Staff Report

Published July 2, 2009

The Columbia office market occupancy rate dropped 2% in the second quarter of 2009 compared to the same period in 2008 with an addition 145,614 square feet coming available, according to Colliers Keenan commercial real estate company.

The occupancy rate fell from 84.72% at year-end 2008 to 82.02% at mid-year 2009 for all classes of office space combined. Although the U.S. entered into a recession nearly 18 months ago, the Columbia office market started to feel the negative impact in the real estate sector during the first six months of 2009.

A significant portion of office space that was vacated during the first six months came as national corporate tenants downsized. The Columbia office market also experienced an increase in tenants vacating space that remained under lease, which resulted in 122,979 square feet of available sublease space at mid-year 2009.

The sublease space will create additional competition for landlords looking to attract or retain tenants during the second half of 2009.

The Class A office market experienced the greatest impact of the recession during the first half of the year, as national tenants occupy a large percentage of Class A space in the Columbia market. During the first six months of 2009, the Class A market experienced 92,893 square feet of negative absorption plus an additional 43,210 square feet of sublease space was added to the market.

The decline in occupied space resulted in a reduction in average asking rental rates from $19.18 per square foot at year-end 2008 to $18.97 per square foot at mid-year 2009.

Although the market experienced a downturn during the six months prior to mid-year 2009, the Central Business District demonstrated exceptional resistance to the weak economy, the report said.

The report said that even though two of the fundamental building blocks of the Midlands’ local economy, the South Carolina state government and the University of South Carolina, experienced budget cuts, the office market did not see a downturn. The strength of local office tenants created resilience to the negative impact caused by the national economy.

Other details about the Columbia office market

Main and Gervais, the new office tower that was under construction at mid-year 2009, became highly visible in Columbia’s skyline during the first half of the year. The owner/anchor partners, NBSC, The McNair Law Firm and Edens and Avant, will move into the building during the first and second quarters of 2010.

The relocation of these tenants from other downtown properties will leave approximately 180,000 square feet of vacant space along the Main Street corridor. This space, coupled with the vacant Palmetto Center, will result in a projected occupancy rate of approximately 73.2% in the downtown office market by mid-year 2010. While these numbers give the impression of a soft market, it is important to note that this vacancy is comprised of a few very large blocks of space.

Coordinated recruitment efforts could provide the opportunity to attract new businesses to Columbia and positively impact the local economy.

The suburban markets were unfortunately not as stable as the Central Business District during the first half of 2009. Occupancy rates declined from 82.17% at year-end 2009 to 77.61% at mid-year 2009. This decrease was the result of 121,774 square feet of negative absorption in the suburbs.

The Northeast submarket experienced the greatest downturn during the first half of the year with 150,415 square feet of negative absorption. This resulted largely from national tenants downsizing or leaving the Columbia market. It is no surprise that this submarket experienced the greatest decrease in occupied space as it also experienced the greatest amount of growth, in office, residential and retail, during the economic boom experienced from 2005 to 2007.

The Forest Acres submarket also experienced negative absorption of 28,485 square feet during the first six months of 2009.

The St. Andrews and Cayce submarkets both experienced positive absorption during the first six months of 2009. With positive absorption of 50,769 square feet and 19,095 square feet, respectively, these submarkets outperformed other submarkets in the Columbia region during the first half of the year.

St. Andrews can attribute its expansion to the addition of national tenants which continued to grow in this submarket due to its connectivity within the state and region. The Cayce submarket has grown in notoriety over the past several years, and the pending relocation of SCANA to this submarket continued to lend additional credibility to the area.

With large blocks of space available both for direct lease and sublease at mid-year 2009, landlords will work diligently to hold on to existing tenants, offering concessions for longer terms and early renewals.