Developers expected to deliver in 2014

CHARLOTTE – Andrew Jenkins has been studying the city’s commercial real estate market since 1988 and last year he saw something he’d never seen before.

In all of 2013, not a single square foot of office or industrial space was delivered in the Charlotte market, according to Jenkins, managing partner of Karnes Co., a local real estate analytics firm.

“It’s probably the first time it’s ever happened (in Charlotte). Well, maybe since the 1800s,” Jenkins said.

The building-completion anomaly is more a result of what happened in the decade leading up to 2013 than a lack of commercial confidence from developers.

In the years before the recession squeezed its vise grip on the U.S. economy, commercial developers in Charlotte were enjoying as healthy a market as Jenkins said he’s seen. Buildings were going up and tenants were demanding space at similar rates, sometimes demanding more space than was being built. In those times, developers seemed foolish if they didn’t add new space.

Office demand plunged

In 2006, for example, developers added 1.25 million square feet of new office supply, and office demand was 1.46 million square feet, Jenkins said. For perspective, office demand over the last five years has averaged 833,829 square feet per year and new supply has averaged 964,193 per year, according to the Karnes Report.

Strong office demand continued into 2007, when users needed 1.47 million square feet of space. But that year only 692,000 square feet of space was delivered to the market, indicating what looked at the time to be a great need for new space. Seeing the disconnect, developers began planning to add that space, not knowing demand was on the precipice of a freefall.

In 2008, developers added 2 million square feet of new office supply. If demand had remained level, it would have been considered a solid year. But demand fell to only 670,000 square feet, less than 34 percent of the newly built space, as tenants began to feel the effects of the recession and stopped expanding and relocating.

The majority of the space added in 2008 was planned well before 2007, when demand greatly exceeded supply, Jenkins said.

The next two years saw the completion of office space that would have been eaten up in 2006 and 2007, but struggled to get a nibble in 2009 and 2010. Developers in 2009 added 1.2 million square feet of office space, while demand continued to fall and in 2009 was negative, meaning tenants across the Charlotte market vacated more space than they moved into, the Karnes Report said.

In 2010, when Jenkins said a lot of the projects planned back in 2007 were completed, there was 2.3 million square feet of new office supply added to the Charlotte market. Demand in 2010 was less than half of the new supply added, at just 1 million square feet.

That resulted in a new supply that was three times the amount of office space demanded during 2009 and 2010.

Jenkins said many of those completions had been started two or three years earlier, and were under construction when demand began to disappear.

“They had started development and planning of the new buildings in 2007, and then you look at 2008, and that’s when demand starts to go down,” he said. “But you can’t stop construction on these buildings before you top them out.

“So instead of stopping construction, we doubled down. It was all these things that were several years in the making.”

Warehouse market rebounds

The Charlotte warehouse market experienced the same cycle of sky-high demand followed by increased supply completed just as demand dried up, according to the Karnes Report, though the peaks and valleys weren’t as extreme as in the office market.

In 2006, industrial developers added 1.2 million square feet of warehouse supply, while users needed about 1.3 million feet.

Historically, 1.25 million square feet of demand is considered a good year in Charlotte, said Matt Cochrane, vice president in the Charlotte office of EastGroup Properties, a commercial real estate firm that focuses on industrial properties.

Supply continued to be delivered in large chunks in 2007, when 1.5 million square feet of warehouse space was added to the Charlotte market. That same year, there was 1.2 million square feet of demand. Demand again exceeded supply in 2008, when users needed 433,000 feet of space and developers built only 362,000 square feet.

But, much like in the office market, 2009 brought negative demand. Karnes reported that about 104,294 square feet of warehouse space was completed, while demand was at negative 506,869 square feet.

In every year since 2009, however, demand has eclipsed supply, and in 2013 – when no new supply was delivered – there was demand for nearly 2.3 million square feet of space.

The Karnes Report doesn’t expect 2013’s lack of new warehouse and office space to be repeated in 2014, however.

Because of increasing demand for warehouse and office space – the latter of which reached nearly 1.3 million square feet in 2013, 500,000 square feet in the fourth quarter alone – the Karnes report expects developers to complete more space.

The company reports there are 274,754 square feet of office space and 248,800 square feet of warehouse space currently under construction in the Charlotte market. Taylor Allison, an analyst in the Charlotte office of Jones Lang LaSalle, said he expects more commercial space to be started this year, but that he also expects developers to be careful.

“The only thing you’re going to see in the next few quarters is build-to-suit, except Lincoln Harris is going to supposedly go up with these buildings in SouthPark,” Allison said, referring to the proposed Capitol Towers speculative office project. “(Developers are) marketing, but they’re waiting for an anchor tenant. They’re not going to do it until a tenant says they are going to take a large chunk of space.”

While doing only build-to-suit projects may not match the ambition and optimism of the days before the recession reminded everyone of the consequences of overbuilding, it will likely ensure that the Charlotte market won’t face the oversupply of commercial property that led to a 2013 with no new office or industrial product.

But Jenkins said developers will start to build again. They don’t really have a choice.

“There’s definitely something out there in the market that’s being pent up,” he said. “The lack of new space (in 2013) was definitely a matter of absorbing the space that was already there. We’ve absorbed everything that was built. There’s nowhere to go but to start building again.”

CORRECTION: A previous version of this story used a confusing quote from Taylor Allison. The quote has been clarified above.