Greenville-Spartanburg Office Figures Q3 2023
Large Blocks of Suburban Availability Negate Uptick in Deal Velocity
October 24, 2023 10 Minute Read
Due to limited availability of similar-sized alternatives, tenants in the Greenville market are choosing to renew leases in smaller offices. In the last quarter, seven lease renewals took place, with an average size of 5,072 sq. ft. The largest renewal occurred at 550 S. Main Street, where a space of 12,928 sq. ft. was renewed. Additionally, Southern Tide pre-leased 24,406 sq. ft. in the Borden Building, which is expected to be completed by the end of this year.
Vacancy has remained relatively stable while availability rates are on the rise in the Greenville-Spartanburg market as office tenants adapt to a shifting workforce. Downtown Greenville continues to maintain a vacancy rate under 10%, attributed to tenant preference for Class A spaces. Suburban areas, however, have a higher vacancy rate of 11.2%, largely comprised of vacancy over 20,000 SF. There has also been a substantial increase in sublease space, particularly in suburban areas, where roughly 250,000 sq. ft. was added to this submarket, driving the availability rate up to 17.4% for the quarter. Despite these hurdles, the Greenville-Spartanburg office market remains robust due to its strong market and workforce fundamentals.
There were four office sales totaling nearly $20 million in the Greenville-Spartanburg market in Q3. Despite concerns about the office asset class at a national level, GSP remains an attractive office market for buyers due to its low-risk profile, popularity, and affordability as a secondary market which is mostly immune to the woes faced by larger metros. Landlords with ample funding are expected to thrive in the tightening market in the next three years. This is mainly due to the lack of significant new office buildings being constructed, and the ability of these landlords to compete against almost every deal in the market. The challenges in obtaining investment debt for office assets might lead to a shift in ownership dynamics, with more owner/users entering the market to meet their space requirements. Developers who can quickly offer new office product or revamp existing ones will be successful. The high cost of construction, however, is currently discouraging improvements and new office projects.
Due to both the lack of available quality office space and an increase in construction costs for tenant upfits, the Greenville-Spartanburg office market is experiencing a rise in rental rates despite an increase in vacancy and availability. The overall market rental rates this quarter averaged at $23.03 per sq. ft., while Class A rates averaged at $25.87 per sq. ft. For the past seven quarters, the average rates have varied between the high $22s and low $23 per sq. ft., marking a significant increase over the previous average rates.
Economic Trends & Outlook
The U.S. economy has demonstrated resilience despite stringent credit conditions and banking sector write-downs, largely due to the impact of the Chips and IRA Acts on the construction sector, Federal Reserve and FDIC's support to banks, and strong consumer balance sheets and incomes. However, challenges such as rising oil prices, the resumption of student loan payments, and a weakening global economy are emerging in the face of high-interest rates. The Federal Reserve's predicted end to its tightening cycle could benefit real estate capital markets. Although economic growth may slow down, valuations are expected to stabilize by the first half of 2024. The Upstate region may face additional stressors like increasing sublease space and lease give-backs but this creates opportunities for new companies due to the availability of large blocks of space and strong population growth.