The vacancy rate among Savannah’s commercial office locations shrank to 6.3 percent at the end of 2013, its lowest point in more than five years, echoing other commercial real estate sectors slowly rebounding from the recession.
The overall rate was down from 9.2 percent in the same period last year with a positive net absorption of 49,450 square feet, according to a local market report from real estate research company CoStar Group.
Realtors attributed the drop to a healthy absorption rate and no significant new construction.
“We continue to see a positive absorption of space,” said Adam Bryant of commercial real estate group Sperry Van Ness. “With the expansion of existing businesses and having new office users coming into the market, we’re starting to become healthier than we have been in recent years.”
The CoStar report examines office trends in downtown Savannah as well as outlying areas in Chatham, Bryan and Effingham counties.
In downtown Savannah’s commercial business district, the vacancy rate dropped to 6.6 percent from 11.1 percent over the year, while the suburban market rate decreased to 6.2 percent from 7.8 percent.
“Downtown, there are fewer vacancies than I’ve ever seen,” said Rhett Mouchet, a commercial broker at Judge Realty, who used to do his own office inventory tracking a few decades ago.
Mouchet said other forces coming into play are the growth of the service industry, the financial industry rebounding and now architectural and engineering groups beginning to grow again.
Some of the bigger leases signed last year were the 12,000-square-foot lease by EMC Engineering off Chatham Parkway, a 10,860-square-foot lease signed by UPS Supply Chain and the 10,000-square-foot lease by OnePoint Digital on Drayton Street.
Bigger leases point to a healthier economic picture, as the majority of office users in Savannah are in the smaller, less than 3,000-square-foot range.
Bryant said one trend he sees is an uptick in established medical practices from downtown or Southside looking to open satellite offices to serve the growing West Chatham population, particularly in Pooler.
As downtown vacancies drop, Mouchet said, there will be even more interest in areas with available space like Chatham Parkway.
“I think the next office opportunity is going to be the most immediate, and it’s going to be the Westside,” said Mouchet. “What we’re looking toward is more of a connector between the [commercial business district] and the Westside.”
Even with the improvement in occupancy rates, rental rates for offices have held steady for the most part, with overall asking rates at $17.59 per square foot, about 10 cents less than December 2012. The average quoted rate in Savannah’s downtown commercial business district was $19.24.
Mouchet said part of the reason for this was still a lack of demand for newer product. He said companies are making do or trying to fit within certain spaces to fit the still-rebounding economy. Also, during the recession, landlords were willing to accommodate shorter leases for tenants, which keeps rates flat.
Bryant said that’s beginning to change.
“You’re seeing tenants willing to execute longer-term leases,” said Bryant. “Before, they were fearful of the economy and really trying to run their business as efficiently as possible by signing shorter terms … so that was the variable you saw.”
He said other than in 2007 when it took a dip, rates have held flat without any new product on the market.
Only about 38,015 square feet of office space was under construction at the end of 2013. The tightening of credit and stricter lending requirements have meant little new speculative construction in Savannah, a trend spread across the real estate industry.
Total office inventory in the Savannah market at the end of the year included 10,780,000 square feet in 1,326 buildings.
Realtors expect more of the same in 2014 — more absorption of existing space and a pretty flat supply. Only when supply starts to decrease will construction enter the equation again.
“We’re definitely headed toward that conversation,” said Bryant.