Ridge Creek yet to rise: Industrial market expected building to lease more quickly

SOUTHWEST CHARLOTTE – Ridge Creek IV, an industrial building off Westinghouse Boulevard, opened its doors in December, just as the dust had cleared from the recession.

It was the first large industrial building built in Charlotte in five years, and with around 200,000 square feet of space for the taking, the Childress Klein Properties-owned building seemed ideal to reel in those tenants who were waiting for a recovery to make a move to buildings new.

Tenants have been moving; Matt Cochrane, vice president in the Charlotte office of EastGroup Properties, said in the first two quarters this year the Charlotte industrial market has seen about 1 million square feet of positive absorption, more than any full year going back to 2009.

Only none of those deals put companies into Ridge Creek IV, which claims only trucking company Averitt Express as a tenant. And Averitt has been in the building since the day it opened.

With the latest-and-greatest industrial building in Charlotte struggling to get leased, it may give pause to the next industrial developer looking to break ground on another speculative building.

But John Morris said whether it’s bad timing, a lack of space or just rotten luck, the lagging lease-up of Ridge Creek IV isn’t reflective of the area’s industrial market.

Morris, the partner overseeing the industrial market for Charlotte-based Beacon Partners, said that while Ridge Creek IV is a paragon of the type of industrial building that has worked in Charlotte, developers shouldn’t worry that the building is still around 75 percent vacant.

“With the size and location of that building, that’s really something that’s traditionally worked well in Charlotte,” Morris said. “But the lease-up has been slow over there, much slower than Childress Klein would like, and that has some people wary about the prospects of new (industrial development).

“I think we’ll see a number of build to suits (next year). Users are not finding existing stock so they’re going to want to build.”

One reason that Morris and others aren’t too concerned about Ridge Creek IV is because it’s clear why the building has missed out on the last couple of large deals: There wasn’t enough space.

With Averitt in 67,600 square feet, Ridge Creek IV has 202,800 square feet vacant. The last two large deals in Charlotte were Texas-based Conn’s going into around 300,000 feet in Ridge Creek II – which isn’t owned by Childress Klein – and Synder’s-Lance going into 253,000 feet in Patriot Industrial Works in southwest Charlotte.

The Childress Klein building also looks to be missing out on the next huge industrial deal, according to Andrew Jenkins, president of Charlotte-based Karnes Co., an industrial analytics firm. He said Michelin is set to move into 345,000 square feet at Twin Lakes Business Park near Interstates 77 and 485 in north Charlotte.

Chris Daly, the partner in charge of industrial properties with Childress Klein who has overseen Ridge Creek IV from the start, said he and his team have seen the irony in the fact that they built the biggest speculative building in Charlotte for the last five years and it still hasn’t been big enough to get recent deals.

“Having Averitt in 70,000 has probably lost us a deal, but we had to get it preleased in order to secure financing,” Daly said. “It would’ve been difficult to finance a building that was 100 percent spec. A prelease was a pretty vital aspect at that time.”

Before the recession, from around 1995 to 2008, financing was flowing freely and developers were throwing up spec buildings all over the city’s industrial corridors, Morris said. But the easy money dried up during the recession and banks still hesitate to finance speculative projects without any preleasing.

Jenkins said while size has prevented Childress Klein from getting deals done, it isn’t the only thing restricting tenants from coming. Being a new building, Ridge Creek IV has rents that may be discouraging other deals.

“It may be that they want $4.25 (per square foot) and the tenants want to pay more like $3.95,” he said. “That doesn’t seem like a lot, but when you’re talking 200,000 feet it adds up.”

According to the second quarter Karnes Report, the average rent in the Southwest submarket – which contains Ridge Creek – is $4.25. Average rent across the city is $4.18.

Daly said $4.25 per foot is the going rate at his building and that rate is as low as Childress Klein can justify in order to recoup construction costs. Anything lower would put the company in the hole, he said. Not that some potential tenants haven’t tried cutting deals.

“We’ve tried to show a bit of backbone and people have come along and lowballed offers that we weren’t interested in,” he said. “We’re by no means in panic mode right now.”

Daly said when Ridge Creek IV opened, Childress Klein projected it would take between 12 and 18 months to fill the building. But he said he didn’t expect not to have a single new tenant signed in the first 10 months after opening.

“Would I say I’m surprised we’re only 25 percent leased? Yes,” Daly said. “But we aren’t even a year into it. The nature of this business is that buildings usually fill up in chunks.”

The industrial insiders wouldn’t offer predictions about how long it might take Daly to fill up his building, but they said over the next year conditions in the local industrial market should give Childress Klein reason to be positive about the future.

Industrial vacancies in the city have fallen since 2010, from 14.4 percent to 10.7 percent in the second quarter, according to the Karnes Report. Rents have continued to rise over the past two years, from $4.05 per square foot in 2011 to $4.18 per foot in the second quarter.

Jenkins said vacancies are expected to continue to fall in the foreseeable future, and said it’s only a matter of time until the deals reach Ridge Creek IV.

Daly said the market is starting to get constrained, which means tenants have to have somewhere to go. With very little new product available, Daly said he thinks the future of his building looks brighter than the past.

“A year ago, I didn’t think we’d be having a conversation of this nature, but you take what the market gives you,” he said about Ridge Creek IV only being one-quarter full. “That big tenant could be a month away.”