CITY HIGHLIGHT, JUNE 2008

CHARLOTTE CITY HIGHLIGHTS
Engle Addington, Anne Johnson & Louis Stephens

Charlotte Multifamily Market

Apartment development is ripe throughout the Charlotte region with more than 5,000 units currently under construction and another 14,000 units proposed for development. The area of the city experiencing the most new development is along the new light rail line, which opened at year-end. There are fifteen stations between uptown Charlotte and Interstate 485. Weekday ridership averages more than 13,000. Currently, there are more than 4,000 units in a dozen communities planned along the line. Construction is underway on the first three communities: Crescent Resources’ 361-unit Circle at SouthEnd; Hanover’s 310-unit Ashton SouthEnd; and The Dinerstein Companies’ 269-unit Millenium SouthEnd. The first units at all three of these communities are expected to come online in the first half of next year.

Meanwhile, in southwest Charlotte there are almost 2,500 units planned or under construction. Located just south of the I-485 loop and the last stop on the light rail line, the Ayrsley neighborhood boasts two new communities. The Colonial Grand at Ayrsley features 368 units and the Woodfield Ayrsley features 358 units. Colonial Properties Trust expects to complete construction on its community this summer, and Woodfield Investments expects its first units online before the end of the year.

Northeast Charlotte, which includes the area known as University City, continues to be a high-growth submarket. The area is home to some of Charlotte’s largest employers at University Research Park. It boasts the area’s largest higher-education institution at the University of North Carolina at Charlotte. The area’s popularity continues to fuel population growth and, therefore, housing. Local developer Charter Properties plans to begin work before the end of the year on 304 units at Pavilion Point, which is located on North Tryon Street at Interstate 485.

Many of the surrounding counties are experiencing new growth, as well. In Cabarrus County, new developments are cropping up around the North Carolina Biotechnology Center in Kannapolis. The center is expected to generate more than 5,000 jobs, and there are already more than 2,000 new apartment units proposed in six communities to house some of those new employees. Ballast Point Group broke ground in March on 532 units at Parkway Commons, which is situated on 38 acres of land between Kannapolis Parkway and Barr Road.

The majority of new development in Iredell County is occurring in the town of Mooresville, which is also known as Race City, USA. The city is home to more than 60 NASCAR teams and racing related businesses. The home improvement giant Lowe’s corporate headquarters is located in Mooresville and has spurred additional interest and development activity over the past year. H.H. Hunt of Cary, North Carolina, just finished construction on the 320-unit Abberly Green and plans to begin work in next year on another 300-unit community on Waterlynn Road in Mooresville.

York County, which is located just across the border in South Carolina, has seen increased interest, especially in the towns of Rock Hill and Fort Mill. Greensboro, North Carolina-based Blue Ridge Companies has two active developments in York County. Legacy at Manchester Village will feature 288 units, and the first phase of Millcrest Park will feature 240 units.

Based on the number of units in the development pipeline, vacancy rates are expected to stay in the 9 percent to 11 percent range through next year.

— Engle Addington is analyst with Charlotte, North Carolina-based Real Data.

Charlotte Office Market

The greater Charlotte office market was a tale of two markets at the end of the first quarter due to the national economic slowdown. The central business district (CBD) and inner-core submarkets remained tight, offering tenants few options for relocation or expansion. For example, the CBD’s vacancy rate measured 1.2 percent, which is half the level of this time last year. Midtown’s vacancy rate was low, but up from the previous quarter at 6.2 percent. Meanwhile, constrained leasing activity in the outlying Southeast, Southwest, East and Northeast submarkets has kept leverage firmly in the hands of tenants as vacancy levels remained below last year’s level, but higher than regional and national averages (greater than 15 percent).

While the Midtown and South submarkets displayed negative net absorption in the first quarter, occupancy gains continued in the greater Charlotte market with positive net absorption of 118,677 square feet. The CBD and Southwest submarkets led absorption for the quarter with gains of 96,801 square feet and 66,087 square feet, respectively. As occupancy has increased, vacancy levels have decreased overall for the region, from 8.7 percent at year-end to 8.6 percent by the end of March. While sublease space increased by approximately 57,095 square feet during the quarter, principally from financial firms, overall vacancy was down to 9.4 percent.

Financial firms have not significantly affected Charlotte’s office market; however, increased turbulence in the equity markets and protracted national economic malaise could lead to a slowdown in leasing velocity and the increase of sublease space on the market going forward. During the short term, vacant new deliveries hitting the market in the Northeast, South, Midtown and Southwest markets will most likely lead to vacancy increases, giving tenants more options.

Construction in the burgeoning Charlotte office market remained aggressive at the end of the first quarter. In total, 4.3 million square feet was under construction and set to deliver through 2010. Projected deliveries for this year totaled 1.8 million square feet, while preleases in those developments measured just 24 percent. Deliveries include developments in the south, namely Bissell Development’s four speculative office buildings totaling 800,000 square feet, which are not preleased, in the Ballantyne Corporate Park. Also, Colonial Property Trusts’ 153,617-square-foot, Class A development in Midtown is scheduled to deliver this year. The development was 90 percent preleased at the end of the first quarter to Aon, Collet & Associates, New Dominion Bank and Cherry Bekaert & Holland. In contrast, to slow preleasing levels for the overall market, the CBD, which accounts for 59 percent of all construction at the end of the quarter, posted significantly higher preleasing levels. Of the 2.6 million square feet set to deliver during the coming quarters, 69 percent of the space was preleased. The mixed-use Epicentre Project was the only CBD development projected to deliver this year. Nascar Plaza is set to deliver next in early 2009.

Rents within the CBD and Midtown submarkets continued to increase, as did rents in the outlying North and South submarkets, albeit at a slower pace. At the quarter end, rents within the CBD were the highest recorded for the region exceeding $30 per square foot in the downtown towers. In Midtown, similar fundamentals applied, as rents jumped to an average of $22.51 per square foot, a 21 percent increase from year-end 2006. Rents are likely to spike in the CBD and Midtown as vacancies are projected to remain stable, while new developments in the outlying submarkets could push asking rents up. However, effective rents are likely to decline as the amount of rent abatement and tenant improvement packages are likely to turn in the tenants’ favor.

With great economic speculation that the government’s fiscal stimulus package will boost confidence in the economy, it appears that Charlotte will remain relatively unscathed by the current slowdown, unlike the last recession in 2001. However, if the credit markets take a longer-term toll on the economy, the Charlotte market could see a sizeable amount of space return to the market owing to its reliance on financial institutions.

— Louis Stephens is managing director with the Tenant Representation Group in Jones Lang LaSalle’s Charlotte office.

Charlotte Industrial Market

Charlotte is the 29th largest industrial market in the country, with an industrial base of more than 122 million square feet. Charlotte is also a major southeastern transportation and distribution center whose warehouse/distribution space comprises approximately 70 percent of the market. Due primarily to reasonably priced labor (mostly non-union) in the area, quality manufacturing space is also in high demand. The vacancy rate for manufacturing space in the region is 6.2 percent. Charlotte is one of the strongest industrial markets in the country, and industrial space users are attracted to the area due to its central location, excellent transportation infrastructure, high quality of life and low operating costs.

Although the Charlotte industrial market remains healthy with positive results, overall activity has slowed slightly from the record pace set last year. Vacancy rates continued to decrease in the overall market, dropping from 7.2 percent at year-end to 7 percent in the first quarter. Overall market vacancy was 7.5 percent in the first quarter. The vacancy rate was 7.9 percent in the first quarter of 2006.

The vacancy rate for multi-tenant warehouse development space decreased from 10.67 percent to 9.68 percent. Despite very low vacancy, only 362,400 square feet of speculative warehouse space is currently under construction. Vacancy rates are lowest in north Charlotte at 1.37 percent and highest in the airport area at 21.65 percent. Although demand remains healthy, many tenants are price sensitive and are focused on the most cost effective space alternatives. Thus, leasing activity has been strongest for second-generation properties offering quality features, particularly ESFR sprinkler systems. Activity has been somewhat slower for new buildings that are more expensive.

Despite strong market fundamentals, development activity has slowed considerably. Only 475,495 square feet is currently under construction. Of this space, approximately 200,000 square feet will be user occupied. In contrast, during the first quarter of last year, almost 950,000 square feet was under construction, most of which was speculative development. Additionally, there are very few large tracts of available industrial land in Charlotte that are suitable for development. Therefore, many of the newest industrial projects are being developed in outlying counties.

Although the uncertainty of the debt markets has slowed overall investment sale activity, pricing has remained very strong on institutional quality properties, particularly multi-tenant bulk distribution properties. A number of significant sales have closed over recent months to national REITs and pension fund advisors. Although Charlotte is not a core U. S. market, a very deep, significant roster of national and institutional owners owns its industrial product.

Despite a slowing national economy, the Charlotte market has remained strong. Although activity for 2008 will likely not equal the record results achieved in 2007, the market should experience generally healthy activity that illustrates the economic strength and depth of the region.

— Anne Johnson is senior vice president in the industrial properties division of CB Richard Ellis’ office in Charlotte, North Carolina.

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