Large blocks of office space becoming available created negative absorption and overshadowed the 37 office sales transactions and 58 leases executed during the third quarter of 2020.
No new construction was delivered to the Greenville-Spartanburg submarkets during the third quarter of 2020.
Deal velocity is steady
The Greenville-Spartanburg office market has many options for tenants to choose from due to new space becoming available. Sublease space availabilities have increased to 152,573 square feet this quarter to go along with approximately 1.79 million square feet of direct vacancies throughout the market. Most of these vacancies have been caused by downsizing or closures due to the pandemic. Despite negative absorption surpassing the positive activity due to large blocks of space becoming available, there are still many deals being executed throughout the market. According to CoStar, there were 37 office sales transactions and 58 leases executed during the third quarter of 2020. Most of the executed leases were for office space ranging from 1,500 square feet to 5,000 square feet; therefore the large blocks of office space becoming available overshadowed the deal activity creating negative absorption. Office sale transactions are popular because interest rates are at an all time low, and companies like the idea of being able to control their own space with minimal contact with others. Deal velocity is expected to increase through year-end as more employers and employees reopen and businesses move to accommodate their post-pandemic needs. In addition, Greenville-Spartanburg offices may also find increased activity from tenants within larger markets looking to relocate to a smaller market with less population density.
Overall Greenville-Spartanburg Market
The Greenville-Spartanburg office market consists of 17.83 million square feet. There are currently two office buildings under construction which, upon completion, will add 160,531 square feet to the inventory. In addition, another 286,720 square feet are proposed to be built. The effects of the pandemic are beginning to become evident this quarter, the overall Greenville-Spartanburg market posted a net negative absorption of 79,813 square feet. The majority of the negative absorption, 62,385 square feet, occurred in Class B offices, spread out among several suites 5,000 square feet each, or less. The negative absorption forced the vacancy rate upward from 9.42% during the second quarter of 2020 to 10.87% this quarter. The overall average weighted rental rate was $21.33 per square foot this quarter, ranging from $8.00 per square foot in Spartanburg County to $30.00 per square foot in the Greenville central business district. Average weighted rental rates in Class A office space averaged $23.75 per square foot during the third quarter of 2020.
Greenville Central Business District (CBD)
The Greenville central business district is comprised of 4.78 million square feet. The offices in downtown Greenville posted a negative absorption of 22,511 square feet this quarter, mostly in Class B office space. No new buildings delivered to the downtown submarket. However, there are two office projects totaling 160,531 square feet currently under construction within the Greenville central business district. Negative leasing activity raised the downtown market vacancy rate from 14.92% last quarter to 18.54% during the third quarter of 2020. Downtown Class A vacancy rates remain below 10% but Class B vacancy rates increased to 27.28%, up 536 basis points from last quarter. Due to higher quality space becoming available likely caused by the pandemic, the rental rates in the central business district increased this quarter. The average weighted rental rate within the CBD increased to $24.35 per square foot; likewise, Class A office property weighted rental rates rose to $26.54 per square foot.
The Greenville-Spartanburg suburban office submarkets consists of 13.05 million square feet. No buildings were under construction, nor were there new construction deliveries this quarter. However, there are currently four proposed offices to be built which will add 274,720 square feet to the suburbs. The suburban offices posted a negative absorption of 57,302 square feet during the third quarter of 2020. Most of the negative absorption occurred within the I-385/85 submarket in Class B offices. Due to the negative activity, the suburban vacancy rate rose from 7.62% during the second quarter of this year to 8.06% this quarter. The overall average rental rate for the remaining suburban office space was $18.84 per square foot, the averages ranged from $25.50 per square foot in Class A I-385/85 suburban office space down to $8.00 per square foot in Class C Spartanburg County offices.
During the third quarter of 2020, there were 37 office sale transactions. Also, according to CoStar, and 58 leases were signed within the Greenville-Spartanburg submarkets, including two new leases totaling 30,652 square feet at 104 South Main Street..
Office-using employment are those jobs related to the professional and business services, financial activities and information sectors, within the combined Greenville-Spartanburg-Anderson Combined Statistical Area (CSA). According to the most recent April 2020 data from the Bureau of Labor Statistics, there are a total of 116,400 office-using jobs in the Greenville-Spartanburg-Anderson CSA. The office-using employment total is 10,211 less than it was 1 year ago due to pandemic job loss. As employers and employees find their comfort zone regarding COVID-19, some of the losses may be recovered when people are able to return to work. According to the Bureau of Labor Statistics, as of July 2020, the unemployment rate in the Spartanburg MSA was 9.9% and the Greenville-Mauldin-Easley MSA was 7.9%- both areas are lower than the national unemployment rate of 10.2%.
Even though the Greenville-Spartanburg office absorption was negative this quarter, deals are still being made. The affects of the Coronavirus have started to become apparent; however, the market deal velocity is still high and is expected to steadily continue. Sale transactions will be popular for smaller businesses who wish to own their own space, because interest rates are at an all time low. Rental rates are rising each quarter as owners keep up with rising operational costs to comply with pandemic building standards; however, some landlords may choose to lower rental rates in the coming quarters in order to compete with sublease availabilities.
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.