Quality office space is still in short supply and rental rates are rising
By David Dykes
Despite negative absorption and rising vacancy rates, Columbia’s office market is still attractive due to the business climate, employment, regional investments, and strong market drivers. That’s according to Colliers International, a commercial real estate services firm that studies local trends.
The firm says the Columbia office market is showing signs of sluggishness due to varying market conditions.
Office market activity decelerated in the first quarter of this year, with the differential between rising construction costs and rental rates meaning it isn’t economically viable for new office development, Colliers says.
While the Columbia-area unemployment rate was still attractive at 3.2% in May, the researchers say office-using job growth peaked at the end of 2016 through April of 2017, leaving the market flat.
While that might seem like Columbia is headed for an inevitable downturn, that’s not the case, Colliers notes. They believe high-quality space is still in short supply and owners will continue to try to raise market rental rates.
The long-term trend involves persistent positive absorption, according to researchers for CBRE, a real estate services and investment firm. Market fundamentals are solid, with vacancy declining and asking rates rising. While this sustained trend normally would inspire developers to bring new office product to the market, asking rates are too inexpensive to justify new construction.
Due to more than 180,000 square feet of absorption, office vacancy declined 140 basis points during the first quarter to a record low 13.9%, according to CBRE. While the market has a legacy of strong performance among CBD assets, absorption was broad-based with the most activity in suburban submarkets.
In addition to record-low vacancy, asking rates for the market as a whole exceeded $17 per square foot on a full-service basis. In most instances, new construction is a primary driver of rental-rate movement. With no new construction activity, rate movement is more associated with a tightening office market, says Brian Reed, CBRE’s associate research director for the Southeast.
Over time, CBRE believes demand for Class A space will rise enough to justify new construction.
Meanwhile, local retail trends have mirrored those at the national level, with modest suburban construction, mostly confined to grocery retail and ancillary strip centers in growing suburban areas and increasing urban options for retailers interested in locating in downtown Columbia.
The most significant retail project is BullStreet, a large-scale redevelopment of several blocks close to downtown. It was intended to include more than 800,000 square feet, but slow absorption since its conception could alter final plans for the site, CBRE says.
Of all of the commercial real estate sectors in Columbia, retail is the one finding the most traction with institutional and international investors, the researchers say. They cite retail cap rates that typically have been about 50 basis points higher than the national average.
Colliers says there are 1.89 million square feet of urban retail in Columbia in seven distinct urban areas. Triple-net weighted rental rates for the remaining urban spaces rose to $21.36 per square foot during the first quarter. The overall first-quarter vacancy rate decreased to 8.72%, with 164,666 square feet of core vacancy and no sublease space available.
While the Columbia market historically hasn’t generated large amounts of industrial activity, that appears to be changing, CBRE researchers say. Steady growth among warehouse users is a major factor driving the industrial market, but new manufacturing also is playing an increasingly important role.
They say growth has been inhibited by a lack of Class A availability, as well as the absence of land appropriately zoned with the infrastructure necessary for new construction.