SOUTHEAST SNAPSHOT, MARCH 2008

Columbia Office Market

Strong activity is driving new development in the Columbia office market. Last year’s 3.1 percent increase in the Class A rental rates has given developer Miller-Valentine confidence to begin development of new office product, particularly in the Central Business District (CBD). Construction is scheduled to begin on Center Vista, a mixed-use project located on Gervais Street, early this year. The project will contain 70,000 square feet of office space as well as 20,000 square feet of ground floor retail space. Holder Properties has announced plans for a 19-story office tower on Main Street that would contain 194,000 square feet of office space, a parking garage and 10,000 square feet of retail space. It is expected to be completed in 2010. Additionally, while the start date has been delayed, construction is expected to commence on the Horizon II office building, the 110,000-square-foot privately developed component of the Horizon block in Innovista, the University of South Carolina’s research institute. The Discovery Plaza office building, also part of USC’s Innovista, will be built within 1 year following completion of the Horizon II building.

Suburban construction is not expected to see as much activity. However, the 40,441-square-foot Pinnacle Point I building will be completed at Farrow Road and Interstate 77 this year.

Many of the tenants expected to occupy the new buildings being constructed are already located in Columbia and will be moving from older, Class B buildings. This trend has been a driving force of new construction since the beginning of the decade in Columbia, and much of the demand for new buildings has come from law firms and the financial sector. However, Columbia has successfully attracted new tenants from outside the market to backfill this space. These have been primarily tenants that service insurance and government sectors of the market.

The office investment market in Columbia remains strong. Nearly 1.7 million square feet of office space is currently being offered for sale or under contract and 326,611 square feet closed in the fourth quarter of this year. Cap rates for stabilized properties range from 6.5 to 8.5 percent. The demand for investment products is driven by the stability of the office market coupled with the ability to achieve higher returns in that market in Columbia when compared to larger, first-tier real estate markets. However, the credit crunch last year was a warning sign to the market and may affect the flow of capital into real estate markets similar to Columbia’s market.

While rental rates have been steadily increasing and vacancy rates decreasing for the past few years, downtown Columbia is bracing for a slowdown, particularly in the Class B market. SCANA has begun moving employees from downtown to new facilities in Cayce and will completely vacate the 456,000-square-foot Palmetto Center in 2009. As new Class A buildings come online and pull tenants from existing Class B buildings and the Palmetto Center becomes available, expect Class B rental rates to flatten. This will create opportunities for tenants to achieve better relative value with class B space when compared to Class A rates.

— Billy Way, CCIM, SIOR, is a principal, office and investment specialist, with Columbia, South Carolina-based Grubb & Ellis | Wilson Kibler.

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