Vacancy in the Upstate office market continued to decline as absorption held steady and office construction increased during the third quarter, according to a report from Colliers International.
The report suggested the high occupancy and asking rental rates have created “a lower-risk environment with opportunity for higher returns for local and out-of-market investors.”
According to Colliers, the absorption of downtown Greenville Class A office space was 194,000-square-feet – three times the total absorption of Class A space in 2015. New employers like Sioux Chief Manufacturing and Brose North America, along with call centers and customer service agencies locating downtown, have dropped vacancy to 8.9% for the quarter – a drop from the 12.4% reported in the second quarter.
“As a result, landlords in Greenville are seeing a flight-to-quality and a shift in the tenant mix of their office buildings. They are requiring longer leases and raising asking rental rates,” the report said. “Higher operational costs and rising costs for tenant improvements combined with overall election-related uncertainty has created a longer deal process, as negotiations between landlords and tenants become more complex.”
A similar office market report from CBRE suggested office space owners are “beginning to recognize the opportunity to market, underutilized square footage to the market as available for lease to other users.” Fluor Corp. recently made 52,000-square-feet of office space available for lease. Fluor occupies more than 500,000-square-feet of office space in the market, according to CBRE.
Another note in the Colliers report was the increase in investment in Spartanburg. Colliers said there has been $259 million in capital investment in Spartanburg during the last decade “with another $67.4 million of capital investment projects planned for the coming years.” Downtown Spartanburg is being enhanced by office and retail renovations as well as streetscaping.
The Colliers report noted that new investment in the urban market of Spartanburg, along with lower office space costs compared to Greenville, “makes the submarket an increasingly attractive alternative for employers in the region.” Some of the investments planned for downtown Spartanburg include:
- Montgomery Building – renovations will add 72 new market-rate residential units, 10,000-square-feet of office space and 9,000-square-feet of street-level retail space;
- AC Hotel – adding 120 rooms, outdoor dining, a rooftop bar and meeting space;
- West Main Street and Daniel Morgan Avenue – a mixed-use development adding 30 new apartments and 3,000-square-feet of street-level retail space, and
- Liberty Street – office development adding 50,000-square-feet of downtown, Class A office space.
In all, the office market had 144,400-square-feet of absorption at the end of the third quarter and market vacancy dropped for the fourth consecutive quarter. The total absorption rate was 15.3% at the end of Q3 2016 compared to 18.4% at the end of Q3 2015.
The Greenville downtown market continued to have one of the lowest vacancy rates – 10.4% - at the end of the quarter along with a rise in asking rental rates to an average $26.92 per square foot. Current construction is adding more than 280,000-square-feet of office space to the market.
- Falls Park Place – adding 12,000-square-feet of Class A office space in January 2017. The office space – part of the 40,000-square-foot project – is fully leased;
- Erwin Penland – a 125,000-square-foot, Class A office building is expected to be completed in January 2017. While Erwin Penland will occupy two floors, the rest of the office building is more than 80% leased;
- Camperdown – the former Greenville News building is being redeveloped to include 150,000-square-feet of office space, a Marriott AC Hotel, 170 market-rate apartments and 80,000-square-feet of retail space.
The Colliers report indicated that an office building has not sold in Greenville in three years and there are now five office buildings and six building office parks on the market.
“Competition in primary markets has driven institutional investors to look for investment opportunities in tertiary markets like Greenville, improving sale opportunities for building owners,” the Colliers report said.
The properties for sale include: the Brookfield office park, the Patewood office park, Liberty Square Towers, Wells Fargo Center and the Bank of America building.
While the Spartanburg submarket continued to develop at a rapid pace, Colliers reported the I-385/I-85 submarket was the most active submarket in the quarter. The Colliers report indicated the submarket ended the quarter with a vacancy rate of 16.2% with Class A vacancy at 9.4% down from 11.7% reported at the end of the previous quarter. The average asking rental rate in the submarket hit a high of $21.51 per square foot at the end of the third quarter.
Colliers said the occupancy and rental rate increases are expected to continue in the market in the immediate future.
“The delivery of three office buildings currently under construction will impact the tenant mix of downtown office buildings as new tenants move to the market and existing tenants continue to search for higher quality spaces,” the Colliers report said. “Spartanburg will be an area to watch as several new developments are moving through the pipeline and employers and residents start to take notice.”
CBRE noted that the market has averaged more than 85,000-square-feet in office space absorption per quarter – an annual growth rate of 3% - but retraction of the for-profit education sector may slow that trend. CBRE’s report said for-profit education accounts for 220,000-square-feet of office space and 75,000-square-feet is expected to be vacated by the end of 2017.