13 to watch in ’13: Class B office space

(Part three of a 13-part series)

Editor’s note: For many, 13 is a dreaded number, a cursed pair of digits to be avoided at all costs. But ’13 might be a year of luck and plenty for some Charlotte-area developers and real estate and construction companies.

The Mecklenburg Times, in a 13-part series, will focus on the people, companies and things worth paying attention to in 2013. There’s no science behind our list; simply, our reporting and research have us thinking that these 13 will be among the busiest and biggest newsmakers of the year. Who knows? We could be wrong.

Previous: Camden Property Trust

CHARLOTTE — Bob Smith remembers what it was like two years ago, when Charlotte’s office market was in the clawed hands of the economic downturn.

It was a time when owners of some of the city’s office buildings found themselves owing more than their properties were worth. For some, it was so bad they turned to their banks to see if they could refinance their loans and, with luck, survive the reduction in rental rates that came along with the Great Recession.

“Two years ago, no one had any hope,” said Smith, director of leasing for the Charlotte office of Parkway Properties, an Orlando, Fla.-based company that leases and manages office buildings throughout Charlotte.

But, with the start of a new year, there’s optimism springing up in Charlotte’s office market that 2013 could mark the start of a turnaround for the city’s Class B space, just as there’s a recovery said to be already taking place in its Class A market.

“The owners of (Class) B now have hope,” Smith said.

Related story: Meck office rents up, vacancies down compared with before the downturn

In a bit of a twist, the decline in construction of new Class A office space is being credited, at least partially, with now producing a boost in demand for, or at least interest in, Class B offices.

“What you’ve got out there is a lack of new construction,” said David Dorsch, a Charlotte-based senior vice president for Cassidy Turley, a property management and leasing company.

The lack of new office high-rise construction, he said, stems from banks that are still trying to “get out of bad loans.”

While it’s easier these days to get a loan to buy an existing building — one that has tenants and, therefore, a proven income stream — it’s way more difficult to get financing to bring a new office building into existence, he said.

Dorsch said he doesn’t expect another speculative office building to be built in Charlotte this year. At the earliest, he said, an announcement about a new building, or buildings, might be made in 2014. But even if that were to happen, any new buildings likely won’t be finished until 2015, he said.

Dorsch and others say the shortage of new Class A office space coming on the market in Charlotte is pushing some tenants to consider the middle child of office space. He said he even predicts a landlord’s market for the city’s Class B space by the third quarter of this year.

Meanwhile, there’s already been a switch from a tenant’s market to a landlord’s one for the city’s Class A space, a switch that took effect last year, he said.

While Dorsch doesn’t predict that the concessions landlords have been offering in the downturn — incentives like free rent and covering the costs to upfit space for new tenants — will disappear in the city’s Class B market this year, he does expect them to “contract” in 2013, as the winds keep shifting in landlords’ favor.

But in Class B buildings that are in “Class A areas,” he said, such as Midtown and SouthPark, “you’ll start to see the concessions dry up in those areas first.”

Construction slows

According to Andrew Jenkins, managing partner for Karnes Research Co., which tracks Mecklenburg County’s office market, the only office space added in the county last year was in the Woodward and Gragg speculative office buildings, which combined have about 550,000 square feet and are in Ballantyne; Midtown Medical Plaza II, which has 171,000 square feet and is home to the Levine Cancer Institute; SPX’s 238,991-square-foot headquarters, in Ballantyne Corporate Place; and the 25,184-square-foot American Honda Finance Corp. building, also in Ballantyne Corporate Place.

In 2011, only two office buildings were finished in the county, he said: 7915 Microsoft Way, a 150,100-square-foot building for the FBI; and the Calhoun Building, a speculative building that has 140,869 square feet and is in Ballantyne.

The year before that, a large amount of office space was added to the county in two buildings, Duke Energy Center and Bank of America Center, Jenkins said.

But, Jenkins points out, the buildings that were finished in the county from 2010 to 2012 were largely designed for specific tenants.

“That’s a three-year period with relatively limited new construction … of suburban Class A space, especially,” he said.

But from 2000 to today, an average of 332,168 square feet of office space per quarter has been added to the county, he said, adding that that level of construction has not been seen in the past three years.

“In 2011, 2012 we’ve been under that total for the most part,” he said. “In 2010, we were over that only because of two downtown buildings being completed; if you were to take those out of the picture, we were well under it (the average of 332,168 square feet a quarter) in terms of suburban space.”

‘They’ll probably stay flat’

Smith, of Parkway Properties, has also seen the decline in new office space in Charlotte. Now, for the Class B space he manages and leases out, that could mean more demand.

“It’s been a long period of time that no new buildings have gotten built,” he said, “and it’s been a long time that it’s been a tenant’s market.”

A tenant looking for 40,000 to 50,000 square feet of Class B space in Charlotte will have a tougher time finding it this year versus a year ago, Smith said.

He said more tenants are interested in the Class B spaces that Parkway manages and leases. For example, at Carmel Crossing Center, a Class B office park that Parkway manages and that is near the intersection of Pineville-Matthews and Carmel roads, Smith said rents and occupancy are up.

Last year, occupancy at Carmel Crossing rose to the low-90 percentages from the mid-80 percentages, he said. About a year and a half ago, he said, quoted rents at the business park were raised, from about $17.50 to roughly $19.

Carmel Crossing has 328,000 square feet of space, he said, and an occupancy rate of 92 percent.

Despite the market tipping in favor of Class B, Smith said concessions are still being offered at Carmel Crossing. The money being spent on tenant improvements varies and is based on negotiations, he said. Also, about a month in free rent per year is still being given to new tenants, but not so much for those renewing leases, he said.

Smith said he doesn’t expect Charlotte’s Class B market to do away with concessions this year. And, unlike Dorsch, the Cassidy Turley senior vice president, he doesn’t predict a landlord’s market in Class B this year.

Even though his crystal ball shows conditions improving in 2013 for the owners of Charlotte’s Class B space, Dorsch doesn’t expect Class B rents to hit the roof.

“I think they’ll probably stay flat,” he said.

The last thing Class B landlords want to do right now, he said, is jack up rents.

ROBERTS can be reached at [email protected].