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Lack of class ‘A’ office space threatens economic development
By Dennis Quick
Senior Staff Writer
For the first time in recent years, the vacancy rate of class “A” office space in the Lowcountry has dropped below 10%, a sign that the market is strong and active, according to a mid-year report from local commercial real estate firm Colliers Keenan.
That is the good news. The troubling news is that little sizeable class “A” office space is being built to attract out-of-state companies looking to relocate to, or expand in, the Lowcountry, says Peter Fennelly, marketing vice president at Colliers Keenan.
The lack of existing or soon-to-be-built class “A” office space could weaken the region’s economic development, Fennelly warns, adding that national companies looking to relocate prefer regions with available or soon-to-be available buildings rather than places where the companies have to build offices from scratch.
What the Lowcountry needs is new office space large enough to accommodate corporations with 50 employees or more, Fennelly says.
Because the Lowcountry lacks such office space, national companies are “backing off” from relocating here, Fennelly says.
Companies faced with building new offices to meet their relocation or expansion needs have concerns about construction timetables and costs, he says.
“That’s why they prefer to move to where there is existing product,” Fennelly explains.
Currently, the lack of available, sizeable class “A” office space is not hurting the business-recruiting efforts of the Charleston Regional Development Alliance. Most of the 35 companies the alliance is trying to recruit are manufacturers and distributors, notes David Ginn, the alliance’s president and CEO. Although the alliance does recruit corporations seeking class “A” office space, the markets in which the alliance is finding the most recruiting activity are manufacturing and distribution, he explains.
Verizon Wireless chose North Charleston for its new call center mainly because of the existence of the 150,000-square-foot Montgomery Ward building which was renovated and upgraded to class “A” status, Fennelly says.
Only two forthcoming class “A” office buildings 15,000 square feet or greater currently are slated for construction: a 15,000-square-foot building on Daniel Island and an 18,000-square-foot building in North Charleston’s Executive Park at Faber Place, Fennelly cites.
“Only local and regional companies build new, class ‘A’ product from scratch,” he says. “That new office building is their headquarters, they want it to be impressive, so it’s worth the effort to build it.”
While the vacancy rate for class “A” office space has plummeted from 15.45% in July 2003 to 8.96% in July 2005 and vacancy for the region’s overall office market has dropped from 17.95% to 10.85% during the same time span, office rental rates have increased, Colliers Keenan reports.
Between mid-2003 and mid-2005, the average rental rate for class “A” space rose from $19.90 a square foot to $20.81 a square foot while rates for the overall office market climbed from $16.36 a square foot to $17.06 a square foot.
“We’ve raised our lease rates about $2 to $3 a square foot,” says Jeremy Willits, a principal at West Ashley-based commercial real estate firm BarkleyFraser.com. A rise in interest rates has driven lease rates upward, Willits explains.
The Lowcountry’s 7.7 million-square-foot office space market has about 804,226 available square feet. The region’s 3.2 million-square-foot class “A” market has about 277,200 square feet unoccupied, according to the Colliers Keenan mid-year report.
“We’re at a juncture where it’s important to build new office space,” Fennelly says. “I hope we see developers build more class ‘A’ office parks like Faber Place.”
An additional 2.2 million square feet have been proposed for the overall office space market, with more than 2 million of it proposed for class “A” office space. Most of that proposed class “A” square footage, 702,000 square feet, is in lower North Charleston, while the second-largest amount, 681,900 square feet, is in East Cooper, which leads the Lowcountry in class “A” inventory at more than 1 million square feet.
Mount Pleasant and Daniel Island in the East Cooper remain the region’s hottest office markets, Willits points out. “Everybody’s going out to Daniel Island because the buildings are all new,” he says, adding that the new buildings account for Daniel Island having the area’s highest lease rates.
Downtown Charleston, which has the region’s second-largest class “A” office space inventory at roughly 971,220 square feet, has the third-largest proposed class “A” space at 310,000 square feet.
Looking into the future, Fennelly predicts developers will build the bulk of their new office space in Berkeley and Dorchester counties because of land availability and fast-growing populations.
Dennis Quick is senior staff writer at the Business Journal. E-mail him at dquick@crbj.com.
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