SOUTHEAST SNAPSHOT, OCTOBER 2007

Charlotte, North Carolina Retail Market

Driven by solid employment and population growth, demand for retail space in Charlotte is expected to remain strong as the year comes to a close. The metro’s population has expanded faster than the national average every year since the beginning of the decade. Charlotte, which is generally regarded as the financial capital of the south, continues to attract new residents and businesses alike. The health of the local economy is exhibited by the fact that nearly every sector of the economy is expected to achieve above-average growth this year, led in part by the high-paying financial activities, and professional and business services sectors.

During the first quarter of 2007, these two sectors added approximately 1,000 jobs to the metro. Charlotte’s business friendly environment and skilled labor force continue to attract new businesses. Shutterfly, an Internet-based publishing service, announced plans for a $31.5 million manufacturing plant, which will bring approximately 250 new positions to the metro. After employment increased 3.3 percent last year, job growth is expected to slow but remain robust and well above the national average. By year’s end, Charlotte employers are expected to increase payrolls 2.4 percent with the addition of 20,000 positions.

As a result, retail sales growth will outpace the national average for the second consecutive year. Major retailers and developers are responding to the metro’s rapid economic expansion, and this year’s deliveries will nearly double the 5-year average. Much of the new retail space will be filled quickly, and vacancy will record only a modest increase this year. Rents are expected to continue to move higher, albeit at a more measured pace, despite the competition from new space.

Retail deliveries have averaged 2.2 million square feet during the past 5 years. After bringing 2.6 million square feet online in 2006, developers are scheduled to deliver 3 million square feet of retail space by year-end 2007. The majority of new construction in the Charlotte metro this year consists of multi-tenant developments, which account for 2.5 million square feet of total new deliveries. The bulk of the new space is concentrated in the South submarket, as retailers continue to follow rooftops.

One of the largest projects recently brought online was the Midtown Square shopping center at South Independence Boulevard and Kings Drive. Anchored by Target and EXPO Design Center, the additional phases will add 330,000 square feet to inventory when complete.

Overall vacancy in Charlotte will end the year at 10.7 percent, an 80 basis point increase from 2006, as the delivery of new inventory remains elevated. Retailer expansion will continue to be strong in the North submarket, as developers are expected to follow residential expansion. In 2006, the vacancy rate for neighborhood/community centers declined 20 basis points to 7.3 percent. Elevated construction activity is expected to push neighborhood/community center vacancies higher by year’s end. Vacancy in the South submarket is at a marketwide low of 6.6 percent, allowing substantial effective rent growth. As a result, average revenue has increased 5.6 percent during the past year. Asking rents are expected to gain 4 percent this year to $18.20 per square foot.

Effective rents are forecast to increase at a faster pace, advancing 5.1 percent to $15.65 per square foot, as owners limit the use of concessions. Demand for retail space in the east submarket has supported market-leading rent growth. During the past year, owners have raised asking rents 5.5 percent to $13.84 per square foot, which has supported a 5.9 percent increase in average revenue, the highest of any submarket in the metro.

Turning to the investment sales market, activity is expected to remain robust, led in part by institutional investors looking to expand their holdings in the Charlotte retail market. An abundance of new Class A space in prime, growing submarkets will keep transaction volumes near all-time highs. Competition among institutional buyers for these assets will likely lead to further cap rate compression for high-end properties, although, valuations will remain in-line with market fundamentals.

Lower-tier product may experience a subtle increase in cap rates, as prices stabilize and revenues increase. Opportunities exist in the northern and southern regions of the market, where economic expansion is driving residential growth, supporting the need for additional retail space in the Ballantyne and Lake Norman areas.

— Gary Lucas is a senior vice president and managing director of Marcus & Millichap Real Estate Investment Services. He is also regional manager of the firm’s Charlotte office.


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