CITY HIGHLIGHT, JUNE 2005

QUEEN CITY THRIVES ON HIGH LEVEL OF ACTIVITY

Charlotte, North Carolina’s commercial real estate market is seeing growth in many sectors. The apartment market has seen a dramatic increase in demand in the past year. This bodes well for the office market, which already is experiencing growth in many areas including speculative development. The retail and industrial sectors also are staying strong with new development and positive absorption.

Multifamily

Over the past 12 months, demand for apartments in Charlotte nearly doubled with 3,478 units absorbed, versus 1,833 units absorbed in the previous 12 months. Increased demand is due in part to the creation of new jobs and a shrinking unemployment rate. According to the Employment Securities Commission of North Carolina, employment grew by 2.5 percent, or more than 20,000 jobs, in the past 12 months. The strengthening economy has lifted demand and, consequently, occupancy rates.

As with many markets, the apartment market in Charlotte is influenced by the seasons; demand historically is weaker during the winter months. The occupancy rate fell slightly to 89.3 percent in the past 6 months. However, when compared to the occupancy rate reported 1 year ago, current occupancies have improved nearly 2 percentage points.

With occupancy rates below 90 percent the last several years, apartment communities have struggled to maintain their rental rates. In fact, since 2001 rental rates adjusted for inflation have steadily fallen in the Charlotte area. One year ago the average rental rate in the Charlotte market was $668 per month. Currently, the average rental rate is $646 per month. The falling rental rates have resulted from increased concessions or “specials,” which apartment communities use in order to attract renters by lowering the monthly rent. Apartment owners and managers are hoping to see rental rates begin to rise in 2005. Owners/managers have discussed minimizing the use of concessions, but thus far, these talks have not gained enough momentum to affect the average rental rate.

Developers, sensing an upswing in the market, stepped up the pace in the past 6 months by starting construction on more than 1,600 new apartment units. Currently almost 2,600 units are under construction, and another 4,000 units are in various stages of planning.

More than half of the development activity is occuring in Northeast Charlotte, which includes the area known as University City. This area has experienced extraordinary growth in the past 15 years, and it is home to some of Charlotte’s largest employers. University Research Park boasts the area’s largest higher-education institution, the University of North Carolina at Charlotte, and Northeast Charlotte offers plenty of shopping and recreational activities at places such as Lowe’s Motor Speedway, Concord Mills and Verizon Wireless Amphitheatre. The area’s popularity continues to fuel population growth and, therefore,  increased housing development. The following developers have a total of nine apartment communities currently under construction or in the planning stages in Northeast Charlotte: Biltmark Corporation, Colonial Properties Trust, Charter Properties, A.G. Spanos, CB Development, Easlan Management and Blue Ridge Companies.

The development activity in Northeast Charlotte has been strong for several years and it will continue to be one of the fastest growing areas in Charlotte. Occupancy rates have varied in this area over the years and currently range between 87 percent and 92 percent.           

— Engle Addington, multi-family analyst, Real Data

Retail

Activity has been brisk in the Charlotte retail market. Infill projects seem to lead the way with development continuing along new sections of the Interstate 485 Outerbelt Loop. Recent announcements include a 160,000-square-foot infill Lowe’s Home Improvement Warehouse. The project, located in the South End about 2 miles from downtown, is situated on 11.3 acres and includes 60 units of residential along with 258 rooftop parking spaces. There is still an uphill battle regarding the rezoning, which will be addressed at a June 2005 public hearing.

Pappas Properties, in partnership with Collett & Associates, still is working on the redevelopment of the Midtown Square just outside of the downtown core, which will include Target and Home Depot Expo. A site plan amendment has been filed asking for an additional junior anchor tenant within the project. The development includes restaurants, an office tower and a residential condo project. On the west side of the downtown core, Wal-Mart is spearheading a redevelopment of an empty big box built in the 1970s for Woolco. The old building has been razed and construction is well underway on the new Supercenter. 1st Carolina Properties of Cary, North Carolina, is developing the outparcel shops; according to Jim Broemer of 1st Carolina Properties, the tenants are excited to see this kind of infill development in an area that had problems finding tenants in the past.

Development activity is moving rapidly from the inner city infill projects to the new sections of the I-485 Outerbelt Loop. Childress Klein Properties, in conjunction with General Growth Properties, is seeking a rezoning for a 1.3 million-square-foot retail development known as the Bridges at Mint Hill, located at the intersection of I-485 and Lawyers Road. Moving west on I-485 toward Independence Boulevard, several projects are in the works. Will Whitley of New South Properties is heading the redevelopment of a closed Kmart into an Ashley Home Furnishings, and Wal-Mart has a new Supercenter planned on Independence Boulevard at Unionville Indian Trail Road. Hendrick Automotive Group has a large auto mall planned at I-485 and Independence Boulevard; Hendrick also has received approval for a similar development at I-485 and Statesville Road on the north side of town. AAC Real Estate has a large master-planned mixed-use commuter rail development on more than 200 acres at the same intersection.

Charlotte continues to develop and there seems to be a never-ending hunger by the national, regional and local retailers to expand their markets.

— Jim Plyler, partner, Piedmont Properties/CORFAC International

Office

The Charlotte region historically has been recognized as a banking and financial center, primarily due to Bank of America and Wachovia having their headquarters here. Its primary source of growth has been the expansion of those two banks and the ancillary services that have followed them. However, while the banks continue to grow, there has been a new trend in that other Fortune 500 companies have made major relocations and expansions in the city, and Charlotte now is starting a new growth trend that could be reminiscent of those seen in the early 1990s.

In certain suburban submarkets, developers are putting up pure speculative office buildings once again. Fueled by growth and demand, developers in certain submarkets have begun construction of Class A mid-rise office buildings counting on growth trends that indicate a need for these properties. Specifically, Piedmont Town Center, a joint venture between Lincoln Harris and Crescent Resources, started construction of a 200,000-square-foot office building anchored by Piedmont Natural Gas. The response to the announcement of that building prompted the companies to start construction of the sister building with no pre-leasing whatsoever. In the Ballantyne submarket, developers Bissell Patrick, LLC and the Lichton Corporations both have 100,000-square-foot+ speculative office buildings underway in their Ballantyne and Torringdon developments.

What is driving growth in the Charlotte market and what is the reason behind constructing these new facilities? Recent announcements such as CitiFinancial’s lease of a 165,000-square-foot Class A office building in Childress Klein’s Kingsley Office Park and the pending announcement of Decision One Mortgage Group’s 200,000-square-foot facility indicate that need for speculative office space is starting to reemerge. Other recent announcements such as Hewitt Associates’ lease of approximately 200,000 square feet in the University area as well as Maersk Corporation researching its needs for a Charlotte operation give further credence that growth in Charlotte is not only in banking and finance.

However, it’s not only the suburbs that are experiencing these growth trends. Wachovia Corporation just announced plans for a new 900,000-square-foot downtown office tower that will incorporate a 1,200-seat theatre for the performing arts as well as a residential component. Furthermore, Bank of America has hinted that it is considering another downtown tower in the near future as well. In a downtown market that has approximately 12 million square feet of office space, these two buildings alone would increase the size of that market by more than 15 percent. With the downtown vacancy rate hovering around 8 percent, many real estate professionals believe that now is an opportune time to begin construction of these facilities as they each will take approximately 2 years to build. By then, they will be able to meet the growth needs of the banks and other service providers that are expected to accompany them.

The increase in multifamily development in Charlotte is helping the office market as well. In the past 6 months more than 2,500 residential condominiums have been announced in the downtown market alone, with the majority of those coming in four towers ranging in height from 28 stories to 55 stories. Bringing a larger residential component into the downtown market will stabilize a workforce that fills these buildings as well as increases the livability in the downtown area, creating a true 24-hour city center.

Charlotte’s overall office vacancy rate is somewhat misleading. While hovering around an average of 17 percent, it is somewhat skewed as there are several submarkets with unusually high vacancy rates that affect the overall average. However, most developers are bullish on the market as they have all reported an increase in activity and feel strongly that 2005 will show significant absorption in a majority of submarkets. Specifically, the Airport, Interstate 77, Southpark and Ballantyne markets all are poised the show strong growth patterns, and the University submarket is showing signs of rebounding as well. While the rental rates for suburban Class A space are remaining fairly flat, the concessions offered for the past 2 years (free rent, over-standard tenant improvement allowance, moving allowances, etc.) are starting to tighten. Overall, Charlotte is poised to be a leading indicator of the commercial real estate market coming back to a position of strength after a lack luster 3 to 4 years in the overall economy. While most developers remain cautiously optimistic, it’s safe to say that the light at the end of the tunnel is not that of an oncoming train, but that of an architect’s office working late at night on new building designs.

— Robert Percival, SIOR, president, Percival McGuire Commercial Real Estate/TCN Worldwide

Industrial

The Charlotte warehouse market experienced a very strong 2004 with more than 1.6 million square feet absorbed, and momentum continued in the first quarter of 2005. This was refreshing news after Charlotte experienced negative absorption in 2002 and 2003. Today, warehouse vacancy rates are approximately 13 percent, compared with over 18 percent just a year ago. Unfortunately, the same cannot be said about the flex market. Flex vacancy rates climbed to approximately 20 percent from approximately 18.5 percent a year earlier.

With warehouse vacancy rates dropping and most of the available 24-foot-plus clear height product with ESFR sprinklers being leased in the last 12 months, developers are on the brink of starting speculative development. Many would have already broken ground, but increased construction costs have made it difficult to make numbers work at today’s rental rates. However, because of the higher construction costs, expect to see rental rates increase, especially on buildings with 24-foot-plus clear and ESFR sprinkler systems (new product “spec”).

With that being said, Charlotte continues to be on the radar screen for many national developers. However, the barriers to entry are high because of the lack of well located, available, industrial-zoned land and the long list of quality developers that are already here, including Childress Klein Properties, Beacon Partners, Crescent Resources, ProLogis, Lord Baltimore, Cabot Industrial and Higgins. Lauth recently joined the list by purchasing 68 acres in the Southwest Interstate 77 market. The company plans to start with a 423,000-square-foot cross-dock bulk warehouse with 32-foot clear. If they build it, it will be the largest speculative warehouse ever built in the Charlotte region. Lord Baltimore Properties recently closed on land for a new park they have named Perimeter West, which is located in the West Interstate 485 market. The company plans to start construction on a 180,000-square-foot building with 30-foot clear in the near future. Also, ProLogis seriously is considering building a 250,000-square-foot cross-dock facility (expandable to 500,000 square feet) at its West Pointe Business Park in the West Interstate 85/I-485 market.

Due to Charlotte’s central location to the eastern U.S. population, very competitive trucking rates and proximity to the deep-sea ports, it remains a very viable option for distribution space. These factors are some of the reasons several Asian companies chose Charlotte for their East Coast warehouse location to distribute to customers located in the eastern U.S. The Charlotte region continues to see automotive-related suppliers and manufactures locating here due to our close proximity to the nearby BMW, Freightliner and Volvo assembly plants. While the majority of large prospects are distribution and warehouse related, there has been a dramatic improvement in manufacturing prospects for the region. Manufacturers tend to have smaller square footage requirements, with several seeking space in the 40,000- to 100,000-square-foot range.

— Lane Holbert, CCIM, senior industrial advisor/broker, Colliers Pinkard

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