Q2 2024 Charleston Office Market Report

CHARLESTON OFFICE MARKET REPORT

Q2 MARKET SNAPSHOT

Q2 HIGHLIGHTS & TRENDS

• THE CHARLESTON OFFICE MARKET REMAINS HEALTHY AND ACTIVE, WITH STRONG DEMAND FOR BOTH NEW CONSTRUCTION AND EXISTING OFFICE SPACE.

• THE OVERALL VACANCY DECREASED TO 12%, INDICATING STRONG DEMAND FOR OFFICE SPACE IN THE REGION.

• RENT GROWTH HAS BEEN PARTICULARLY STRONG IN THE HIGHEST-QUALITY, NEWEST SPACES, WITH CLASS A PROPERTIES COMMANDING THE HIGHEST RENTS.

• OVERALL ABSORPTION HAS BEEN POSITIVE IN 2024, BOOSTING DEVELOPERS CONFIDENCE IN THE CHARLESTON MARKET.

• THE NEXT WAVE OF DEVELOPMENT IN CHARLESTON IS EXPECTED TO OCCUR IN 2025-2026, BUT DEVELOPERS MUST BE PREPARED FOR CHALLENGES SUCH AS RISING CONSTRUCTION COSTS, INCREASED FINANCE COSTS, LONGER ENTITLEMENT PROCESSES, AND POTENTIAL TAX INCREASES.

• DESPITE THE UNCERTAINTIES SURROUNDING THE UPCOMING ELECTION, THE CHARLESTON OFFICE MARKET CONTINUES TO DISPLAY NOTABLE RESILIENCE IN COMPARISON TO NATIONAL TRENDS.

NEW DELIVERIES DOWNTOWN ATTRACTING TENANTS

RENTAL RATES INCREASE

• Rents throughout the Charleston Region have experienced a significant uptick, driven by strong demand for moderate-sized office spaces in the 2,000-10,000 square foot range.

• Notably, the Downtown Charleston market and the Summerville submarket in Nexton have seen the most pronounced spikes in rental rates, although rates have been on an upward trajectory over the past 3-4 years across the region.

• On average, downtown Class A rents are $40.00/SF FS, while newer space in buildings like The Morris and Morrison Yard have seen rates as high as $55.00/SF FS.

• The combination of strong demand, limited supply, and increased construction costs has all contributed to the overall upward trend in rental rates in the Charleston market.

LOW VACANCY

• Vacancy rates in the region have decreased due to strong regional growth and limited new construction.

• Success stories like Morrison Yard, The Morris, and 677 King highlight tenant demand for high quality office spaces.

• The influx of new residents and businesses has put pressure on the existing inventory, leading to increased competition among tenants.

POSITIVE ABSORPTION

• Major recent leases in the office market have been dominated by the healthcare, homebuilders, and finance service sectors.

• The majority of inventory delivered since 2020 has already

leased and approximately 50% of under construction space has secured tenants.

• Anticipated office market activity in 2024 is expected to increase due to back-to-work policies and ongoing migration from other regions of the country.

• The sustained demand for office space in Charleston, suggests that rents are likely to remain elevated in the upcoming quarters.

NEW CONSTRUCTION

• A notable portion of new office construction in the area is taking place in the suburban areas, particularly within the Nexton development.

• Nexton, currently has four separate speculative office and medical projects under construction, with expected deliveries in late 2024 and early 2025.

• Higher construction costs due to inflation with required rents to support financing has posed challenges in the past year. However, with sustained rent growth, the market has reached a level of equilibrium necessary to kickstart new construction projects.

INVESTMENT SALES

• Investment Sales have been very limited over the past twelve months due to increase in financing costs.

• Owner-users are playing a more significant role in the market, taking advantage of accessible debt and favorable value fluctuations.

• The expectation is for the Federal Reserve to take action to lower interest rates, aiming to stimulate investment sales at cap rates that are mutually beneficial for both buyers and sellers.