The Queen City is sitting pretty, with rising occupancy and rents for office, industrial, retail and multifamily.
The queen city is sitting pretty these days. Throughout her office, industrial, retail and multifamily markets, occupancies are up and rents are rising, too. Much of the health of this market can be attributed to its prime location along the Interstate 85 growth corridor between Atlanta and Raleigh-Durham. In this, the nation's second largest banking center, office towers are rising from the ground continuously, mostly to house the banking industry. And where many cities this size have downtowns suffering from a lack of new development, Charlotte's "uptown" is burgeoning.
The office market is perhaps the greatest catalyst behind this growth, as it is the financial industry that is fueling much of the new development. "This city is hot," says Flint McNaughton, vice president of corporate services for The Harris Group, Charlotte. According to McNaughton, developers are putting up office product both uptown and in active suburban areas like SouthPark, a move which he says will provide relief to a very tight market.
Among the larger projects downtown is 525 North Tryon, the newest addition to the very active Tryon Street corridor where several other towers have joined the skyline recently. The 19-story, 412,800 sq. ft. tower is being built by The Harris Group for NationsBank.
NationsBank also announced in December plans to transform five sparsely developed blocks of uptown Charlotte's Third Ward neighborhood into a $250 million urban village of offices, shops and residences, according to Frank Alexander, partner with Berkeley Capital Advisors LLC, Charlotte. The bank, in a joint venture with Atlanta-based Cousins Properties Inc., plans more than 1 million sq. ft. of offices, 400 residential units and 4,000 parking spaces in the area. Cousins Properties will develop the $125 million first phase, which will include a 600,000 sq. ft. office complex, 2,000 parking spaces and 200 mid-rise residential units, he says.
Construction also is under way by First Union: Childress Klein Properties of Charlotte is developing a 30-story office tower on South Tryon Street to be called Three First Union Center, according to Mark Folk, spokesman for First Union Corp. Construction of the 860,000 sq. ft. building at the corner of Second and Tryon streets is expected to be complete by the fourth quarter of 1999. First Union will occupy 540,000 sq. ft. of the facility, which, according to Folk, will be the third-largest building in uptown Charlotte."We are excited about offering an more than 300,000 additional sq. f t. of multitenant office space in a Class-A property uptown," says Childress Klein Properties' managing partner Fred W. Klein.
"The three big horses here are NationsBank, First Union and Duke Power," says Charles Madsen, CCIM, president with Binswanger's Realty Group South, Charlotte. "As a consequence of their expansion, accounting firms and law firms with whom they work are taking additional space uptown." Although Charlotte relies heavily on the growth of its banking industry, Madsen doesn't feel the city is dependent on it.
"Although the banking tenants seem to have a voracious appetite for space, non-bank related activity uptown is slower than expected," adds Jennifer Stanton, director of research for Faison, Charlotte. In the suburbs, she says, new development is spurred on not only by the banking industry, but by other businesses and industries savvy enough to take note of the positive office environment in Charlotte.
Charlotte is growing not only in its uptown but also in the suburbs, which are growing as the outer beltway opens up new areas of development. Completion of the 65-mile loop around the city is set for 2008. "This is expected to stimulate a great deal of commercial growth," says Randy Allen, director of development for Laing Properties, Charlotte.
Because of all the new product coming on line both downtown and in the suburbs, some upswing in vacancy is possible, says Eric Karnes of Karnes Research, Charlotte. The overall office vacancy for Charlotte was 7.1% at the end of the third quarter 1997, an improvement over 7.3% three months earlier, according to Karnes. The downtown vacancy rate of 5.1% was down from 6.6% over the same time period.
Composite absorption of 1.57 million sq. ft. in the first nine months of 1997 surpassed the 1996 annual total of 769,562 sq. ft. Tight office market conditions have translated into steady increases in effective rental rates over the last three years, according to Karnes.
Industrial activity is excellent Activity in the industrial market is "excellent," according to Brad Cherry, of Charlotte's Trammell Crow Co. "There's lots of construction, and absorption continues to outpace construction," he says. The industrial market is seeing much institutional demand for new product. "But they're having a hard time finding it," he says. "There's not much available space, and there aren't many sellers."
Charlotte is a popular distribution center, and both expanding and relocating companies are looking for space here. Thus, absorption rates continue to break records and the vacancy rate is holding steady. "Charlotte's record six-month warehouse net absorption of 829,751 sq. ft. between April and October 1997 was surpassed only by completions of 964,400 sq. ft.," Karnes says. This addition of new space caused a slight spike in the vacancy rate from 13.9% to 14.2%. Over the last year, approximately 1.4 million sq. ft. of multitenant warehouse space was added to the market, while 1.5 million was absorbed. "And with about 850,000 sq. ft. under construction and another 850,000 sq. ft. proposed, the vacancy rate will likely remain in the 14% to 16% range for the next year," Karnes predicts.
Current and proposed construction projects probably will keep the vacancy rate above 12% for the next year, even though the amount of proposed space fell from 1.1 million sq. ft. in April 1997 to 859,900 sq. ft. in October of last year, Karnes says. "As a result, warehouse rents should remain fairly static over the next six months," he says. Average rents per sq. ft. are in the $2.85 to $6 range for newer warehouse product and $4.50 to $12.50 for newer flex space.
Retail is strong Charlotte's retail market is "one of the strongest in the Southeast," according to Rob Carter, partner with Berkeley Capital Advisors, Charlotte.
With the outer beltloop opening up new areas and changing the demographics, Carter expects new regional malls to materialize in the I-485/Independence area in the next seven to eight yearsand in the I-77/Harris area in the next two to three years.
While the overall market is healthy, conditions vary. Today, neighborhood and community centers with supermarket anchors are driving new construction, as power center construction is waning in response to financial weakness among some big box discount retailers, according to Karnes. Despite the closing of several anchor tenants throughout the city, the overall retail vacancy rate was relatively unchanged in the first half of 1997 and net absorption of 627,943 sq. ft. was outpaced by completions of 669,900 sq. ft. The vacancy rate of 7.6%, though, still is down from that of one year earlier when 8.2% was the average.
In newer centers, small shop rents generally are in the $12 to $18 per sq. ft. range, though some of the more popular centers command more than $22 per sq. ft. and vacant anchor spaces of 20,000 to 75,000 sq. ft. are offered at a highly negotiable $2 to $7 per sq. ft.
Apartment market is expanding Charlotte's apartment market, too, is expanding as residential growth in the city rises. Last August the vacancy rate was just 5.5% overall.
Absorption continues to exceed expectations here, according to Jud Little, president of Crosland Properties, Charlotte. Historically the market has absorbed about 2,500 units annually, but last year absorbed nearly 2,700 units in a six-month period, more than the 2,200 units completed during that time. "Right now the economy is humming," Little says. "Though higher vacancy levels certainly are likely as the development community remains active, we're optimistic."
Reflective of Charlotte's balanced and continuous residential growth, the multifamily, retail, office, industrial markets all continue to see cranes dotting the landscape as developers cautiously expand.
Lisa P. Mayfield is a Macon, Ga.-based writer who contributes frequently to Commercial Real Estate South.