As we reflect on the economic conditions of 2002, we see a slowdown in consumer spending and corporate expansion, rising energy prices and reduced technology spending. How has this affected real estate development the United States as a whole and in the Southeast in particular? The answer is more favorable than one might imagine. Companies around the Southeast are down but not out. New construction might be temporarily stalled and vacancy rates may be rising, but there are bright spots on the horizon as companies look forward to 2003. In the meantime, many firms exercise caution in developing speculative space.

Nashville Area

“The economy has affected us in our timing but not in our development intentions,” says Dave McRae, director of leasing for Crescent Resources’ Tennessee region. “The economic climate in the real estate market over the past 18 to 24 months has just slowed things down. We are now focusing more on pre-leasing our new projects.” These projects include construction of a new building at Corporate Centre at Cool Springs, a 354-acre office campus, which includes a 250-suite hotel and more than 1 million square feet of Class A office space, in Franklin, Tennessee. Construction will begin sometime next year and the new 130,000- to 150,000-square-foot office building will be completed in 2003. Office vacancy in the suburban Nashville market is decreasing and net absorption and lease rates have recently rebounded slightly. Despite these good signs, speculative construction is at a standstill. (CB Richard Ellis – Market Index Brief – Nashville – Suburban Office Market – 3rd Quarter 2002)

Nashville is one of only a few U.S. cities to be served by three major interstates — 65, 40 and 24 — and this makes it a prime location for industrial facilities. Crescent’s Nashville office has plans to develop a third building at CentrePoint, the 260-acre warehouse and distribution park in LaVergne, Tennessee, near the intersection of the three interstates. Plans are to break ground and complete the approximately 250,000-square-foot warehouse industrial distribution facility in 2003.

Charlotte

The industrial market in Crescent Resources’ headquarters of Charlotte, North Carolina, is not faring as well as Nashville’s. Charlotte’s industrial vacancy currently stands at 9 percent. The city’s overall industrial vacancy hasn’t reached this level in 6 years. Industrial net absorption and lease rates have fallen due to the plethora of sublease or “shadow” space that is currently available. Construction activity has fallen; the amount of space under construction has fallen to 300,000 square feet versus the 1.2 million reported this time last year. (CB Richard Ellis - Market Index Brief - Charlotte Industrial Market - 3rd Quarter). Office vacancy has also been increasing in the Charlotte metropolitan statistical area over the past year. Most of the vacancy is attributable to the fact that production of office space is currently outpacing the demand for it.

Robby Kirby, vice president of commercial leasing in Crescent Resources’ Charlotte office, says that his company is dealing with this dilemma by focusing more on build-to-suits rather than speculative development going into 2003. "We’re also focused on filling up the current space that we have available,” says Kirby. “Another thing we’re fighting is sublease space. A lot of companies have put their space on the market for sublease and that’s competing with our new and second-generation space. It’s harder to compete with sublease space, because typically the rent is discounted significantly.”

GVA Lat Purser & Associates, which focuses on retail and mixed-use developments in North and South Carolina, is also dealing with the market conditions unique to Charlotte. “[The Charlotte economy] has made everyone, including us, focus more carefully on being a bit more disciplined about the risks that we take, but it hasn’t stopped the process as much as slowed it up and made us a bit more cautious,” says Lat Purser, CEO of the Charlotte-based firm. “I think that all cities are looking at job growth to determine how much development can be accommodated. Job growth is one of the things that the economy has affected throughout the state, but we’re optimistic that will turn around in the next several months.”
Job growth in the area could be on the upswing shortly, due to transportation plans in the works, including an approved $735 million improvement of the Charlotte-Douglas Airport that will involve a light rail system extending from Charlotte’s downtown through SouthEnd all the way to Pineville, 20 miles south of Charlotte. Perhaps most importantly, construction of Interstate 485, which will connect interstates 77 and 85, is partially complete and work on the road will continue until 2008. I-485 is expected to create new opportunities for development and employment. Development activity is now, in large part, being driven by the effect that the new transit system will have on Charlotte as well as the effect of I-485, which will further connect Charlotte with outlying suburbs, such as Concord, Belmont and Rock Hill.

In anticipation of this turnaround, GVA Lat Purser has two major projects that are currently going through city planning and rezoning. One is a 30-acre retail and residential project in the Charlotte suburb of Huntersville that is a joint venture with Charlotte-based Gandy Communities. Retail will account for 20 acres of the development and the remaining 10 acres will be residential. GVA Lat Purser is also developing an office and retail property on Mallard Creek Church Road in the northeast part of Charlotte. The company anticipates groundbreaking on both projects to take place sometime in the third or fourth quarter of 2003. At Matthews Station, a main street redevelopment of a deteriorated downtown that is designed to look like an early 1900s village in Matthews, North Carolina, GVA Lat Purser recently completed a town hall, library and about 45,000 square feet of mixed-use office and retail. Construction on a third building is expected to break ground in the first quarter of 2003, with possible plans for a fourth building later in the year.

Washington, D.C.

Not all Southeast markets have felt the drastic effects of economic downturn. Washington, D.C., has been dubbed by some as the “recession proof” city. Federal government jobs have protected, to some extent, the metropolitan area from some of the economic upheaval experienced by the rest of the nation. The D.C. area, which has experienced a development boom in recent years, may see only moderate gains in the near future. Nevertheless, the area remains a bright spot for apartment investment. The area boasts extremely low apartment vacancy rates and solid rent growth. According to Marcus & Millichap’s Apartment Research Report - Washington D.C. - July 2002, construction activity is down by more than 15 percent from 2001, and it will continue to taper off over the next 5 years as the market becomes built out. Vacancy rates are slightly higher than they were in 2001 but are still among the lowest in the country.
Clark Realty Capital, the development subsidiary of Bethesda, Maryland-based Clark Enterprises, is taking advantage of the favorable market conditions in the area. “Washington has been relatively insulated from the economic woes that the rest of the country has felt,” says Alan Davis, managing director of Clark Realty Capital. “We’re a long-term investor here in the metropolitan area. Right now, we are well positioned with what we have and we’re just going to be a little more selective about our development deals.”

Clark Realty, which develops a wide array of multifamily properties — everything from low-income, tax credit-financed housing to luxury high-rises — recently completed construction on 3883 Connecticut Avenue, a 158-unit, nine-story apartment community in the heart of Washington, D.C.’s upscale Cleveland Park neighborhood. The company recently broke ground on a project called The Hudson in the D.C. suburb of Arlington, Virginia. The Hudson is a planned 293-unit luxury apartment community, with a retail component, that will be located adjacent to Clarendon Metro Station. At the south end of the site will be a 151-unit, 12-story tower, which will be intersected by a four-story, 142-unit apartment building. Completion is scheduled for September 2004, with the first residences available for lease in early 2003.

Clark Realty Builders, a subsidiary company, acting as a general contractor, also recently broke ground on another luxury multifamily property, The Blair Towns in Silver Spring, Maryland. The apartments will be part of The Blairs, a 28-acre, mixed-use development. Clark Realty is also doing an in-place renovation on Columbia Heights Village, a 406-unit, 31-building apartment complex in Washington, D.C. Clark Realty is working with the non-profit corporation Change All Souls Housing in this venture, which should be complete by March 2003.

Louisville

Louisville, Kentucky, is another Southeast market that seems to be facing favorable market conditions for 2003. Louisville has consistently outpaced many other U.S. markets in job and income growth. This growth will most likely continue with the current influx of population that the city is experiencing.

Louisville-based Faulkner Hinton & Associates has a strong portfolio of commercial and residential properties in the Jefferson County metro area. In nearby Shelby County, Faulkner Hinton has an interchange, mixed-use development, which opened in 1999, that includes 17 acres of restaurant and convenience retail space, a 20,000-square-foot retail center and an 81-room Holiday Inn Express that Faulkner Hinton owns and manages. The development includes room for additional office, retail, hotel and restaurant space. Faulkner Hinton recently began construction on 48 patio home units at the project. The company is also offering 95 single-family lots for sale.

Faulkner Hinton recently completed construction on Suburban Medical Plaza III, a seven-story, 196,000-square-foot, Class A medical office building in Louisville. The company broke ground last month on another medical plaza building on the Norton Audubon Hospital campus. The approximately 80,000-square-foot medical office building will be complete in 2003.

Mark Hinton, Faulkner Hinton’s manager of sales and leasing, dismisses any effect that the economy may have on his company’s developments in 2003. “The last few months have been tremendous,” he says. “Even with the national economy down, Louisville is a consistent and steady market.”


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