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Suburban office space nears completion; industrial demand strong

The demand for office space was highest in areas outside Charlotte’s central business district at the end of 2014, and the vacancy rate for industrial space reached its lowest point since 2010, driving the amount of industrial space under construction to its highest point since 2007.

Lincoln Harris has started constructing the domed roof of its first Capitol Towers office building in SouthPark. The 240,000-square-foot building is being on Congress Street, and is expected to be delivered during the third quarter of this year. Photo by Eric Dinkins

Lincoln Harris has started constructing the domed roof of its first Capitol Towers office building in SouthPark. The 240,000-square-foot building is being on Congress Street, and is expected to be delivered during the third quarter of this year. Photo by Eric Dinkins

Quarterly reports recently released by Charlotte-based Karnes Research Co. and JLL’s Charlotte office indicate good conditions for office space scheduled to be delivered this year, despite a dip in demand in Charlotte’s central business district in the fourth quarter of last year.

Charlotte’s suburban office market – areas outside uptown, midtown and South End – had close to 106,000 square feet of positive net demand in fourth quarter 2014 compared with a negative net demand of 78,542 square feet in the previous quarter, according to Karnes. The vacancy rate in Charlotte’s suburban office market was down 0.3 percentage points in the fourth quarter compared with the previous quarter.

“I think it’s just because of the action within the (central business district),” said Taylor Allison, research analyst at JLL Charlotte. “Driving some of that capital into the market there has kind of just generally brought action into the market.”

Although Charlotte’s central business district had a negative net demand of 41,000 square feet in the fourth quarter, following a positive net demand of more than 200,000 square feet the previous quarter, Allison said it’s easy for demand in one submarket to change substantially from one quarter to the next, especially if a tenant that occupies a lot of space makes a move.

Bank of America accounted for more than 100,000 square feet of the central business district’s positive net demand in third quarter 2014, and an undisclosed tenant moved out of almost 40,000 square feet of space at 400 S. Tryon in uptown in the fourth quarter, which was the biggest occupancy loss in the county.

The positive net demand for office space countywide in fourth quarter 2014 was 65,000 square feet, a number that Andrew Jenkins, managing partner at Karnes Research Co., described as “lackluster.”

The net absorption, which is the square feet leased minus the square feet vacated, in fourth quarter 2014 was less than half that in the third quarter, and the net absorption for all of 2014 was less than half the net absorption reported in 2013.  Net absorption also includes the space of completed buildings, but there was no new office space delivered in fourth quarter.

Two Harbour Place, a 50,000-square-foot office building at the Griffith and Jetton streets roundabout in Davidson, is expected to be delivered in the first half of the year, according to Karnes, and three office towers have been announced for uptown and South End, two of which are scheduled to start construction later this year.

What about spec space?

With steadily increasing demand for office space across the county, Jenkins said he was surprised more speculative space isn’t being built.

“It seems like you’d be getting to the point now that people would take a risk,” he said.

The vacancy rate for office space in Mecklenburg County at the end of 2014 was 14.3 percent, and Jenkins said anywhere between 10 percent and 15 percent was a good sign.

Bissell Development started construction in 2011 on what – at the time – was the largest speculative office project in the country at 550,000 square feet, and the vacancy rate for office space in Charlotte was 18.4 percent, according to Karnes.

Jenkins said speculative office space in Charlotte has often been built by the same companies, such as Bissell and Lincoln Harris, which makes him wonder when the city will see some “new blood.”

Lincoln Harris’s Capitol Towers project in SouthPark is expected to deliver the first of two class-A office buildings in the next several months, and has yet to announce a single tenant for the 240,000-square-foot building. Phone calls to Lincoln Harris seeking an update were not returned.

Other large office projects have been announced but not yet broken ground. Portman Holdings plans to break ground in June on a 19-story office tower, 615 South College, and Crescent Communities has revealed plans to begin construction on a 27-story office tower, Tryon Place, later this year. Neither developer has announced an anchor tenant. Trinity Capital Advisors and Honey Properties Inc. announced plans to develop 1000 South Tryon, a 14-story office building at Tryon and Morehead streets in South End, but construction won’t start until an anchor tenant commits to the building, according to Trinity Capital’s website.

The most recent office tower to start construction in Charlotte was 300 South Tryon, which broke ground in mid-December. Babson Capital Management, a global investment management company, will anchor the 25-story office tower, occupying 200,000 of the 600,000 total square feet of space.

Allison said developers could be waiting for rental rates to reach a certain point before they feel confident enough to build speculative space.

Industrial space supply chases demand

More industrial space was added to the pipeline in the fourth quarter of last year in response to falling vacancy rates and high demand.

The vacancy rate for warehouse space dropped to 5.9 percent in fourth quarter 2014 from 6.5 percent the previous quarter, and the vacancy rate for flex space dropped to 14.8 percent in the fourth quarter from 16.1 percent in third quarter, according to Karnes.

The vacancy rate for all industrial space was at 8 percent at the end of last year, down 1.7 percent points from the vacancy rate at the end of 2013, and the vacancy rates for both warehouse and flex space have steadily decreased since 2010.

Allison said he doubted construction would continue at its current pace, but that he expects demand to remain high.

“You just won’t see a massive glut of new construction as we’ve seen over the last year and a half,” he said.

More than 900,000 square feet of industrial space was under construction in Charlotte at the end of 2014, the most since second quarter 2007, according to Karnes.

The only industrial building that was completed in Charlotte during fourth quarter was Steele Creek Commerce Park Building 4, which added 56,771 square feet of space.

A JLL quarterly report said there’s a lack of available large spaces, specifically blocks greater than 100,000 square feet, which has left companies that need space waiting for the new development to be delivered.

Only one new lease was signed for more than 100,000 square feet of space in Charlotte in the fourth quarter. Charlotte-based Distribution Technology, which offers logistics, warehousing and transportation services, signed a lease for 104,000 square feet of space at 3550 Westinghouse Blvd. in southwest Charlotte.

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