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Vacancies fall; buildings to rise: Nearly 8 million SF proposed in office construction

Pappas Properties recently completed an 86,000-square-foot office building at Sharon Square near Sharon and Fairview roads, the first office space completed in the SouthPark submarket since 2006. Photo by Sharon Roberts

Pappas Properties recently completed an 86,000-square-foot office building at Sharon Square near Sharon and Fairview roads, the first office space completed in the SouthPark submarket since 2006. Photo by Sharon Roberts

Industrial building vacancies continue to drop across Charlotte, especially for flex space, and the number of proposed office buildings in and around uptown is expected to change the commercial landscape in the next few years.

Charlotte-based Karnes Research Co. recently released its quarterly reports for commercial and industrial space in Charlotte, and the reports indicate mostly positive trends for the city.


Flex vacancy falls

Compared with third quarter 2013, the vacancy rates across the city’s eight flex industrial submarkets have dropped an average of 3.3 percentage points, ranging from an increase of 1.9 percentage points in the Northwest submarket to a decrease of 12.5 percentage points in the Northeast submarket. Of the eight submarkets, six saw decreased vacancy rates in third quarter 2014 compared with third quarter last year.

“We’ve had literally no added product, so any absorption will help the vacancy rate go down,” said Scott Hensley, principal at commercial real estate firm Piedmont Properties.

Construction began on only 10,000 feet of flex space in the third quarter.

He also said that as vacancy rates decline, landlords are able to increase rental rates.

“Because of the low vacancy, the landlords and owners are trying to push the rental rates to a point to justify new construction,” Hensley said. “For a developer to have confidence for building, not only do you have to have the demand, but you have to have the rental rates to justify it.”

The average rent for flex space was $8.84 per square foot in the third quarter, up from $8.54 in 2013. The average rent rose 14 cents per square foot in 2013 compared with 2012.

The demand for flex space has grown substantially since the first quarter of the year, when the positive net demand was 17,000 square feet. Positive net demand totaled nearly 170,000 square feet in the third quarter, bouncing back from a negative net demand of almost 80,000 square feet in the previous quarter.

The southwest submarket, where available warehouse space and flex space is more than double that of any other submarket in Charlotte, accounted for the majority of the demand. Pinpoint Warehousing Inc., a private logistics company, moved into 102,400 square feet of space at the Shopton Ridge Industrial Park, and was responsible for the biggest gain of leased space in the submarket.

Warehouse construction up

The vacancy rate for warehouse space was 2.2 percentage points lower this quarter than in last year’s third quarter, but vacancy rates in three of charlotte’s six submarkets have increased slightly since the beginning of the year. Karnes includes warehouse buildings with more than 15,000 square feet, unless they are part of an industrial park totaling more than 15,000 square feet.

The overall falling vacancy has prompted new warehouse construction. With four projects totaling 675,492 square feet, the amount of warehouse space under construction in third quarter 2014 was more than double that built in all of 2013. The completion of another building at the Steele Creek Commerce Park added 108,800 square feet to the area’s total amount of warehouse space.

Only 7 percent of the total available warehouse space in the city is vacant, compared with 16 percent of the total available flex space.


Office construction underway

The Karnes office report highlights the return of office building construction in Charlotte. Construction was underway on over 850,000 square feet of office space this quarter, which is more than in 2012 and 2013 combined.

The U.S. Department of Veterans Affairs Charlotte Health Care Center began construction on a 295,000-square-foot hospital in the southwest submarket, and Lincoln Harris began work on its Capital Towers project in SouthPark, which will be two 10-story buildings totaling 480,000 square feet of office space.

A couple of big moves by large companies such as Bank of America and MetLife accounted for a large portion of net absorption activity in Charlotte’s office market.

Bank of America filled almost 110,000 square feet of its corporate headquarters building, including 21,519 square feet of space that was previously occupied by The Duke Endowment organization, which relocated to its own building in Midtown.

Andrew Jenkins, managing partner at Karnes, said Bank of America had not announced what the space was being used for.

MetLife insurance vacated the 105,000-square-foot Ballantyne Three building in the Ballantyne Corporate Park that it had been temporarily occupying while transitioning into its new U.S. retail headquarters at the Ballantyne Gragg Building.

Snyder’s Lance, the snack food manufacturer, plans to relocate its corporate headquarters to the Ballantyne Three building’s 105,000 square feet next year. Lance currently occupies over 80,000 square feet in the Ballantyne Harris building.

Jenkins said the amount of movement in Ballantyne could encourage some developers who have proposed buildings to begin construction. Nearly 700,000 square feet is proposed for the submarket.

“We’re looking at two years now with no new space; that may certainly prompt them to start developing,” he said.

The Ballantyne submarket had a negative net absorption of almost 50,000 square feet in the third quarter, but that was largely due to MetLife occupying space in both buildings while it transitioned to one building.


Pappas adds SouthPark space

The SouthPark submarket had the greatest loss of net absorption, at more than 83,000 square feet, but the completion of an 86,000-square-foot office building within the Sharon Square mixed-use development accounts for most of the loss. Karnes includes completed buildings in its net absorption calculation, and the building at Sharon Square opened with more than 80,000 square feet unoccupied.

Developer Pappas Properties, the building’s sole tenant, is leasing 4,500 square feet of space. SunTrust banking will relocate its Charlotte regional headquarters to the building later this year, and will lease 62,500 square feet.

This building represents the first new office space in SouthPark since 2006.

Jenkins said he is curious to see how the completion of Lincoln Harris’s Capital Towers in SouthPark will affect the rest of the city’s submarkets. Because of the Capital Towers project, SouthPark had more office space under construction in the third quarter than all other submarkets.

“Is that development going to take away from development in Ballanytne or Downtown?” he said.

In the Downtown submarket, Spectrum Properties has proposed the 633,000-square-foot 300 South Tryon building, and Crescent Communities has announced plans for its 715,000-square-foot Tryon Place. These two developments make up most of the proposed 1.8 million square feet of office space in Downtown.

The Southwest submarket had the most proposed office space during the third quarter at 2.3 million square feet, and included buildings at Ayrsley near South Tryon Street and Interstate 485; Berewick in Steele Creek; the Coliseum Center off West Tyvola Road; and the Scaleybark Project on Freeland Lane off South Boulevard.

The Northeast submarket also had slightly more proposed space than Downtown, at 1.9 million square feet. More than half of that is being proposed by Lincoln Harris as a mixed-use project at North Tryon Street and Mallard Creek Church Road.



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