Charlotte, North Carolina, is often referred to as the Capital of the New South. Strategically located at the intersection of two major highways, interstates 77 and 85, Charlotte occupies the majority of Mecklenburg County. The population of the city is roughly 600,000 and the Charlotte MSA ranks 26th in the United States with just over 1.5 million people.

There are eight Fortune 500 companies headquartered in Charlotte: Duke Energy, Bank of America, Wachovia, Sonic Automotive, BF Goodrich, Nucor, SPX and Family Dollar. The office market inventory of approximately 37 million square feet is generally described as having 11 submarkets with the Downtown market comprising over 35 percent of the total space. The next four largest submarkets, I-77 Southwest, Northeast, SouthPark and Southeast make up another 43 percent. In the industrial/flex sector there are eight submarkets totaling just under 34 million square feet with over 70 percent of the industrial/flex space located in the Southwest (airport) and North markets.

There is no question that Charlotte's economy, and thus its real estate market, has been and continues to be impacted by the influences of the recession of the past 2 years. However, given the extraordinary growth of the 1990s, a period of relative dormancy should not be unexpected. Although the vacancy rates have climbed over that past year, increased employment opportunities and reduced new development should help to turn the situation around during the second half of 2002.

Office

The city of Charlotte is probably best known today as one of the premier financial centers in the world. In fact, Charlotte is home to the nation's largest consumer bank, Bank of America, and Wachovia Corporation, which became the fourth largest bank in the United States after the recent merger with First Union. Combined, the balance sheets of these two institutions contain almost $1 trillion in assets. In addition, the Charlotte branch of the Federal Reserve Bank distributes almost $1 billion each day to its member banks.

The scope of these financial institutions, together with the infrastructure they support, have been and continue to be a key driver in the health of the real estate industry in the Greater Charlotte area. During the last half of the 1990s, the vitality of Charlotte's financial services sector attracted more than 20,000 new jobs, only half of which were banking positions. As an example, in 2001 TIAA-CREF occupied its new regional office with over 800 employees in The University Research Park in Charlotte. The company expects the office to grow dramatically -- it could house over 9,000 workers by the end of the decade. The University Research Park is also home to First Union's (now Wachovia's) massive call center, totaling 2.1 million square feet with over 8,500 employees.

While there have been a number of new announcements made and several exciting projects are being discussed, the fact is that office vacancy has been increasing over the past year and now stands at just over 13.5 percent. Charlotte has not been immune to the effects of the tragedies of September 11 and the general malaise of the national economy; however, much of the vacancy is due to the availability of new product outpacing the absorption.

New projects in downtown Charlotte include The Hearst Tower, Bank of America's 820,000-square-foot project developed by Keith Corporation and Trammell Crow Company and constructed by Batson-Cook Company. The Hearst Tower is currently fully leased. Another new downtown development is Gateway Center, a 1.5 million-square-foot mixed-use project developed by Bank of America and Cousins Properties. Johnson & Wales University, a world famous hospitality institution, recently announced it would locate an $82 million campus at the newly completed Gateway project. This new school will be staged in over a period of several years and is being created by the consolidation of existing campuses in Norfolk, Virginia, and Charleston, South Carolina. Another prominent redevelopment is the Ratcliffe project on South Tryon, owned by Wachovia and developed by Childress Klein. The completion of the Ratcliffe, which includes office and retail components, luxury condominiums and a mid-city park, offers a striking improvement to that area of downtown Charlotte.

Despite the recession's impact on the growth of Wachovia and Bank of America, the vacancy rate in the downtown submarket is a very healthy 7.5 percent. There are a number of large blocks of space available in several downtown buildings, including a 100,000-square-foot sublease by Wachovia and the space vacated by Hearst Corporation after the move to its new tower. However, activity seems to be increasing according to Maxwell Hanks, a vice president/principal at Colliers Pinkard and leasing agent for a large block of space in the BB&T Building. "Tenants are looking for a central location, abundant and convenient parking and a cost effective rent structure," says Hanks. "In a soft economy tenants gravitate toward value."

Although three of the suburban submarkets have vacancy rates under 10 percent, higher rates around 18 percent and more are being recorded in the Southwest, East, Northeast, North and CrownPoint markets. Probably the most significant of these are the Southwest and Northeast markets. Both markets have grown rapidly and are popular as corporate headquarter locations but have suffered as demand diminished just as several new buildings were delivered. With the increasing vacancy in the suburbs, landlords are aggressively pursuing all transactions. Enticements such as free rent, lease assumptions and generous tenant improvement allowances have returned. As a result, many tenants are testing the waters as early as 18 months prior to their existing lease expirations.

Within these submarkets, the most notable initiatives include major expansions for TIAA-CREF and EDS in the University Research Park, the headquarters relocations of SPX and Carlisle corporations into The Bissell Company's Ballantyne Corporate Park in the Southeast submarket and the relocation of Billy Graham's headquarters from Minneapolis to a new Childress Klein development near the airport.

Another development that is getting attention in the Southeast submarket is a master-planned, mixed-use project called Toringdon. Dene Ecuyer, vice president of leasing for the developer, Lichtin Corporation, notes that the "new urbanism concept of Toringdon has been well received in the market as evidenced by the rapid leasing activity by high quality tenants such as GMAC, Prudential and Selective Insurance."

Industrial

With the significant exception of the 280,000-square-foot Catawba Distribution Center, there have been no recent additions to the warehousing and flex inventory in the Charlotte submarkets. Nonetheless, this incremental warehouse space was largely responsible for the increasing vacancy rate in the first half of 2002. During this time vacancy in warehousing space stabilized or declined in all submarkets except the dominant Southwest where the addition of the Catawba Distribution Center and weakness in leasing existing product produced a significant negative absorption. The overall vacancy rate for warehouse space in Charlotte currently stands at just below 16.5 percent with flex space coming in at 17.4 percent.

Although delivery of new and proposed warehousing and flex space will be substantially below prior years' figures, the anticipated subleasing of over 430,000 square feet of warehouse space by U.S. Foods and John Deere, together with the completion of 128,000 square feet of warehouse space and 167,000 square feet of flex space, will be a definite challenge to the leasing demand. Additionally, there is more than 2.3 million square feet of warehouse space and almost 300,000 square feet of flex space still in the proposal stage, which, if realized, could further dampen the recovery.

According to the Charlotte Chamber of Commerce, the investment that new and expanding companies made in Charlotte during the first quarter of 2002 was the third-highest first quarter on record. For example, Ingersol Rand recently committed to a 10-year term for nearly 350,000 square feet of warehouse space owned by Highwoods Realty. According to Greg Copps and Lawrence Shaw of Colliers Pinkard, who negotiated the deal, this lease is significant not only because of its size but it is "indicative of an increasing willingness by tenants to commit to large blocks of space." Given that office and industrial investment is usually a first priority in expanding or relocating, it should not take long for those expenditures to reverse the trend of the past 2 years.

Land Sales

According to Bob Taylor of GVA Lat Purser & Associates, there is currently a "ground" swell of commercial real estate activity in Charlotte. While many sectors are down, the market for large tracts of land is up, says Taylor. "The last 3 years have been the strongest I've seen," he continues. "I attribute it to a combination of low interest rates, which have driven the housing market, the availability of reasonably priced land and developers that are planning and positioning their acquisitions to accommodate not only residential but future office and retail as well. Investors are also fueling some of the activity by moving some dollars from stocks to well located, path-of-progress land parcels."

Transportation

A synopsis of Charlotte would not be complete without some mention of three major transportation-related projects that will have a major effect on the local real estate climate.

In late 1999, Charlotte's city leaders approved funding to improve and expand the Charlotte-Douglas Airport. This $735 million project will enhance and expand the number of gates for domestic, international and commuter flights and will ensure that access and egress for passengers is both safe and efficient.

Planning is now underway for the development of a light rail system to share the right-of-way currently used by a trolley system tying the historic SouthEnd to Downtown. The trolley/ light rail will ultimately travel from Downtown, through the Convention Center and new Westin Hotel to the SouthEnd and terminate in the bedroom community of Pineville some 20 miles to the south. Economic development along this pathway has already commenced, and it is expected to have significant impact on the value of adjacent real estate.

Construction of an outer loop around Charlotte, Interstate 485, began in 1989 and will continue toward substantial completion in 2008. That part of the beltway, which is currently completed, has enabled the success of the Southeast market, most notably Ballantyne Corporate Park, and is expected to have a similar influence on undeveloped land in the northeast and northwest areas of the market.

Charlotte's spirit of proactivity and cooperation between the public and private sectors has never been stronger. The achievements of the 1990s provided the foundation for even greater success in the years to come. These projects demonstrate the optimism of the city's leadership for an economic recovery in 2002 and 2003.

Jack Bowman is vice president, corporate services with Colliers Pinkard in Charlotte, North Carolina.


©2002 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.