A recent survey found vacancy rates for Charleston’s Class A buildings have hit unseen highs, despite improving conditions for the state’s economy.
Six of the seven modern, high-rise office towers in downtown Charleston, known as Class A properties, have seen their vacancy rates jump from an average of 17.8 percent in October to 19.6 percent today. The data come from a recent survey conducted by Howard Swint, an associate broker with Colliers International.
Swint said the vacancy rate is the highest in the nearly 20 years he has tracked the market.
The Class A market’s struggles in the past few years can be primarily attributed to a drop in natural gas demand after a period of high activity in the Marcellus Shale region, according to Swint. Energy companies, which have always had a presence in Charleston’s high-rise buildings, began downsizing their leases or leaving entirely to minimize loss.
The average vacancy rate did shrink for a brief period, but it reached a new high in Swint’s October survey before climbing again in the most recent survey.
The properties surveyed were Chase Tower, Laidley Tower, the United Center, BB&T Square, MVB Bank Building and Huntington Square. City Center West was not included because it is owned by the state, effectively removing it from the market, Swint said.
Huntington Square had the highest vacancy rate at 41.4 percent. MVB Bank Building and Laidley Tower weren’t far behind at 33.3 percent and 32 percent, respectively. The three other properties surveyed fell below the average, with the United Center having the lowest vacancy rate at 6.5 percent.
Swint said vacancy rates are a lagging indicator of the economy’s health, and a recent uptick in the energy industry shows there may be an end to its climb.
“I would like to think we have hit bottom,” Swint said.
Brian Lego, a research assistant professor with West Virginia University’s Bureau of Business and Economic Research, said the survey’s findings were not surprising.
“The state of the major industries like white-collar engineering tend to drive demand, and all industries took a hit with the state’s economy having to adjust,” he said.
Lego said with the energy sector improving, or at least adjusting to previous hurdles, it should raise the prospects of other lines of work that have come to rely on it. More hires means more office space is needed.
“They’ve already started to rehire people,” Lego said of energy companies. “Once you see that pick up, you’ll see a need for more space for firms involved in the legal and accounting side, too.”
Lego said if the vacancy rates don’t drop, people and small businesses in Charleston may migrate toward more suburban areas. Owners and investors in the Class A properties may want to make sure they aren’t overly reliant on one company’s success, he added.
“If they have all their eggs in that one basket, they could go belly-up if there isn’t an improvement,” he said of Class A property owners. “Buildings can close down if the owner can’t pay because there aren’t enough tenants paying them rent.”
Matthew Ballard, president of the Charleston Area Alliance, said he feels good about the prospects of the city’s Class A buildings. Since the beginning of the year, the alliance has contacted multiple companies eyeing the properties Swint surveyed, according to Ballard.
“We’ve seen a lot more calls from companies interested in these buildings in the past six months or so,” he said. “Hopefully in the next six to 10 months, some of them will become tenants.”
Donna McGivern, a broker at Real Estate Resources Inc. for the United Center, said when oil and gas companies move out of a Class A building, like Patriot Coal did in 2014, the rest of the tenants fall “just like dominoes.”
Sometimes an emptier Class A property, and the lower lease rates that follow, give tenants who would normally occupy a Class B space the chance to move up, she said. However, McGivern said that is likely not a long-term solution for the property owners.
The United Center hasn’t been immune to the Class A market’s struggles, McGivern said, but tenants from a variety of sectors like West Virginia Mutual Insurance Company and Bailey & Slotnick helped ease the fall. Having a locally owned group in the Kanawha Roxalana Company help manage the property is also a plus, she added.
McGivern said she can’t guarantee the current Class A vacancy rate is the highest Charleston will experience.
“I guess it could, but who knew we would have the 2008 crash, or what we saw with oil and gas a few years ago?” she said. “All I can say is we need to fill up office space.”
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