The onset of the Coronavirus will have immediate short term and long term impacts to the U.S. office market and even the Columbia office market.
Although office investment sales were robust in the first quarter of 2020, the real impact of COVID-19 will be the absence of office investment sales over the next few quarters. Another aspect to take into careful consideration is if COVID-19 impacts properties to the extent that some lenders begin to experience loan defaults.
Capital available for real estate
Due to current economic conditions and the volatility of the stock market, investors have money and are searching for an alternative way to use it. Despite the COVID-19 virus outbreak and the temporary setbacks it will eventually cause; when business operations resume, some real estate sector will provide real estate will still be a solid investment choice for investors, although pricing of these assets may be very different in a post COVID-19 period. The office market will continue to experience some recovery throughout 2020, but the office investment market will be slow to recover for fear that what was learned by working remotely will have a noticeable impact on the need for office space in the future.
Overall Columbia Market
The Columbia office market is comprised of 16.40 million square feet. During the first quarter of 2020 there were 167,999 square feet of office space absorbed throughout the Columbia market. Class B office space absorbed 78,978 square feet - the most of all of the classes. This level of absorption is very strong for one quarter of the market. Yet, the amount of absorption will fall off considerably in the second quarter of this year. The overall market vacancy rate dropped from 9.98% last quarter to 8.96% during the first quarter of this year. Class A office space has the lowest vacancy rate at 8.42%. The overall market weighted rental rates averaged $18.68 per square foot. However, the range of average weighted rental rates range from $21.23 per square foot in Class A space to $16.07 per square foot in Class C offices.
Columbia Business District (CBD)
The Columbia central business district consists of 5.56 million square feet. Construction activity remains absent; however, there is one office proposed to be built at 911 Washington Street. During the first quarter of 2020 downtown offices absorbed 86,712 square feet, almost half of which was in Class B office space. Class C downtown offices have the lowest vacancy rate at 4.99%. The overall central business district vacancy rate dropped to 8.15% this quarter, down from 9.71% during the fourth quarter of 2019. The overall average weighted rental rate in downtown offices rose from $20.91 per square foot at year end to $21.68 during the first quarter of 2020. The central business district rental rates range from $23.15 per square foot in Class A offices to $17.51 per square foot in Class C space.
The Columbia suburban markets consist of 10.83 million square feet of office properties. During the first quarter of 2020, the suburban markets absorbed 81,287 square feet - Class A office space led the way absorbing 45,806 square feet. Due to the positive absorption, the overall suburban vacancy rate decreased from 9.71% last quarter to 9.37% during the first quarter of this year. The overall suburban office weighted rental rates averaged $17.44 per square foot this quarter. The rental rate averages ranged from $20.22 per square foot in Class A suburban offices to $15.92 per square foot in Class C space.
According to Costar, during the first quarter of 2020 there were approximately 65 leases executed. There were also 26 sale transactions this quarter, the largest of which are included on page one of this report.
Blue Cross and Blue Shield of South Carolina leased 19,757 square feet at 1301 Gervais Street in downtown Columbia.
Landmark Builders of S.C. leased 10,800 square feet at 1118 Shop Road in Columbia.
The Market Forecast for the Columbia office market is almost solely contingent on the longevity of the COVID-19. As we start the second quarter, almost all office-using businesses are working remotely and not physically occupying their leased office space. The longer this event occurs the more significant the negative impact will be to the office market-both in terms of lack of market activity and the long-lasting impact of companies determining they can operate efficiently in a remote office environment. The Coronavirus will significantly impact a landlord’s ability to escalate rental rates for fear that there will be more available space on the market.
A Note Regarding COVID-19
As we publish this report, the U.S. and the world at large are facing a tremendous challenge, the scale of which is unprecedented in recent history. The spread of the novel Coronavirus (COVID-19) is significantly altering day-to-day life, impacting society, the economy and, by extension, commercial real estate.
The extent, length and severity of this pandemic is unknown and continues to evolve at a rapid pace. The scale of the impact and its timing varies between locations. To better understand trends and emerging adjustments, please subscribe to Colliers’ COVID-19 Knowledge Leader page for resources and recent updates.
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