By Ashley Fletcher Frampton
aframpton@scbiznews.com
Published May 10, 2010

The Charleston metro area’s office market is seeing small signs of improvement, according to a first-quarter report by Grubb & Ellis WRS.

Overall office vacancy fell to 17.4% in the first quarter, down from 20.2% in the prior quarter.

“After several quarters of flat or rising vacancy, the Charleston office market is finally seeing a decrease in vacancy,” the commercial real estate firm’s report said. “While the decrease is minimal, it is an improvement just the same.”

Construction activity remains stagnant, with all projects started at the beginning of the recession now completed. The lack of new space has contributed to the improvement in vacancy rate, said Jon Chalfie, senior vice president with Grubb & Ellis WRS.

Lease rates for office space, though down 20% to 30% from their peak a few years ago, are stabilizing, and tenants are signing lease deals for longer terms, Chalfie said.

During 2009, many tenants took a wait-and-see approach, opting for one-year leases to avoid long-term commitments amid a period of uncertainty, he said.

During the first quarter of 2010, Chalfie said there was a return to the more typical three- to five-year lease terms.

“With that, the landlords are willing to offer some free rent, and tenants are willing to take advantage of (lower) lease rates,” Chalfie said.

He said property owners’ asking rents are holding steady instead of continuing the recent downward trend.

Asking rents for Class “A” office space averaged $23.13 per square foot, according to the first-quarter 2010 report. In the fourth quarter, asking rent averaged $22.32.

One year ago, the firm’s report showed average asking rents were $23.85.

Private companies doing work for the federal government helped fill some office space during the first quarter, especially in Mount Pleasant, according to the report, which also credited “buoyed confidence” in the market to the Boeing 787 Dreamliner final assembly plant now under construction.

In the fourth quarter of 2009, three submarkets were above 20% in vacancy — Daniel Island, North Charleston and West Ashley. As of the first quarter, only Daniel Island remained over that mark, with vacancy at 23.2%.

Retail trends
First-quarter average vacancy among retail properties was 9.7%, Grubb & Ellis WRS reported, up from 8.4% in the fourth quarter.

The increase, the company said, is largely attributable to several properties recently added to the inventory and classified as vacant. That includes two older shopping centers that had been slated for demolition but now are not.

Also in the mix are two shopping centers under development, both to be anchored by Harris Teeter grocery stores, said Trey Lucy, senior associate with Grubb & Ellis WRS.

Barring any setbacks in the retail market, Lucy said vacancy should decrease in the coming months as the grocery stores, along with some smaller tenants in the shopping centers they anchor, come online.

The quarterly report said retail leasing activity was slow in the Charleston metro area during the first three months of 2010.

“Quality tenants with capital, experience and organization have been few and far between,” the report said. “Even well-capitalized, quality tenants have difficulty obtaining financing for expansions, relocations and/or new business ventures, resulting in fewer lease transactions.”

Across the market, the average asking rent was $14.97 per square foot, compared with $13.83 in the fourth quarter. That increase also reflects the new inventory, Lucy said.

For retail and office markets, the firm said investment activity is stalled because of lack of financing.

Industrial trends
Vacancy among industrial properties, at 13.8% in the first quarter, was nearly even with the 14.2% reported in the fourth quarter Grubb & Ellis WRS said.

Asking rents remained flat at $4.67 per square foot, compared to $4.68 in the prior quarter.

“It looks like a bottom has formed here,” said Mike Ferrer, vice president of global logistics with Grubb & Ellis WRS.

Ferrer said recovery seems to have started at the top of the market, with the recent announcements of three large projects:

• TBC Corp.’s plans to build a 1.1 million square foot distribution center.
• Gildan’s purchase of the former Mikasa building for a distribution facility.
• Boeing Co’s plans to build a final assembly plant for its 787 Dreamliner.

Ferrer said he is now starting to see a trickle-down effect from those projects, with firms doing related work looking for smaller space in the area.

During the first quarter, new and existing companies began to absorb inexpensive, primarily sublease space, the report said.

“The federal government has had a tremendous impact through contracts it has awarded to private contractors, the bulk of which has been in the defense industry,” it said.

The market report says the best deals for industrial tenants and buyers are to be found this year, before rental rates start to rise.

Reach Ashley Fletcher Frampton at 843-849-3129.

Charleston MSA Commercial Real Estate – First Quarter 2010

Source: Grubb & Ellis WRS