CITY HIGHLIGHT, JUNE 2004

GROWTH, ACTIVITY SURROUND CHARLOTTE

Charlotte, North Carolina, is seeing growth in nearly every commercial real estate sector. The multifamily market is experiencing high vacancy rates, but developers are still active and investor interest remains strong. There are a number of new retail developments underway, and the office market is seeing a modest amount of new development.

Multifamily

Apartment vacancy rates in the Charlotte metropolitan statistical area remain high, according to the March 2004 Charlotte Apartment Report published by Real Data. The vacancy rate, which is above 12 percent, has risen over the past 6 months; however, the rate is virtually unchanged from March 2003.

The apartment market has been adversely affected by a weaker than expected job market. Charles Dalton, president of Real Data, notes, “This is most evident in the relatively higher vacancy rates in moderate income areas, which are more negatively influenced by a weak economy.” In addition, apartment communities are facing stiff competition from single-family homeownership. “Low mortgage rates are attracting would-be renters to real estate purchases,” says Dalton. “Three-bedroom units, which have an average vacancy rate above 14 percent, have been most impacted by the drop in mortgage rates.”

The average rental rate in the Charlotte market is $668. “The Charlotte apartment market continues to be a challenging one for investors and operators,” says John Porter, president of the Charlotte Apartment Association. “Our members continue to respond to these pressures responsibly and with creativity. Operators of existing product have found new ways to keep expenses in check while providing top-drawer service and, in many cases, rent concessions.”

Although vacancy rates remain high and concessions have become the norm, developers and investors are active in the market. Development of Northlake Mall, located at Reames Road and Interstate 77, has spurred construction of The Residences at Braemar and Auston Woods. In the University area, Colonial Properties Trust and Charter Properties each have communities under construction. In south Charlotte, the Ballantyne area remains active with more than 600 units expected to come on line this spring.

Investor interest has been strong over the last year with more than 20 apartment communities changing hands in the last 12 months. Weinstein Management Company, headquartered in Virginia, has recently entered the Charlotte market with the purchase of four apartment communities. Cornerstone Realty and Midwest Diversified have each purchased two communities as well.

— Bonnie McCormick, multifamily analyst, Real Data

Retail

Southern Charlotte is experiencing a population boom. York County, South Carolina, which is part of the Charlotte metropolitan statistical area, is expected to experience a 62 percent increase in population over the next 20 years. In north Mecklenburg County, the population grew 124 percent between 1990 and 2000 and is expected to grow another 17 percent by 2008. Average household incomes in north Charlotte have also soared, growing more than 50 percent since 1990. Iredell County, home of Lowe’s Home Improvement Warehouse’s corporate campus and the Lake Norman Regional Medical Center, is also considered to be in growth mode. In other words, Charlotte is continuing to grow and its residents have money to spend.

Retail is outperforming office and industrial development in Charlotte. According to Karnes Research Company, in late 2003 there was more than 2.5 million square feet of retail space under construction, compared with 1.3 million in late 2002. Vacancies were 7.3 percent in 2003, compared with 14.7 percent in 2002. Retail developers are capitalizing on the housing boom, low interest rates and available land in outlying areas.

Spectrum Properties is redeveloping the former downtown convention center into an entertainment center. When complete, the 200,000-square-foot building will house restaurants, stores, a 10-screen movie theater and a sports bar. Pappas Properties is considering developing shops, offices and residential units on 6 acres adjacent to the former trolley barn on Bland Street at South Boulevard. A former greenhouse site north of downtown may be converted to a grocery-anchored neighborhood center. If a zoning change is approved, an 11-acre site at the intersection of North Graham Street and Sugar Creek Road could become home to a supermarket and shop space.

Collins Goodman Development has purchased 11 acres next to Concord Mills, where the Atlanta-based company will develop three restaurants and 45,600 square feet of shops. The project is called Concord Station and will benefit from the success of Concord Mills, dubbed the Number 1 shopping destination in the state by the North Carolina Department of Commerce.

Simon Property Group has completed a $100 million makeover of SouthPark Mall after acquiring the property 2 years ago. Retailers attracted by the makeover include new anchor Nordstrom, Anthropologie, Urban Outfitters, Burberry, Louis Vuitton, Kate Spade, Sigrid Olsen, Tommy Bahama and Galyan’s Trading Company Inc. In the near future, Dillard’s plans to expand its store by 40,000 square feet and, next year, the former Sears Automotive will become one of Eckerd’s largest freestanding stores. A study by developers estimates that the expanded mall will generate $33.5 million in annual property and sales taxes.

Taubman Centers Inc. will open the $77 million Northlake Mall in September 2005. Tenants such as Nike Goddess, Harry & David gourmet foods and a Lego toy store will join anchors Belk, Dillard’s, Hecht’s and Dick’s Sporting Goods at the 1.1 million-square-foot mall.

Wal-Mart will open its third Mecklenburg County Supercenter in February 2005. The new store will be located on 23 acres in Callabridge Landing shopping center at the northeast corner of N.C. 16 and Mount Holly-Huntersville Road. Wal-Mart reportedly paid Granite Development $4.1 million for 17 acres and purchased an additional 6.5-acre parcel from Food Lion for an undisclosed price. The second Wal-Mart Supercenter in the county will open this summer at Sardis Road North and Monroe Road in east Charlotte. Wal-Mart is also said to be finalizing plans to open a Supercenter by summer 2005 in west Charlotte at Wilkinson Boulevard and Ashley Road.

Crosland Inc. is nearing completion on Whitehall Commons, a 585,000-square-foot center anchored by Wal-Mart Supercenter and Lowe’s Home Improvement Warehouse. Located at the northwest corner of Tryon Street and Interstate 485, the development will serve the growing population of southwest Charlotte.

Crosland recently brought the first Lowes Foods to southeast Charlotte with the opening of Hunter’s Crossing, a 70,000-square-foot retail center. The center is located in Mecklenburg County along the 521 corridor, just minutes from the border of South Carolina and Lancaster County. Adjacent to the retail center, Crosland’s office and industrial division is nearing completion on the first of nine planned office buildings for its business park, to provide a total of 80,000 square feet of medical and professional offices for this rapidly growing area.

Childress Klein Properties is proposing to develop a $50 million, 600,000-square-foot center at the intersection of Steele Creek and York roads in southwest Charlotte. Still unnamed, the center is expected to be anchored by Target, The Home Depot and possibly a movie theater.

Harris, Murr & Vermillion is developing Mintworth Commons in a joint venture with Lincoln Harris. The project, located at the intersection of Margaret Wallace Road and Idlewild Road in east Charlotte, will include 90,000 square feet of retail, single-family homes and apartments. Harris, Murr & Vermillion is also developing Colonial Village, a 90,000-square-foot center in Concord.

At least two restaurants will open their first Charlotte locations this year. Fire Mountain Grill, a Greer, South Carolina-based Ryans Family Steak Houses concept, recently opened at Concord Station. Cary, North Carolina-based Bear Rock Café will open two sites, one at Cochran Commons and one at Colony Place at Colony and Rea roads.

Significant transactions include the $96.5 million acquisition in May 2003 by Inland Real Estate of a majority stakeholder position in Birkdale Village, named the nation’s best mixed-use development last year by the National Association of Home Builders. Crosland Inc. and Pappas Properties developed the 52-acre development, comprised of 234,921 square feet of retail, plus office space and luxury apartments.

In December 2003, Inland Real Estate also acquired Winslow Bay Commons for $42 million from the developer. Located in Mooresville, the 429,531-square-foot power center is anchored by Dick’s Sporting Goods, Ross Dress For Less, T.J. Maxx, Linens ‘n Things, Michaels, PetsMart, Cost Plus World Market, Party City, Pier 1 Imports and Rack Room Shoes. SuperTarget shadow anchors the center. The deal was brokered by NewBridge Retail Advisors, which represented the seller.

In one of the highest prices on record for a neighborhood center in Charlotte, Ballantyne Commons East was sold for $29.7 million. The 129,000-square-foot Harris Teeter-anchored center was acquired in February 2004 by a Connecticut family investment group named Fiebro LLC from a Harris family venture and Ruddick Corporation.

Also in February 2004, Mecklenburg County acquired Freedom Mall for $6.6 million from Miami-based Shottenstein Realty Company. Built in 1964, the mall is located on 37.5 acres on Freedom Drive at Tuckaseegee and Ashley roads in west Charlotte. There are no plans yet for the property, but it may be used to house government operations.

JDH Capital recently purchased Reddman Square Shopping Center from Childress Klein Properties for $3 million. Dollar Tree will occupy 11,000 square feet of the 80,000-square-foot center.

— Lynn Leonard, vice president of marketing, NewBridge Retail Advisors

Office

Like most cities around the country and in the Southeast, Charlotte has seen relatively stagnant office development since 2002. However, there is select new build-to-suit and speculative construction in suburban markets, specifically centered around major intersections of the half completed I-485 beltway.

In 2003, Charlotte added 524,940 square feet to the existing 38.6 million-square-foot office inventory, representing a 1.4 percent increase. This was down dramatically from the 2002 addition of 4.6 percent or 1.7 million square feet to total inventory, due in large part to the delivery of the 957,648-square-foot Hearst Tower in downtown. Important to note is that the majority of the new speculative construction is centered around the key southern section of the I-485 beltway. Those key intersections are the maturing Ballantyne and emerging Whitehall projects, which both provide a “straight shot” access to Charlotte’s International Airport and southern, affluent neighborhoods.

Moving through 2004, 969,625 square feet is under construction, which is a projected expansion of 2.5 percent toward a total inventory of 39.6 million square feet. This expansion would be almost double of that in 2003. The trend of current activity is in suburban markets, notably the I-77 corridors going both north and south, with a focus around the southern I-485 beltway intersection.

There is approximately 2.9 million square feet of planned buildings, most of which will not be built until job growth catches up with overall economic growth. Some of these are jumping from the presentation board to the job site as build-to-suits. Proposed buildings are mixed between Charlotte’s very active downtown and its thriving suburbs.

Referenced statistics cover buildings of more than 20,000 square feet; however, there are also select smaller projects in niche areas like the affluent Lake Norman district, located north of Charlotte.

As the office market struggles out of the recession, some larger users are taking advantage of the depressed market with early renewals or moves. Charlotte continues to see a healthy amount of corporate relocations from outside the Southeast; these companies are primarily heading toward traditional, more centrally located office parks. Additionally, many of Charlotte’s existing companies are looking toward the limits of Charlotte’s northern and southern boundaries. Charlotte’s office development continues to center around high-end housing areas, interstate access and special niche areas that offer companies economic or other incentives for relocation.

Along I-77 north of Charlotte, Lowe’s Home Improvement Warehouse took occupancy of its new 1 million-square-foot corporate headquarters in Mooresville, part of the affluent Lake Norman district. Coupled with this move, Lowe’s suppliers have been filling in vacant space in many speculative developments nearby.

While downtown’s office market has been in a lull for the past 2 years, due in large part to Bank of America’s and Wachovia’s continued downsizing, we may see an upswing in downtown demand, especially with Bank of America’s acquisition of FleetBoston Financial. Downtown continues to experience other development, including rapid residential condominium development, planned entertainment retail and a new NBA arena for the new NBA Charlotte Bobcats.

There are several “hot spots” that have new office space under construction or are targeted for planned projects. The majority of this is focused around the I-77 south corridor, moving east, west and south from the intersection of I-77 and the I-485 beltway. Currently there is one recently completed 125,000-square-foot speculative building and another 125,000-square-foot building under construction in Ballantyne. Additionally, there are several rumored large expansions of existing users along the I-77 south corridor stretching toward South Carolina, which is quickly being incorporated as part of Charlotte’s suburban sphere.

Some larger users are choosing to capture significant tax credits by relocating to a growing number of parks in South Carolina, along the I-77 south corridor. With their relocation to South Carolina, Wellman Industries, Alemite Corporation and Wells Fargo Home Mortgage will certainly inspire others to consider this attractive option.

South Charlotte continues to see higher demand due to the convergence of factors such as proximity to Charlotte’s U.S. Airways hub airport, higher income population, access to retail amenities and private schools, and the half completed I-485 beltway. Significant tax incentives offered by South Carolina and North Carolina are providing companies the competitive leverage that results in lower occupancy costs.

North Charlotte also continues to see historically consistent demand and relocations of large base employers, such as Lowe’s Home Improvement’s headquarters. North Charlotte users enjoy easy access to the University of North Carolina at Charlotte, Davidson College, I-85 and I-77, as well as the lifestyle of waterfront living at Lake Norman, which has more shore line than North Carolina’s border with the Atlantic Ocean.

Charlotte’s most active office developers include Bissell Companies, American Asset Corporation (AAC), Crescent Resources and Childress Klein, all of which have multiple projects citywide. Additionally, newcomers like Lauth Properties, LNR and Lichtin Corporation are finding success.

The citywide office vacancy rate inched up to 14.8 percent, a modest 0.6 percent increase from the end of 2002; the vacancy rate increases to 15.5 percent when including sublease space. There is a large discrepancy in submarket vacancy rates from a low of 9.7 percent in downtown to a high of 26.1 percent in Crown Point/Matthews, reinforcing the importance of niche areas.

In 2003, quoted rental rates hit 3-year lows, with substantial concessions effectively lowering rental rates even further. The beginning of 2004 has seen moderate stabilization in quoted rental rates, as some submarkets are seeing positive net absorption pointing toward a brighter future for landlords.

Charlotte’s downtown, comprising 37 percent of total office inventory, and I-77 running south toward the I-485 intersection should rebound first with new job growth. The I-485 south corridor and the further southern expansion into South Carolina will continue to provide opportunities for new tenants and buyers, with competition between South Carolina’s and North Carolina’s economic incentives being a major factor.

— David Dorsch, Colliers Pinkard

(Most of the statistical data referenced in the office section of this article came from Karnes Research Company’s fourth quarter office report.)


©2004 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.