Columbia, S.C. — Columbia's CBD office sector is on the verge of becoming a landlord’s market. So says David Lockwood, senior vice president of leasing for Colliers International South Carolina Inc., who expects that in 2012 owners of downtown office buildings will offer fewer concessions than the previous 12 months as vacancies fall and rents rise.
“Tenants just aren’t going to be able to find the deals that were out there a year or 2 years ago,” said Lockwood during a 30-minute webinar hosted by Colliers on Monday that focused on office leasing and employment trends in greater Columbia.
In contrast, however, Lockwood fully anticipates rental rates in Columbia’s suburban office market will fall as landlords pull out all the stops to land tenants. “Suburban landlords will become even more aggressive,” said Lockwood. “They’ll offer more concessions, and they’ll offer more TI (tenant improvements), and that has a short-term degrading effect on the market by lowering the average rental rates.”
The direct vacancy rate for the office market as a whole stood at 24 percent at the end of 2011, including 22.67 percent in the CBD and 25.49 percent in the suburbs, according to Colliers. In the CBD, much of that vacant space is concentrated at the Palmetto Center, a 466,000-square-foot office building formerly occupied by energy firm SCANA Corp. (See chart)
Courtesy of Colliers International
Excluding the Palmetto Center, the vacancy rate for Class A and B space in the central business district is 13.2 percent. “That is inching closer and closer to 10 percent. By most accounts, a vacancy rate of 10 percent, or an occupancy rate of 90 percent, begins to transition the market from a tenant’s market to a landlord’s market,” emphasized Lockwood during the webinar.
The biggest dilemma the Columbia office market faces overall is what to do with the huge glut of vacant Class C space. At the end of the 2011, the direct vacancy rate for Class C space was 37.3 percent marketwide, including 28.8 percent in the suburbs, and 48.16 percent in the CBD. In fact, net absorption of Class C space was negative 92,557 square feet overall across the entire market in 2011.
“This is what we refer to as a flight to quality,” said Lockwood. “We saw tenants quickly leave Class C buildings — where landlords may not be taking care of the buildings or improving the buildings — and moving up in quality to the Class A and B sector where rates were aggressive and landlords were aggressive. Landlords were putting the money into the infrastructure or common areas of their buildings.”
Class C space is becoming increasingly obsolete, said Lockwood. “Something needs to happen to take those properties off the market, or that vacancy will continue to drag down the market. Lowering the rental rate simply doesn’t create the activity for long-term success. Most tenants want to see landlords investing in their properties.”
One reason for the turn in Columbia’s office fortunes downtown is the improving local economy. The Columbia market added 8,700 jobs in 2011, outperforming Charleston (+4,600) and Greenville (2,900). “For the first time that I can remember in recent history, Columbia has outpaced the Greenville and Charleston market in terms of job growth,” said Ryan Hyler, vice president of research and marketing for Colliers.
The employment gains occurred across a broad range of industries, including the insurance, manufacturing, pharmaceutical, legal and technology sectors. For example, Amazon.com Inc. built a 2.4 million-square-foot distribution facility in Lexington County that opened last fall, adding about 1,100 jobs to the local economy.
“Overall, goods producing and services jobs grew at a great rate in Columbia in 2011, but it’s still important to point out that government was on the decline,” added Hyler.
All three markets — Columbia, Charleston and Greenville — saw declines in government jobs during 2011. For example, Charleston lost 700 government jobs compared to a loss of 600 government jobs in Greenville and a decline of 200 jobs in Columbia.
But those net figures take into account local, state and federal government workers, said Hyler. “The state government actually downsized by 1,100 jobs in 2011. This had a huge impact on the office market.”
Despite the uptick in leasing activity and absorption in Columbia’s Class A and B office market, many tenants still believe that they have leverage in lease negotiations, said Henry Moore, a brokerage associate with Colliers. “The tenants that I work with generally have the perception that we’re still in a soft leasing market and are able to ask, and usually win, reasonably aggressive incentives,” said Moore. Those incentives include rent abatement, free or discounted parking, relocation expenses, and even signage opportunities for larger tenants.
One other notable leasing trend: Corporations are becoming increasingly adept at controlling their occupancy costs. For example, a company occupying 5,000 square feet in one location might only occupy 4,000 square feet upon relocating to a new building, despite retaining the same number of employees. Look for this shift toward higher employee density to continue, said Lockwood.
— Matt Valley