Commercial rent rates exploding in downtown Cola
Landlords are increasing the asking rents on office space by three to five percent every year in downtown Columbia, according to a new report by realty firm Colliers International – South Carolina.
Since the fourth quarter of 2012, the overall average asking rental rate for downtown office space has increased 28.2 percent to $21.06 per square foot a year. Over the next four-year period, average asking rates are organically expected to increase between 12 percent and 20 percent.
The increase, said Collier’s S.C. Research Coordinator Bryana Mistretta, can largely be attributed to two factors: rising operating costs and the higher cost to construct or up-fit space for new and renewing tenants.
The cost to operate an office building is included in the full service asking rental rate a landlord offers to tenants. This portion of the rent can be disaggregated into the cost for items such as utilities, building maintenance and services, property taxes, insurance, security and building management fees.
Based on historical operating costs from 10 office buildings over 30,000 square feet across the Columbia office market, the average cost to operate an office building increased by 10.4 percent from $6.94 per square foot in 2013 to $7.66 per square foot in 2015.
The cost for utilities has increased by 8.5 percent, while general building maintenance and services has increased 13 percent. Property taxes vary by property but have increased by an average of 11 percent. If a tenant leased a 10,000-square-foot space in 2013 and the same space in 2015, the operating costs would on average contribute to an increase of $7,236 to the total rent of the space for a year.
Tenant improvements are customized changes to an existing, leasable space. These improvements can transform a space by adding anything from new paint and carpet to new walls and HVAC systems. The cost to the tenant is dependent on the amount of tenant improvement allowance offered by the landlord and the current level of construction costs.
Because material cost varies over time, the largest driver of up-fit construction cost is labor. Increased wages are a result of fewer construction employees. In South Carolina, average hourly wages in the construction sector and rising demand have increased 28.5 percent to $23 per hour since November of 2007.
Higher labor costs are affecting the cost for tenant improvements to office space in Columbia. As one landlord in the Columbia market explained, $20 per square foot in tenant improvements 10 years ago would pay for new paint and carpet. Today, $20 per square foot would not begin to cover the cost for any improvements; now the base is $30 per square foot.
Tenants entering the market, as well as existing tenants, can expect to see higher asking rental rates in Columbia as landlords are faced with higher operational costs, the office market tighten, and construction costs continue in an upward trend.
Downtown attracts new tenants
Companies in many sectors are choosing to move from the suburban office submarkets to downtown.
The centralized location of the Central Business District (CBD) in relation to the most desirable residential markets, the attraction of Columbia’s Main Street and the Vista as destinations to “live, work and play,” and the aging inventory of the suburbs are the three drivers leading the shift of tenants, according to Colliers’ study.
Employers are increasingly focused on placing their operations in desirable locations convenient for their existing workforce to commute from and attractive to their future workforce. In Columbia, most of the workforce resides in Lexington District 1, Lexington-Richland District 5, Richland District 2, and the in-town neighborhoods east of downtown. Columbia’s CBD is centrally located between these four districts, making it attractive to employers across the region.
Additionally driving the appeal of downtown Columbia is the new Main Street district and the well-established Vista. They are becoming an 18-hour downtown, attracting new hotels, bars and retailers.
The Vista saw the redevelopment of City Market Antique Mall into retail and office space, a new Hyatt hotel and an Aloft hotel that is currently under construction. The Main Street district has added residential projects such as the Hub and Land Bank Lofts.
Nearly 5,000 new residents have moved downtown since 2015. This has encouraged new restaurants and retailers to redevelop older, empty or under-utilized buildings such as 1556 Main Street (Public House), 1635 Main Street (Lula Drake Wine Parlour), 1426 Main Street (The Hub and East Bay Deli), and the former Hennessey’s Building.
Finally, the age of the office inventory in the suburbs is a factor in a company’s decision to move to the CBD. The newest office building in the suburbs is 1074 Pinnacle Point, built in 2012. Prior to that, only three buildings 30,000 square feet or larger had delivered since 2005. There are currently no new buildings under construction or planned in any of the suburban submarkets.
By contrast, the CBD has had three new buildings constructed since 2012 and substantial redevelopment at many of the others. The CBD offers tenants a variety of options for quality office space. Nearly 48 percent of the inventory in the CBD is Class A space, compared to only 20.3 percent in the suburbs.
“Downtown is booming and employers are noticing when making location decisions. Office tenants are increasingly choosing to locate downtown to take advantage of its location, attract the workers of the future and move into more modern properties with more amenities,” Mistretta said.