One of Charlotte's newest office towers serves as a striking symbol of the upheaval in the banking industry that transformed this Southern city into the second-largest U.S. financial services center after New York.

The 48-floor Duke Energy Center was originally designed to house the headquarters of the former Wachovia Corp., but now is seen as the new signature of a city tapping into energy-related industries to recharge its growth.

The homegrown utility that began moving its headquarters from across the street a year ago into the high-profile tower is helping to attract new office tenants to Charlotte. That's key to offsetting the recent turbulence in the entrenched banking industry, according to local real estate players.

“The worst-case scenario has somewhat happened, and our downtown market has held up quite well,” says Walker Collier, managing director of Charlotte-based Trinity Capital Advisors, a real estate investment and development firm that owns several area office properties.

The completion of the 1.5 million sq. ft. Duke Energy Center helped elevate Mecklenburg County's office vacancy rate to a seven-year high of 15.8% in the first quarter of 2010. Construction of the skyscraper and three more towers since 2008 also have kept downward pressure on leasing rates in North Carolina's largest city as it battles the worst U.S. economy since the Great Depression.

But property owners and brokers say the local office market is stabilizing, even if deals on Class-A space prompt aggressive leasing rates on Class-B buildings in the short term. Mecklenburg's office vacancy rate was 15.2% in the fourth quarter of 2010, according to market research firm Reis. Bank of America, headquartered here, and San Francisco-based Wells Fargo, which kept its East Coast headquarters here, are major office tenants and have wound down layoffs tied to mergers and the financial crisis. The banks cut a combined 1,600 jobs in Mecklenburg County between June 2007 and October 2009, but neither has reported major job cuts since.

Meanwhile, several companies offering engineering, construction or other services and products to Duke Energy or its energy peers have moved here. Other newcomers are being wooed by the two museums, cultural center, and performing arts theater that are part of the four-acre Duke Energy Center complex.

City leaders also expect February's announcement that Charlotte will host the 2012 Democratic National Convention will keep the spotlight on the Queen City.

Real estate experts say building owner Wells Fargo's ability to lease 97% of the Duke Energy Center bodes well for the market, considering the metro's 10.7% jobless rate in December, when U.S. unemployment stood at 9.4%.

“The Class-A market is beginning to stabilize faster than anyone expected,” says Jubal Early, senior vice president of brokerage services for Charlotte-based national real estate firm Lincoln Harris. Scarce ground-up development is helping to narrow the gap between demand and supply, he adds.

Ralph V. Oldham Jr., senior vice president of commercial sales and leasing for Cushman & Wakefield/Thalhimer's Charlotte office, also cites a healthier market. “We're seeing not only domestic companies looking at Charlotte for a possible relocation, but also foreign companies,” he says.

Oldham is optimistic that Duke's recent decision to acquire Raleigh, N.C.-based Progress Energy Corp. and form the nation's largest utility also will help.

Some city leaders fret that it could initially mean layoffs and more vacant space, but Duke Energy spokesman Tom Shiel says that concern is premature. Duke sees signs of an improving economy. Its support of regional development efforts to create an “energy hub” and CEO Jim Rogers' role in recruiting the DNC are evidence of a corporate commitment to the city, says Shiel.

Optimism has been in short supply in recent years in Charlotte as the financial crisis rattled an industry that accounts for nearly one-third of the city's economy.

A rocky start for new tower

Charlotte's financial-center roots date to America's first discovery of gold here in 1799. But banking built the modern skyline, turning Charlotte into the 19th largest U.S. city. Its 10 tallest buildings were all either built for, or are now occupied by, financial services companies.

Wachovia began construction at 550 S. Tryon St. in 2006, when the Charlotte-based company was the sixth-largest U.S. bank and growing. The new building was the cornerstone of an $880 million project expected to breathe new life into the southern end of Charlotte's central business district. The nearly 800-ft. tower would also be an iconic bookend to a skyline dominated on the north by buildings tied to cross-town rival Bank of America Corp., the largest bank in the U.S.

But at the height of the nation's financial crisis in late 2008, Wells Fargo & Co. swooped in to buy a faltering Wachovia after it was hit by mortgage losses tied to its acquisition of California mortgage lender Golden West Financial. Wachovia's near collapse threw occupancy prospects for the planned office tower into disarray until Duke Energy in 2009 announced a 20-year lease with naming rights.

Meanwhile, BofA was building a 30-story office tower and 147-room Ritz-Carlton Hotel. With about 15,000 Charlotte employees, BofA was dealing with headaches tied to the financial crisis and its acquisitions of Countrywide Financial Corp and Merrill Lynch & Co. In all, Mecklenburg has shed 11% of private jobs in finance and insurance from the 2007 peak level, while North Carolina has lost 5%, according to state figures.

Nearly 3 million sq. ft. of new office space completed between 2009 and 2010 helped swell downtown's vacancy rate to 12.7% in the fourth quarter of 2010 from the historic low of 2.5% in 2008, says Andrew Jenkins, managing partner at Karnes Research in Charlotte.

By last summer, though, BofA's outlook improved, and it plans to occupy nearly all of 1 Bank of America Center. Financial services employment in Charlotte remains well below earlier levels but has picked up.

Besides the biggest banks, TIAA-CREF, Ally Financial, Fifth Third Bank and other financial services companies have kept a major presence. Unemployed bank workers are helping to attract new employers such as Capgemini, a Paris-based financial services consulting, technology and outsourcing firm that plans to open a new office and employ 550 workers within three years.

Wells Fargo's 20,500 workers in Charlotte now occupy about 3 million sq. ft. downtown and another 2 million sq. ft. in suburbs. It has been shifting 3,000 workers from leased space to bank-owned properties, including the new Duke tower, where it will fill 11 floors.

“Net, we're at the same population we had prior to the merger announcement, and I would suspect we're probably in the similar ballpark in terms of square footage,” says Curt Radkin, senior vice president and development manager for the company's corporate properties group.

Duke Energy, too, is replacing expired or expiring leases with space in new tower, which boasts state-of-the art, environmentally friendly technology and amenities such as a heat-absorbing rooftop garden and showers for tenants biking to work. The company is the primary tenant at 400 S. Tryon St., a 33-story Class-B building recently offered for sale by an affiliate of UBS Realty Investors. Last sold in 2003 for $60.6 million, it should provide a window on commercial real estate sales.

Only two suburban office projects are slated for completion this year, says Jenkins. At the same time, SPX Corp., Shaw Group and others are expanding or relocating. Shaw is one of more than 200 companies tied to the energy sector that employ more than 20,000 people in the region.

Aggressive rates seen in 2011

Still, tepid job growth favors a continued decline in rents in the near term. Effective office rent in the fourth quarter was $17.52 per sq. ft., compared with $17.86 a year earlier and $18.75 in the third quarter of 2008, according to Reis. The firm forecasts that effective rents will increase to $17.67 per sq. ft. in 2011, still well below the peak of $18.75 in the third quarter of 2008, with vacancy rates around 15%.

But vacant Class-A space like the NASCAR Plaza office building have many landlords trying to hold on to their existing tenants, which is driving down rents generally, says Jenkins.

“There's going to be more aggressive leasing activity to get tenants in,” says Jenkins. The lack of new supply should help vacancy rates improve by year end, he says.

Trinity Capital and Philadelphia real estate investment firm Rubenstein Partners bought the 393,000 sq. ft. building, home to Nascar's Charlotte operations, late last year after it fell into foreclosure. Only about 37% of the building is leased, according to Trinity's Collier. But purchase terms, which he wouldn't disclose, have translated into asking prices of $24.50 per sq. ft., several dollars lower than other nearby Class-A space.

“The office market in Charlotte is at or near the bottom, and we expect a recovery over the next three to four years,” says Collier.

NASCAR Plaza is adjacent to the NASCAR Hall of Fame, which opened last year with fanfare and the help of new local hotel-motel taxes. But attendance was less than 200,000 in the first eight months, well shy of first-year projections for 800,000 visitors. In January, the museum cut its budget by $4.8 million but still projects a $1.3 million loss for the year ending in June.

Charlotte is a relatively small office market, but its low number of troubled commercial properties so far is a good sign, says Dan Fasulo, managing director of New York-based research firm Real Capital Analytics.

As of Dec. 1, 12 Charlotte office properties were in distress, meaning they faced foreclosure, bankruptcy, were bank owned or were modifying a loan in default. That's the fourth-lowest number among 10 major markets the firm tracks in the Southeast.

“There's been a great diversity and stability among the tenant base in Charlotte versus some other markets,” says Fasulo.

In Las Vegas, for example, tenants are linked to either the casino or the real estate business, both of which have been hammered. The Charlotte area is headquarters to eight Fortune 500 companies, including Lowe's Cos. and Family Dollar Stores Inc.

That diversity and a vibrancy around the new Duke Energy Center are what convinced Chef Emeril Lagasse to announce recently that he'll open his next restaurant within the 40,000 sq. ft. of retail space in the complex, says Eric Linquest, president of the famous chef's restaurant company.

“We just looked at it and said, ‘Wow, this city is really on the uptick.’”

Mary Ellen Biery is a Charlotte-based writer.

CHARLOTTE: BY THE NUMBERS

POPULATION

704,422

Source: U.S. Census Bureau

CITY UNEMPLOYMENT RATE:

8.6%

Source: N.C. Employment Security Commission

METRO (MECKLENBURG COUNTY) AREA VITAL SIGNS

Office:

15.2% vacancy, 4Q 2010

15.4% vacancy, 4Q 2009

$17.52 rent per sq. ft., 4Q 2010

$17.86 rent per sq. ft, 4Q 2009

Source: Reis

Multifamily:

8.4% vacancy, 4Q 2010

11.3% vacancy, 4Q 2009

$720 monthly rent., 4Q 2010

$703 monthly rent, 4Q 2009

Source: Reis