Warehouse market facing a crisis in supply

CHARLOTTE – Warehouse vacancy around the city fell to 6.9 percent at the end of 2013, one of the lowest rates seen in the history of the Charlotte warehouse market, according to the fourth quarter report from local analytics firm Karnes Co.

Demand in the warehouse sector was so strong that if space were to be filled at the same rate in 2014, Charlotte could hypothetically have almost zero warehouse space to offer, said Andrew Jenkins, the president of Karnes.

A fall to around zero vacant warehouse space is improbable, Jenkins said, as a lot of the remaining space is in small blocks spread across older buildings unable to attract large tenants. But it serves to show that the Charlotte warehouse market is facing a crisis in supply, he said.

The lack of available space means Charlotte can’t be competitive when trying to attract large industrial companies or keeping those companies in the city. New warehouse construction will have to outpace the last few years if the city is to return to a sustainable supply. The vacancy rate in the Charlotte warehouse market in the fourth quarter of 2012 was 12.5 percent, 5.6 percentage points higher than fourth quarter 2013 vacancy.

More warehouse space is planned, with some of Charlotte’s big-boy industrial developers potentially getting involved.

At the end of 2013, four warehouse buildings were under construction, totaling 248,000 square feet that should be completed this year.

“Look at the things like the fact we have 6.9 percent vacancy, which is the lowest we’ve had since (Karnes) started reporting in 1988,” Jenkins said. “A lot of that story would be a lack of new supply. If you look at 2009 to now, we’ve really not delivered more than about a half million square feet of industrial space. In 2013 we had no new deliveries.”

Similarly, Karnes reported recently that no new office space was delivered in 2013 in the Charlotte market, either.

With very little new warehouse space becoming available over the last few years – only 564,738 square feet since 2009 – and the high absorption seen in 2013, the supply-side trouble in the warehouse sector becomes apparent. In 2013, 2.25 million square feet of space was absorbed. At the end of 2013, only 2.36 million square feet of space remains vacant.

Matt Cochrane, vice president of EastGroup Properties‘ Charlotte office, said the 2013 absorption greatly exceeded any realistic expectations in the Charlotte warehouse markets.

“If you look at Charlotte’s historic absorption, 1 million square feet has been a good year,” he said. “The absorption we saw last year will drive the Childress Kleins and Beacons to put up more space.”

It will also drive EastGroup, a commercial real estate firm focused on industrial properties, to put up more space. Of the four industrial buildings under construction in the Charlotte market, Cochrane is overseeing three of them at Steele Creek Commerce Park. The other is under construction at The Park-Huntersville complex.

Cochrane said EastGroup is also awaiting building permits on a fourth building at Steele Creek Commerce Park before breaking ground on the 54,000-square-foot project in the second quarter. Cochrane expects that building to be delivered before the end of the year.

“A lot of people are in the planning process,” Cochrane said. “Childress Klein is planning a spec building at Ridge Creek for about 300,000 square feet and Beacon is ramping up their efforts.”

Jenkins said he predicts the Charlotte warehouse market will see new space started and completed in 2014, but it’s not clear how much, because some developers aren’t prepared to start putting up spec space.

“We’re going to get some supply,” he said. “But I don’t think we’re going to have so much supply that it’s going to outpace demand in the short term.

“Then we’ll see if anyone steps up to put up new space. We’ve talked about all this need for new space, but some companies are standing there with their hands in their pockets.”