Report: Office vacancy rates improve

CHARLOTTE – A look at the city’s office-market statistics would indicate that the market has improved by a solid measure since the depths of the recession.

Statistically, the Charlotte office market has seen a continued improvement. But the recent tightening of the market may be related to a lack of recently completed office space. Photo by Payton Guion.

Office vacancies at the end of 2013 were 14.8 percent, down 3.8 percentage points from the 2011 peak of 18.4 percent, according to the fourth quarter Karnes Report, issued by locally based Karnes Co. Rents are also better, up almost a dollar to $22.68 per square foot from the 2011 trough of $21.75.

Local office analysts and brokers say that they’re pleased to see the market tightening and that they expect a stronger market to continue into 2014, but the improving numbers tell only a part of the Charlotte office narrative.

An additional 1.3 million square feet was leased in 2013, according to Andrew Jenkins, president of Karnes Co., reducing the available office space to less than 7.4 million square feet from 8.7 million at the end of 2012.

However, for the first time since Karnes started collecting data in 1988, no new office space was added in 2013.

“It’s the first year we haven’t had one foot of office space delivered,” Jenkins said. “The questions we have are: Will Ballantyne start another building? What about Uptown?”

Jenkins said he expects completed office space in 2014 to exceed the amount finished in 2012, when 987,415 square feet of office space was delivered. Those additions will be important as the health of the city’s office market continues improving, he said.

Taylor Allison, an analyst in the Charlotte office of Jones Lang LaSalle, said if the city is to remain attractive to corporate relocations, developers need to start adding more space.

“From the perspective of a relocating corporation, they have to wait for space to become available in Charlotte,” Allison said. “If they have to wait for space, companies will choose a different market. The majority of our nice submarkets, as far as space that’s sitting there available, we may not have space to accommodate them.”

At the end of 2013, there were 274,754 square feet under construction in the Charlotte market and nearly 6.2 million square feet of office space proposed, the Karnes report shows.

Proposed space in the Karnes report includes plans that have been announced, but that doesn’t necessarily mean those buildings will be built. For instance, the Downtown submarket every year since 2010 has had at least 757,000 square feet proposed, but nothing has been built, according to the Karnes report.

Hal Kempson, vice president of debt and structured finance in the Charlotte office of CBRE, said he’s seeing a strong office market, but also that even though it remains tough to finance projects, developers should start looking to build again.

The Northeast office submarket, which is around the University Area, had the most office space under construction at the end of the fourth quarter, according to Karnes. Shelco Inc. is adding 163,000 square feet at 8740 Research Drive, according to the Mecklenburg County building permits database. The SouthPark submarket has 86,754 square feet under construction in the Sharon Square office building at Fairview and Sharon roads. The Midtown office submarket has 25,000 square feet under construction in the second building in the Grinnell Water Works complex off West Morehead Street.

Of the city’s 11 office submarkets, only three had no office space proposed: Cotswold, East and Park Road submarkets, older submarkets that haven’t seen much activity in years.

The Interstate 77/Southwest submarket has nearly 2.5 million square feet of space proposed, by far the most of all the submarkets, but hasn’t had any office space completed since before 2009. The North submarket has 946,164 square feet proposed, the Northeast submarket has 837,647 square feet proposed, Downtown has 764,000 feet proposed and SouthPark has 480,000 feet proposed.

Allison said he’s not sure if or when all of this proposed space will be added, but said the space built in 2014 most likely won’t be speculative space.

“The building of office space is impossible to predict,” he said. “You can’t say anything is going to happen on a spec scale. Everyone that owns property toys with going spec, but the only thing you’re going to see in the next few quarters is build-to-suit buildings.”