Like most cities around the country and in the Southeast, Charlotte, North Carolina, has seen relatively stagnant office development over the past 12 months, with some larger projects coming on line that were planned and financed at the tail end of the last boom cycle. On the multifamily side, the market has stabilized, and new development continues. The industrial market has been struggling lately, although things do appear to be improving. Charlotte’s retail market remains one of the strongest in the country, despite a lagging economy.

Office

In 2002, Charlotte added 1.7 million square feet to its 36.7 million-square-foot office inventory, representing a healthy 4.6 percent increase. However, it is important to note that half of this new space was pre-leased in the new Hearst Tower.

As Charlotte moves through 2003, it has 500,000 square feet under construction, representing a projected inventory increase of 1.4 percent for a total of about 39 million square feet. With one exception, the majority of current activity is occurring in the suburban markets, notably south Charlotte.

Approximately 3 million square feet of building space is planned, the majority of which will linger on rendering displays until the economy and market turn around. These planned buildings are mixed between Charlotte’s active downtown and thriving suburbs.

While the referenced statistics cover buildings more than 20,000 square feet, there is an epidemic of office condominium projects, as a result of the under-performing securities markets coupled with low interest rates. These projects range in size, but they are appearing all over the city and are pulling many tenants of less than 5,000 square feet away from larger, suburban buildings and into these ownership opportunities.

As the office market settles into the recession, there are still flashes of pre-lease and existing user expansions in the suburban market of the southern leg of Interstate 77 between Charlotte and the Catawba River in South Carolina. In addition, the Suburban North market, serviced by the northern leg of I-77, saw some major tenant moves in the last half of 2002.

Downtown recently saw the opening of the 1 million-square-foot Hearst Tower, which is anchored by three tenants. The building offers a limited pool of tenants a 9 percent vacancy, but in addition to its office space, this project provides 40,000 square feet of retail space to Charlotte’s growing, downtown retail scene. The Keith Corporation and Trammell Crow Company developed Hearst Tower, and Batson-Cook Company served as general contractor.

There are several hot spots of new office space under construction. The majority of this is focused around the I-77 south corridor and moving east, west and south from the intersection of Interstates 77 and 485. Currently there is one 125,000-square-foot speculative building under construction in the successful, large-scale Ballantyne development. Additionally, there are several rumored large expansions of existing users along the I-77 south corridor stretching into South Carolina. This portion of northern South Carolina is quickly being incorporated as part of Charlotte’s suburban sphere.

The south area of Charlotte continues to see higher demand, due to the convergence of factors such as proximity to Charlotte’s hub airport, higher income population, access to retail amenities and private schools, and the opening of Charlotte’s beltway, I-485. Additionally, significant tax incentives offered by North and South Carolina are helping companies leverage these two states for their businesses.

North Charlotte provides users with access to the University of North Carolina at Charlotte and Interstates 85 and 77, as well as the lifestyle amenity of waterfront living at Lake Norman, which has more coastline than North Carolina’s border with the Atlantic Ocean.

Currently the most active developers in Charlotte include Bissell Development, which is building the Ballantyne project; Crescent Resources, which has existing projects in multiple submarkets; and Childress Klein, which also has existing projects in multiple submarkets.

The citywide vacancy rate is 14.2 percent, which is about 2 percent higher when available sublease space is included. This is a 1.7 percent increase from the end of 2001, with some submarkets now riding over 20 percent vacant. Downtown saw the most increase from 5.6 to 9 percent in 2002, while the average suburban vacancy increased about 1 percent.

In 2002, quoted rental rates stayed relatively constant; however, concessions are substantial, effectively lowering rental rates over 5 percent citywide, with some areas seeing larger drops. Since the beginning of 2003, there has been a drop in quoted rental rates and an increase in proposal concessions, which should push effective rental rates down even further.

Historically, Charlotte’s downtown, which comprises 37 percent of total office inventory, and the I-77 corridor going north and south, should rebound first with the end of the recession. An expansion of the I-77 south market into South Carolina will continue to attract new tenants and buyers, and will probably develop further into its own submarket, with the competition between North and South Carolina economic incentives being a major factor.

It is also important to note that downtown Charlotte has seen dramatic multifamily development over the past 2 years, with both rental and condominium options for residential users. The synergies of the continued demand for office space, high-end residential and growing retail, coupled with public projects like the new NBA arena, the existing NFL stadium and the relocation of many cultural venues, should fuel downtown’s continued demand and future growth.

- David Dorsch, CCIM, office specialist, Colliers Pinkard
Most of the statistical data referenced in this article came from Karnes Research Company’s 4th quarter office report.

Multifamily

The Charlotte apartment market appears to have stabilized. The number of new units coming on line is nearly half of what it was 1 year ago. The total number of units currently under construction stands at 2,828, while an additional 5,636 units are proposed.

Based on these numbers, the vacancy rate in the Charlotte market is likely to remain in the 10 to 12 percent range for the coming year. The current vacancy rate is 12.7 percent. The Southeast-2 submarket reported the lowest vacancy rate at 8.4 percent, while Northeast-1 reported the highest vacancy at 18.1 percent.

The average quoted rental rate in the Charlotte market is $710. One-bedroom rents average $629 per month. Two-bedroom units are $734 and three-bedroom rents are $880. Comparable quoted rents increased by only $1.29 in the past year; in addition, significant concessions, including 2 months or more of free rent, remain common. The Northwest submarket reported the lowest average rent at $492 per month, while the Downtown submarket reported the highest average rent at $1,089 per month.

Development activity continues throughout Charlotte, with pockets of greater activity in the North/Northeast, Southeast and Downtown submarkets.

Downtown is currently experiencing the most development with several new communities springing up in this area. New communities in the Downtown submarket are offering a new style of apartment living catering to renters interested in a more upscale, metropolitan lifestyle. Spectrum Properties is finishing 304 units in the heart of center city. When completed, Fifth & Poplar is expected to set a new standard in upscale apartment living for Charlotte. The project will include Downtown’s first and long sought-after grocery store, a Harris Teeter.

Other urban projects include Crescent Resources’ recently completed 180 units at Charlotte Cotton Mills, located in Charlotte’s Fourth Ward. Grubb Properties is building 145 units at Sterling Dilworth located just minutes from Uptown. This community is part of Latta Pavilion, a mixed-use development including condos, offices, restaurants and shops. Fairfield Properties is finishing 299 units at South End Square, located just outside center city and along the proposed light-rail trolley line.

- Michelle Accetta, multifamily analyst, Carolinas Real Data

Industrial

Everybody in Charlotte — especially developers and landlords — is hoping the worst of this downturn is behind us. Last quarter the vacancy rate for multi-tenant warehouse space in Mecklenburg County hit 17.1 percent, up from 15.4 percent 1 year ago. As there are no speculative buildings under construction to add to the vacancy rate and there are some prospective companies in the market looking for space, vacancy rates should decline in the near future. Most of the demand is for distribution space, and manufacturing users continue to feel the effects of overseas competition.

It is interesting to evaluate two different submarkets, the Southwest and the North. These markets help demonstrate the impact that a downturn in manufacturing can have on a submarket. The Southwest market is the largest and one of the oldest submarkets in Charlotte. It is also home to the largest concentrated area of manufacturing in North Carolina. This market has a mix of older and modern buildings. Also, industrial-zoned land in this area has been plentiful. As a partial result of the manufacturing downturn, the Southwest vacancy rate has risen to about 20.5 percent. In contrast, the North submarket has much less space occupied by manufacturing companies and most of the buildings in this market are modern. Additionally, there is very little industrial-zoned land or land that can be rezoned to industrial in this submarket. Compared to the Southwest’s vacancy rate, the North’s is relatively low at 10 percent.

These days, Charlotte’s landlords and developers are busy trying to renew and retain their current tenants and chasing the few build-to-suit opportunities such as AAC’s expansion of Cadomus’ logistics facility in Whitehall Business Park and Kirco’s construction of Wedeco’s U.S. headquarters being built in SouthPoint Business Park.

Developers are also looking at other opportunities. A good example of this is Charlotte’s Beacon Partners, which traditionally developed ground-up business parks and buildings. Beacon identified an alternative investment with its recent purchase of Atando Business Park, an existing 30-year-old, 1 million-square-foot business park near downtown Charlotte. With speculative building at a standstill and only a handful of build-to-suits in the market, the company saw this purchase as a great opportunity to reposition this centrally located older park. Beacon will make aesthetic and functional improvements to the park and buildings. Furthermore, the park’s service-related companies will benefit from a new road project by the city that will provide excellent access to an I-77 interchange.

Activity, including call volume, showings and lease negotiations, are all improving dramatically. This activity points to a loosening in this tight economy.

- Lane Holbert, CCIM, industrial specialist, Colliers Pinkard

Retail

With retail sales down 9.2 percent during the 2001-2002 fiscal year, Charlotte’s commercial real estate market is hoping for improvement next year. The area is expected to rebound in 2004, when job growth regains momentum and demand for space increases. The Charlotte region has been affected by layoffs in manufacturing and minimal job growth among three of its largest job creators: Bank of America, Wachovia and Duke Energy. On a brighter note, Charlotte’s growing population and household incomes are enticing high-quality retailers throughout Mecklenburg County. Home furnishings and home improvement store sales remain strong. Drugstores and warehouse club sales also increased. Overall, in spite of a lagging economy, Charlotte remains one of the country’s strongest retail markets.

Newcomers have fueled much of this growth. Between 1990 and 2000, the Charlotte region grew by 29 percent. The University City area, for example, almost doubled its population in the past decade and now has more than 4 million square feet of retail space. Construction of I-485 has paved the way for growth in Charlotte’s rural areas. Union County, the fastest-growing county in North Carolina, grew by 47 percent between 1990 and 2000. The U.S. 74 corridor, near the towns of Indian Trail and Stallings, has been transformed into a hot real estate market. The area now has four I-485 interchanges, with a new shopping center at I-485 and Idlewild opening in 2005.

Several retailers have recently entered the Charlotte market, including Champs Sporting Goods (Concord Mills mall). Other retailers coming to the Concord Mills mall area include Yankee Candle (1,500 square feet), Shenandoah Furniture (6,500 square feet) and Pat Rogers Speedway Harley-Davidson (6,800 square feet). Starbucks continues to expand in Charlotte with the addition of two stores. Home Depot has purchased property to build a Home Depot Landscape Supply store on Wendover Road, across from its existing store.

New retailers have been announced as part of the $100 million expansion of SouthPark mall. Helzberg Diamonds, Caswell-Massey, Swarovski Crystal and Apple Computer Inc. will complement Nordstrom in the new wing of the Simon Property Group mall. A $14 million public-private partnership plan has been announced to revitalize Eastland Mall into a “town center” concept and to fill the vacant JC Penney space.

Food Lion has announced plans to open up to three stores in the Charlotte region by summer. Lowes Foods is expected to open more than 10 stores in the area, including anchoring a 200,000-square-foot segment of the Toringdon mixed-use development off of I-485.

Residents on the north side of Charlotte will soon have a new mall. Taubman Centers Inc. will begin construction on Northlake, a 1.2 million-square-foot mall, in September. The area’s first mall will be located at Reames Road and I-77 and is a welcome addition to the underserved northern half of the Charlotte metro area. The $160 million mall is slated to open in August 2005 and will be anchored by Belk, Dillard’s and Hecht’s. Northcrest, a 365,000-square-foot retail project, is planned on 53 acres across from the mall. Lincoln Harris and Collett & Associates are joint venture partners in that development.

Developers are asking for a zoning change for a 20-acre site on Sam Furr Road between Northcross Shopping Center and Cambridge Grove subdivision. Lat Purser & Associates is proposing a project that would include Marshall’s, Bed Bath & Beyond and an office supply store.

Citing traffic and sprawl concerns, residents are providing resistance to some proposed retail developments. Wal-Mart lost its second bid to build a supercenter in Pineville. Crescent Resources is facing opposition to a 10.8-acre project at Alexander and Pineville-Matthews roads that called for a 95,000-square-foot shopping center. Cambridge Properties is also facing stiff resistance to Eastfield Village, which consists of 120,000 square feet of mixed-use development located a mile from I-485 and Prosperity Church Road in northeast Charlotte.

In Huntersville, located north of Charlotte, Crosland Retail plans to take advantage of exponential population growth by developing Birkdale Village, a 52-acre mixed-use project to include 200,000 square feet of retail, restaurants, offices and multifamily dwellings. Crosland is partnering with Pappas Properties on the project. Crosland and Pappas are also developing the 270-acre Blakeney at Ardrey Kell and Rea roads in south Charlotte.

In March, North Carolina opened its second SuperTarget in Mooresville, north of Charlotte on NC 150. Lowe’s Companies Inc. will open a $90 million, 400,000-square-foot corporate campus on 157 acres in nearby Mount Mourne, which is expected to impact the entire Lake Norman area. As many as 300 Lowe’s-related companies are expected to open branch offices to serve the headquarters, scheduled to open in 2004 and house 1,500 employees. As a result, the towns of Davidson, Cornelius and Huntersville are expected to be the next hotbeds of retail and residential growth.

In one of the few acquisitions in the region, Inland recently purchased Concord Crossing, a 55,930-square-foot Bi-Lo-anchored center located in Concord, from U.S. Retail Income Fund for $5.3 million.

- Lynn Leonard, NewBridge Retail Advisors

©2003 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.