Rebuilding year: New commercial space coming online after bleak 2013

 CHARLOTTE – Although the first quarter looked about the same for the Queen City’s office and industrial markets as it did throughout 2013, changes are on the way.

Developers in Charlotte are starting to deliver office and industrial space after a 2013 that, for the first time in 25 years, saw no office or industrial space completed. Photo by Payton Guion

Data released last week from local analytics firm Karnes Co. shows that there was still fairly strong demand for office and industrial space in Charlotte in the first quarter and not much new construction, which was the case throughout 2013.

But last year was the first year in about a quarter of a century that no new office or industrial space was completed in the city, said Andrew Jenkins, managing partner at Karnes.

This year won’t follow suit.

In the city’s industrial market during the first quarter, 140,000 square feet of space has already been completed in the first two building of the Steele Creek Commerce Park, which EastGroup Properties is developing at Shopton and Steele Creek roads in southwest Charlotte. An additional 108,000 square feet of industrial space is under construction and will likely be completed before the end of the year, according to the Karnes Report.

Matt Cochrane, vice president of EastGroup, said the third building in the commerce park is under construction and that the company is in various stages of development on several additional buildings in the park. EastGroup has also sought a rezoning that would allow up to 1 million square feet of new industrial space.

In total, developers are underway on 187,119 square feet of industrial space in Charlotte – 108,800 feet at the third building of Steele Creek and 78,319 square feet at The Park Huntersville – and have more than 2.5 million square feet proposed, some of which could start construction this year.

The city’s office market continues to lag in new construction, with no completions in the first quarter. But the report says that 86,754 square feet will be finished at some point in the second quarter, with the completion of the Sharon Square office, near Fairview and Sharon roads in the SouthPark submarket. Sun Trust will anchor that building. Sharon Square will be the first office space completed in SouthPark since Two Piedmont Row was completed in 2006, according to Karnes.

Two other buildings are under construction in Charlotte: 8740 Research Drive, a 163,000-square-foot building in the Northeast submarket; and an expansion of the Grinnell Water Works Building, a 25,000-square-foot space in the Midtown submarket.

The lack of office completions, coupled with stronger demand, has created a backlog of proposed space. At the end of the first quarter, office developers had proposed more than 6.7 million square feet of space in the city, according to the Karnes Report. Not all of this space will start soon, or even at all, but construction is set to start in the fall on the first office tower in Uptown since the Duke Energy Center. Babson Capital will anchor the 25-story tower, which Karnes reports will be 316,000 square feet.

In the meantime, while those buildings are going up, tenants still need space to rent, which has resulted in falling vacancies and rising rents – a landlord’s market. And it’s expected to stay that way until much of the proposed space is completed.

Office vacancy rates in Charlotte are down in the first quarter from the end of 2013 and are at a five-year low, according to the Karnes numbers. Charlotte office space was 14.3 percent vacant in the first quarter, down from 14.8 percent at the end of 2013 and down from the five-year high of 18.4 percent in 2011. Vacancy rates in Class A buildings – the top of the top – were 13.2 percent in the first quarter, down from 13.8 percent in 2013. Class B vacancies were 17.5 percent, which was unchanged from 2013, and Class C vacancies were 20.2 percent, down from 24.9 percent in 2013, according to Karnes.

At the same time, office rents were on the opposite trajectory. Across the entire market, rental rates were $22.76 per square foot in the first quarter, up from $22.68 in 2013 and the five-year low of $21.75 per foot in 2011. Class A rents averaged $23.83 per foot, up from $23.73 per foot in 2013. Class B rents were $19.51 per foot, up from $19.46 in 2013, and Class C rents were $16.89 per foot, compared with $16.85 in 2013.

“As soon as rents start to rise and vacancies fall it becomes a landlord’s market,” said Taylor Allison, an office analyst in the Charlotte office of Jones Lang LaSalle. “They can drive rates and they have tenants competing for space.

“With a lack of large blocks of space, it’s going to stay a landlord’s market.”

Based on that definition, the Charlotte industrial market is also in a favorable period for landlords, with rents up and vacancies down.

Warehouse vacancies were 6.8 percent in the first quarter, down from 6.9 percent in 2013 and way down from the five-year high of 14.4 percent in 2010, according to Karnes. Flex space, which Karnes defines as warehouse space that also has an office or showroom component, was 17.9 percent vacant in the first quarter, down from 18.4 percent vacant in 2013 and 20.3 percent in 2010.

Warehouse rents are up to $4.25 per square foot, from $4.20 in 2013, while flex rents are $8.70 per square foot, up from $8.54 in 2013, the report says.

Jenkins said with some new developments starting to open in 2014, don’t expect to continue seeing the same rate of change in rents and vacancies, adding though that building owners shouldn’t have much trouble finding tenants.

“We have some tenants that are looking for large blocks of space,” he said. “There hasn’t really been much available, but now it’s starting to become available.”