be disaggregated into the cost for items such as utilities, building maintenance and services, property taxes, insurance, security and building management fees. Based on historical operating costs from ten office buildings over 30,000 square feet across the Columbia office market, the average cost to operate an office building increased by 10.4% from $6.94 per square foot in 2013 to $7.66 per square foot in 2015. The cost for utilities has increased by 8.5%, while general building maintenance and services has increased 13.0%. Property taxes vary by property but have increased by an average of 11.0%. If a tenant leased a 10,000-square-foot space in 2013 and the same space in 2015, the operating costs would on average contribute to an increase of $7,236 to the total rent of the space for a year.

Tenant improvements are customized changes to an existing, leasable space. These improvements can transform a space by adding anything from new paint and carpet to new walls and HVAC systems. The cost to the tenant is dependent on the amount of tenant improvement allowance offered by the landlord and the current level of construction costs. Because material cost varies over time, the largest driver of up-fit construction cost is labor. Increased wages are a result of fewer construction employees. In South Carolina, average hourly wages in the construction sector and rising demand have increased 28.5% to $23.00 per hour since November of 2007.

Higher labor costs are affecting the cost for tenant improvements to office space in Columbia. As one landlord in the Columbia market explained, $20.00 per square foot in tenant improvements ten years ago would pay for new paint and carpet. Today, $20.00 per square foot would not begin to cover the cost for any improvements; now the base is $30.00 per square foot.

Tenants entering the market, as well as existing tenants, can expect to see higher asking rental rates in Columbia as landlords are faced with higher operational costs, the office market tightens and construction costs continue in an upward trend.

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