FEATURE ARTICLE, DECEMBER 2005

Charlotte, North Carolina

In Charlotte, the financial center of the Southeast, the buttoned-down bankers crave conservative, measured growth. That's why they are bullish on their hometown office real estate.

Though far from flying high, Charlotte's office sector recorded its fourth consecutive quarter of sustained improvement following a 4-year slide in rental rates and occupancy. Rates, which this time last year dropped to their lowest recent average of $19.15 per square foot, have climbed back up to $19.54 per square foot. Job growth and new, inbound requirements brought market-wide occupancy to almost 86 percent, a 15 percent uptick from its recent low point just two quarters ago. Net absorption reached a 4-year high of 1.2 million square feet with the final quarter of the year yet to report; this marks a six-fold increase from the total 2004 net absorption figure.

This good news is due to a combination of renewed demand for office space and some with restrained new development. Significant projects include an announcement by Hewitt Associates, the human resources outsourcing firm, to locate 248,000 square feet of administrative space at the Meridian Corporate Center (leased by Trinity Partners and owned by Blackacre Capital) in the University submarket. In addition, Decision One Mortgage will consolidate and expand its Charlotte operations in the red-hot Upstate South Carolina submarket with a 182,000-square-foot, build-to-suit facility. Expansion announcements include Premier, the Chicago-based healthcare concern, which in March announced its intention to bring an additional 200 employees to its existing Charlotte operations. Intellirisk Management Corporation, a third-party call center company, is doubling its 30,000 square feet of space in Charlotte with a relocation to the Airport submarket from Ballantyne Corporate Park.

Elsewhere in the market, the downtown area continues to deepen with a flurry of new announcements in the multifamily market. No less than 10 new residential towers have been announced, buffeted on the supply-side by several significant apartment-to-condominium conversions already underway. The Rolling Stones christened downtown's new $265 million Charlotte Bobcats Arena in October. Retailers are more active than ever in the submarket, scouting sites and wondering how many rooftops will ultimately be built. Not to be outdone, Wachovia Corporation has put a new Tryon Street tower into production, a 750,000-square-foot office building that will house Wake Forest's MBA school as well as a 1,200-seat performing arts center when it comes on line in 2008.

The implementation of a light-rail transit system — and the city's commensurate emphasis on transit-oriented, mixed-use development — will continue to compete directly with the expansion and eventual completion of Interstate 485, Charlotte's outerbelt and new community frontier, in 2006. On the retail front, Pappas Properties' long-awaited Midtown Mall construction and the Interstate 77/North opening of Taubman's NorthLake Regional Mall will provide new dimension to their respective submarkets.

Even though some segments are faring well, recovery has not yet shined as brightly on others. Six office submarkets, particularly those with large Class B and C inventories, continue to endure greater than 20 percent vacancy rates.

Nevertheless, investors of every stripe, following a national trend, are in a fever pitch to snap up all classes of property around the region. This “shark tank” environment makes this New South metropolis a compelling place to conduct real estate business in 2006.

— Chris Keber is managing director of   the corporate services group of Charlotte, North Carolina-based Trinity Partners.

Historically, Charlotte's office growth has primarily been fueled by Wachovia and Bank of America, which are both headquartered in Uptown Charlotte. However, Charlotte is quickly becoming attractive to additional Fortune 500 companies that are aggressively occupying office space in the suburbs. Although the 19th largest city in the country, Charlotte has the fifth highest number of Fortune 500 headquarter locations in the country. The only other cities ranked ahead of Charlotte include New York City, Houston, Atlanta and Chicago, respectively. In addition to Wachovia and Bank of America, Fortune 500 companies headquartered in Charlotte include Lowe's Home Improvement Warehouse, Duke Energy, Nucor Corporation, Sonic Automotive, SPX, Family Dollar and Goodrich Corporation.

During the second quarter of 2005, the Charlotte office market continued its improvement as office vacancy dropped from 17 percent to 15 percent. The office market, which is now nearing 40 million total square feet, experienced a second quarter net absorption of 660,000 square feet. Most notably, in the Northeast submarket, Hewitt occupied 200,000 square feet in the Meridian Exchange Building and Brooks Equipment occupied 32,500 square feet in Two Resource Square. Additionally, in the Southeast submarket, Scottish ReInsurance leased 25,000 square feet in Ballantyne's Simmons Building and Bank of America and Sompo Japan each leased 25,000 square feet in Ballantyne's Hixon Building. Finally, in the Southwest submarket, Pulte Mortgage leased 32,000 square feet in Whitehall Corporate Center II. The suburban demand for office space continues to be centered around accessibility to housing and labor pools, amenities and the Interstate 485 outerbelt, which serves as a direct link between Interstates 85 and 77 and serves as Charlotte's new gateway into the Charlotte Douglas International Airport.    

The amount of suburban supply is following the increased level of demand. Of the 660,000 square feet of absorption described in the paragraph above, 520,000 square feet of the absorption occurred in the suburbs. New suburban projects recently announced or recently started include 185,000 square feet in Whitehall Corporate Center III, 150,000 square feet in LakePointe Corporate Center Three, 48,000 square feet in Ballantyne-Winslow Building, 104,000 square feet in Toringdon VII, 130,000 square feet in Harris Corners Three, and 200,000 square feet in Piedmont Town Center. Average suburban rental rates, which had been trending downward since 2002, increased slightly during the second quarter of 2005 indicating market improvement and justification for construction of new office product.

Although suburban demand and supply continues to swell, Charlotte's Uptown core also continues to flourish, as evidenced by Wachovia's announcement of a new 750,000-square-foot downtown office tower. Additionally in Uptown Charlotte, the former convention center is being converted into a vibrant mixed-use project, the new NBA arena has just opened, and a multitude of new high-rise residential projects have been announced. With the downtown vacancy rate now below 7 percent, many believe that now is an opportune time to begin construction of a new high-rise tower. By the time Wachovia's 30-story building comes on line in 18 months, it will provide some much-needed office product for a tight Uptown market.

Overall, Uptown Charlotte continues to be a good barometer of Charlotte's overall office market as Wachovia and Bank of America continue to expand. In addition to the two big banks, Charlotte continues to attract Fortune 500 headquarter facilities, many of which are selecting suburban locations. The suburban market in particular is currently experiencing strong absorption and, as a result, new developments are being announced. Depending on when these new projects are delivered to the market, vacancy rates will continue to drop during the remainder of this year.

— Michael Fahey, CCIM, SIOR, is an executive vice president with American Asset Corporation.

©2005 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.