Commercial outlook 2015: Population and job growth expected to support apartments, offices, industrial space

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While the rapid growth of apartments in the Charlotte region has some industry professionals concerned that vacancy rates could rise in the near future, they believe job growth and projected population growth will fill the supply in the long run.

Job and population growth, as well as falling vacancy rates, also are expected to spur the construction of additional office space in uptown, supplementing projects that have already begun.

And following several years of steadily declining vacancy rates and a limited amount of new product, warehouse and flex development closed out 2014 with the delivery of several large projects outside of Charlotte.

The biggest concern over commercial construction is when, where and how to balance supply and demand; but industry professionals seem confident in the region’s ability to generate jobs and attract businesses that will support further construction.

More office jobs

When it comes to office buildings, the types of jobs that have been created in the Charlotte area are more important than the number of jobs.

Of the 27,060 new jobs that came to the region in 2014, 42 percent were in professional and business services.

“The strength in the professional and business services sector is linked to innovation and increased use of high-tech workers within the financial services sector,” Paul Hendershot, director of research at the Charlotte Chamber of Commerce, said in an email.

Mark Vitner, senior economist at Wells Fargo, said the proportion of high-quality jobs is relatively robust compared with other regions, and attributed the influx of jobs to the financial services industry as well, which he said should continue to grow this year.

Office buildings rising

The nature of these jobs, in conjunction with an uptown vacancy rate that’s reached its lowest point since 2007, according to a JLL report, has spurred large-scale office development in uptown for the first time in several years.

Cornerstone Real Estate Advisors and Spectrum Properties broke ground in December on the city’s first office tower since 2007, 300 South Tryon, and Lincoln Harris is scheduled in third quarter 2015 to deliver the first of two 10-story office buildings, Capitol Towers in SouthPark.

In addition to those two projects, Portman Holdings plans to break ground on a 19-story, class-A office tower, 615 South College, in June, and Crescent Communities announced last year its plans for a 27-story office building as part of its mixed-use development project, Tryon Place.

Bottom line, more than 850,000 square feet of office space is expected to be completed in 2015, the most since 2012, and another 50,000 square feet could be delivered, according to Charlotte-based Karnes Research Co.

But John Culbertson, managing partner at Charlotte-based consultancy Cardinal Real Estate Partners, said one consequence of creating new office space is that it may diminish the appeal of existing office space.

“The new delivery of these ultra-modern buildings will clearly knock what is considered class-A down to what is considered class-B,” he said.

On the plus side, Culbertson said tenants may be able to get lease deals in existing buildings as much as 30 percent less than what leases will run in the new buildings.

This could be an incentive for companies looking to relocate to Charlotte that don’t want to pay for premium office space. The average rental rate for class-A office space in uptown was $27.38 per square foot in third quarter of last year, according to Karnes Research, and Lincoln Harris is looking to charge $32 per square foot for space in its first-completed Capitol Towers building.

Apartments still coming

Office development has yet to gain the same momentum that apartment development gathered last year.

The Greater Charlotte Apartment Association estimates 8,500 apartment units will be delivered in the Charlotte region this year, and an additional 9,475 units were proposed as of Sept. 1. The association expects many of those units to break ground this year, but it’s unlikely that any will be completed until 2016.

Although some industry professionals have questioned whether the rate of apartment building will outpace demand, most are confident that vacancy rates will stay down.

“I think for the most part they’ll fill up and they’ll do fine long term, it just may be in the short term that there will be a little more competition,” said Charles Dalton, president of Charlotte-based apartment research company Real Data.

Charlotte’s population is expected to continue rising over the next couple of decades.

Charlotte and Raleigh topped the list of U.S. cities expected to grow the fastest by 2030, according to a U.N. World Urbanization Prospects report released in August that looked at metro areas with populations greater than 500,000.

Both cities’ populations are expected to grow by about 71 percent, beating out Austin, Texas, which is projected to experience a population growth of 58 percent.

Despite the possibility of higher apartment vacancy rates in the near future, Vitner said that rental rates will continue climbing this year, but only at a “modest pace.”

In addition, the industry is watching to see whether the extension of the Lynx Blue Line from uptown to UNC Charlotte will encourage development there as it has in South End.

“We may see some more activity around (the Blue Line Extension) and the area between NoDa and downtown, or it may jump all the way up toward UNC Charlotte,” he said, adding that the demand for apartments is still generally in the center city area.

Industrial space moves out

While office space and apartments have been concentrated in uptown, warehouse and flex space has been moving outside the city’s core.

Nearly 700,000 square feet of industrial space was recently delivered in Cabarrus County, divided between a 400,000-square-foot building that’s part of The Silverman Group’s Concord Airport Business Park and Trinity Partners’ 277,000-square-foot building, also in Concord. Childress Klein Properties is expected this month to deliver a 360,000-square-foot industrial building, Afton Ridge.

Scott Hensley, principal at Charlotte-based Piedmont Properties, attributed this shift to both a lack of space in Charlotte and the completion of the widening of Interstate 85.

He also said that apartment development has driven smaller industrial development out of some parts of the city.

“It’s nice to see the gentrification and the redevelopment, but all of these apartments are replacing old industrial buildings that were functional, and there’s just a lack of that space there,” Hensley said, specifically referring to Charlotte’s South End neighborhood.

But Frank Warren, real estate economist with Kimley-Horn and Associates Inc., said it’s not just a lack of space that’s pushing industrial development outside of Mecklenburg County; he said it’s also that the buildings being built are bigger; that what used to be 150,000 square feet is now 300,000 square feet.

“As industrial product gets bigger, you have to have the land – flat land – at a cost that can be supported with the rent, and in Mecklenburg County, that’s become increasingly difficult,” he said.

While Warren agreed with Hensley that industrial development in the region is moving outside of Mecklenburg County, there are a couple of sizeable projects scheduled for delivery in the first half of 2015. Childress Klein’s first Ridge Creek West building, which will be about 310,000 square feet and be completed in the first quarter this year, and Beacon Partners’ InnerLoop North project, two buildings comprising more than 400,000 square feet of space. The first InnerLoop North building will be finished in early February, and the second, at 300,000 square feet, is scheduled to be completed in April.