Marcus & Millichap

Carolinas Office Market Report

Carolinas Region, Second Half 2016

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Carolinas Office Market Benefits From Strong Employment Growth; Investors Active

The expanding and diversifying economy in the Carolinas underpins gains in the office market.  Lower costs, a well-developed transportation network, a growing skilled workforce and warmer weather are among the array of factors that attract businesses to the region. Charlotte’s large financial sector, the significant life science and tech hub in the Research Triangle, the increasing back-office operations in Charleston and the government sectors in Raleigh and Columbia all generate the need for office space. Companies are also attracted to the expanding and skilled labor force that the areas’ many institutions of higher learning provide. These factors have all contributed to a rise in the absorption of existing traditional office space, which is tightening vacancy and improving rent growth in most markets throughout the region. Medical office space in both on- and off-campus buildings throughout each state are also benefiting from the additional population moving into the region and by the growing number of those nearing retirement age.

Office properties in the Carolinas draw attention of a wide range of investors.  Many buyers are from out of the region, lured by strong employment gains, favorable demographic trends, as well as more affordable entry costs and higher cap rates than are available in their home markets. An increasing supply of new buildings near downtown cores or in large employment centers are keeping institutional investors active at first-year returns that are typically in the 7 percent range. Many other buyers are targeting assets with upside potential. Buildings with some vacancy or in need of updating will generally trade with initial yields in the 7 to 8 percent span. Yield-seeking investors will move into smaller metros such as Greensboro or Columbia where cap rates are typically 100 basis points higher. Medical office buildings near a hospital or medical campus are especially sought after at cap rates that will begin in the high-5 percent area for quality buildings in larger metros with leases extending 10 years or more.

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