Songs In The Key Of CRE
Jul 05, 2018 12:12PM
By Kathleen Maris
By Chris Haire
When it comes to commercial real estate in South Carolina’s three major metropolitan areas—Greenville, Charleston, and Columbia—the song remains the same: Business is doing quite well, like No. 1 with a bullet well.
“The migration of talent to the South Carolina markets is helping to spur economic growth. This consistent growth is now attracting investors and developers, who are able to generate more favorable returns than in larger markets,” says Brian Reed, research manager at CBRE Southeast Research.
Be that as it may, the pitch of the tune is different in each area. While one city might be hitting high notes in office space, another might be flat.
Let’s look at the cities and the state of commercial real estate in each metro.
Greenville: It’s a Great Time to be a Tenant
It’s a tenant’s market when it comes to office space in Greenville. While vacancy rates remain low—since 2015 they’ve hovered around 12 percent and recently dropped lower—they are going up.
According to Avison Young, during the first quarter of 2018, the “office vacancy rate for Greenville County increased, as did the vacancy rate in the Central Business District.” In fact, Avison Young notes that for “the first time in over a year, Greenville experienced negative absorption.”
“We got a supply and absorption mismatch,” says Chris Fraser, principal and managing director at Avison Young’s South Carolina offices. “It’s actually a great time to be a tenant.”
But while Avison Young notes that that office market is experiencing “substantial landlord competition” to acquire new and existing tenants, the firm says that “the opportunity to invest in owning Greenville office space remains attractive.”
Spartanburg, on the other hand, has no such absorption problems. According to Avison Young, “Spartanburg continues to see a steady decrease in office vacancies.” Furthermore, the “need for increased office space will be satisfied in the near future as some of Spartanburg’s big projects near delivery.”
Lease rates should also continue for the Greenville-Spartanburg market as a whole through 2019. Vacancy rates are also expected to drop.
Like Avison Young, CBRE notes that downtown Greenville remains an attractive place to do business.
Despite some high-profile losses like Wynit and BB&T and the current wave of new hotel and apartment construction over office space, projects like Camperdown—and its 130,000 square feet of speculative office space—still bode well for the area. And that’s to say nothing of the ambitious project at County Square, which is set to bring 250,000 square feet of office space.
But as attractive as the CBD remains, the suburbs are becoming increasingly popular, with tenants moving into repurposed mills and vacant office complexes.
“The conversion of older industrial mills to office space has been surprisingly consistent in the last five years,” CBRE notes. “While this activity can be expected to continue, the supply of old industrial mills, particularly those proximate to existing clusters of activity, are dwindling.”
Although the supply is finite, several mill projects are on the horizon—like Judson Mill with 215,000 square feet of office space—while others are still receiving new clients.
Co-working spaces have taken off, at mills and elsewhere, but landlords are increasingly leasing out space to multiple tenants, instead of landing one or two big fish.
The largest single space for offices isn’t in downtown—it’s off of Haywood Road in two buildings that used to be owned by Fluor. The complex in question: Axis Office Park.
Built in 1989 and 1990, these two buildings offer nearly 230,000 square feet and a prime location along one of Greenville’s major commercial corridors with easy access to the city’s major roads, including interstates 385 and 85.
Complete with a large outdoor space, shared courtyards, a cafeteria, softball fields, a forthcoming fitness center, and lots of easy-access parking, Axis is a different breed of animal in the market.
“There is nothing in Greenville that has that true campus-like feel,” says Brantley Anderson, brokerage associate with Colliers International.
Currently, attempts are being made to attract national and regional firms to the site. “I don’t think this will become, at least in the near future, extremely multi-tenated,” Anderson says.
The industrial market is notably different from the office market, with industrial space “experiencing record levels of market absorption,” CBRE reports, adding that the growth is fueled by “a growing manufacturing sector and an evolution towards a more distribution-oriented market.”
Avison Young reports: “This data is impressive both because the quarter ended with the lowest vacancy rate since the Great Recession, [and] also one of the greatest quarterly drops in the same period. Another noteworthy factor is that the net absorption rate was nearly double the quarterly average of the preceding five quarters. Contributing to this jump were large spaces taken by BMW, Illinois Tool Works, Productions Unlimited, and Moore Food.”
To further illustrate the demand, CBRE says that 4.1 million square feet has been built since 2014—far greater than the most recent surge from 2004-08 when 2.4 million was created. Another 3 million square feet is currently in the queue.
Still, as Avison Young notes, most of the speculative opportunities are taking place in Spartanburg.
Charleston: To the ’Burbs
The office vacancies rate in downtown Charleston remain low—3.9 percent according to first quarter reports from Avison Young—but rising rents and other factors are beginning to drive potential tenants away from the prestigious peninsula.
“While low vacancy and available financing continue to spur new development in every submarket, the end must justify the means,” Avison Young reports, noting that the average square feet in downtown is $41.63, compared to $36.06 in North Charleston and east of the Cooper River, $32.26 west of the Ashley, and $26.95 in the northern suburbs.
The growing congestion on Charleston’s roadways is also a factor in the location of new office space.
“For employees, traffic continues to be a growing concern, especially for those who live in the more affordable areas of the west suburbs, North Charleston, and the north suburbs,” the first quarter report adds. “Many business owners are responding by choosing locations more central to their workers’ homes and away from downtown Charleston and the east suburbs. Shorter commutes equal happier staff.”
“There is not a lot of new product,” says Fraser, adding that the “barriers to entry are high.”
One such barrier remains a lack of parking. The Avison Young team notes the peninsula is under-parked by several thousand spaces. Simply put: If you can’t park your tenants, you can’t rent.
And then there’s the fact that downtown Charleston is one of the most talked about locales in America. As such, the Holy City has become a haven for hotel and multi-family construction, a move that puts new office buildings at a disadvantage.
“An apartment or condo developer can pay more for land,” Fraser says. “If you are a land owner and you are selling, you only care about the number.”
Still, some new office space is coming online, most notably the WestEdge development near the Medical University of South Carolina and the Ashley River.
A walkable community featuring residential units, stores, and offices, WestEdge began welcoming tenants at its initial seven-story mixed-use apartment complex Caroline earlier this year, while another rental-and-retail project, 10 WestEdge, has begun construction. A third project, 22 WestEdge, will add 150,000 square feet of office space to the peninsula, with construction scheduled to begin soon, if it hasn’t started by press time.
“22 WestEdge will be our first research/lab/office building, and it is an important step towards achieving WestEdge’s goal of bringing new workplaces to Charleston, with a particular focus on bio-tech and health technologies activity,” says Michael Maher, CEO of WestEdge Foundation Inc., noting that the facility is set to open in 2019.
Maher adds, “With its proximity and connections to MUSC, Roper [St. Francis], and the [Veterans Administration], WestEdge provides an ideal location for companies that might spin out of research and innovation at the medical district, or companies that might choose to come to Charleston to collaborate with MUSC or other medical entities.”
Aside from WestEdge, new office construction on the peninsula is at standstill, according to a first quarter report from NAI Charleston. And it’s even worse in other areas.
NAI notes that only 11,000 square feet of new space is under construction downtown, while the James Island/Folly Beach area is home to only 3,800 square feet of new construction. East of the Cooper, Mt. Pleasant has slightly more office space being built—91,871 square feet. However, West Ashley, North Charleston, and Berkeley County have several projects under construction, totalling 172,000, 323,453, and 127,832 square feet respectively.
On the redevelopment front, the Garco Mill project in the revitalized North Charleston neighborhood of Park Circle will bring 60,000 square feet of office space online once the mixed-use, former asbestos plant project is complete.
On the industrial front, most of Charleston County is a new construction dead zone for new industrial real estate, according to NAI Charleston. During the first quarter, there was no new industrial construction in downtown Charleston, Mt. Pleasant, and the eastern and western ends of the county.
Not surprisingly, the two manufacturing centers of the Lowcountry, North Charleston and Berkeley County, were flush with new industrial construction, for a combined 5 million square feet.
Because of the lack of available land in Charleston, increasing attention for industrial space is taking place in Orangeburg County, an hour’s drive from the Holy City.
Columbia: The Chicken or the Egg
Unlike its coastal neighbor to the southeast and its piedmont pal to the northwest, the Columbia CRE market hasn’t quite caught fire.
Homebuilding is doing quite well, but office and industrial construction is lacking. Vacancy rates for industrial properties are rising, according to first quarter reports from CBRE, and absorption and construction rates are falling.
When it comes to office space, vacancies are decreasing, but at 15.1 percent, they’re higher than the rates for Greenville-Spartanburg (11.6) and Charleston (6.9 percent). Overall, there’s both a lack of quality product and a lack of demand for the product available.
First, let’s look at the industrial market.
“The biggest challenge for the market is the lack of quality product—Class A warehouse with modern sprinkler systems and clear heights exceeding 28 feet—in the market,” a CBRE report notes. “This has presented developers with a conundrum in that while there is a lack of competition, there is also little historical track record of demand, which presents a chicken-or-egg dilemma.”
The key to changing all of this, according to CBRE, is new spec space. “Demand for Class A product is loud and clear in other markets in the state like Greenville-Spartanburg and Charleston. The success of new speculative construction in Columbia could help attract additional developers to the market.”
According to CBRE, the most noteworthy spec property under development is the two-building Lexington County Industrial Park. “The first of two buildings were delivered this quarter with 25 percent pre-leasing,” CBRE reports. “Combined, the two buildings will deliver more than 380,000 square feet of Class A warehouse space to a market that has little comparable space to offer.”
As for the office market, it’s a similar situation: there’s too much Class B space and not enough Class A.
But there is a bright spot: the Central Business District.
“Tenant preference for great space is evident in the improvement in market fundamentals for Class A space in the CBD, which has experienced a decline in vacancy of 530 points in the last six quarters to close 10 percent at the close of the first quarter,” CBRE reports, adding that the live-work-play environment of the CBD district is attracting tenants and will likely be a “catalyst for future marketplace development.”
But while rental rates have gone up 9 percent over the last four years in the CBD, they haven’t gone up enough to justify new construction, CBRE says.
“To get a sense for the challenges facing developers, consider that the most recently built office buildings in the CBD were completed in 2016 and had asking rates around $26 per square feet on a full-service basis. Construction costs for tenant improvements have risen roughly 25 percent since that time. Asking rates have not kept pace,” CBRE says. “In order for development to become feasible, rental rates will need to increase or the cost of construction will need to decrease.”
Colliers maintains that “upgrading spaces will raise rental rates and office property values, eventually pushing the market toward new development.” But, like CBRE, Colliers notes that “there is a considerable rate gap between current rental rates and rental rates high enough to spur new downtown office development.”
Be that as it may, Colliers remains bullish on the Columbia office market thanks to several key factors, including the city’s central location in the state, population growth, and economic and employment expansion.
One project leading the downtown development charge is the BullStreet District.
Much like redevelopment projects in the Upstate, the 181-acre BullStreet District is transforming the former state mental hospital and turning it into a mixed-use live-work-play hub, complete with the home field of the Columbia Fireflies in the heart of it all.
“It generally takes decades for downtown districts to redevelop, so we’re thrilled with the progress being made at BullStreet, where we started with a blank slate,” says Chandler Cox, project manager at Hughes Develompent Corporation, the Greenville firm behind the project. “In a little over four years, we have put in over two miles of brand new underground infrastructure, a mile of new roads (with more going in right now), and we’ve created South Carolina’s first urban gigabit community, with the fastest internet speeds available in the state.”
And why are those super-fast speeds important? According to Cox, that download speed was necessary to attract French tech firm Capgemini, Founders Federal Credit Union, and the Ogletree Deakins law firm, all of whom call the district’s office complex, the First Base Building, home. Cox says that the First Base Building, which includes view of the ball field, is the largest office building built in Columbia in nearly a decade.
In addition to the above firms, the BullStreet District is also home to SOCO, a co-working space, and will soon be home to an active senior community and three-bedroom townhomes.
The Bull District district also features the restaurant Bone-In Barbeque restaurant, a state archaeology center, and one interesting amenity: the Spirit Communications Park stadium is open to the public throughout the day and has a become a prime area for people to exercise.