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Friday, October 5, 2007

Uptown vacancy on pace to historic low

Charlotte Business Journal - by Susan Stabley Staff writer

Center city's super snug office market is set to make history.

It's already the nation's tightest office market. And a big lease deal expected in the next few months will cut vacancy to 1.7% -- the third-lowest rate ever measured by CB Richard Ellis, which tracks office markets across the country.

CBRE's third-quarter report describes the 1.7% rate as "unprecedented."

The nation's largest commercial brokerage knows of only two other occasions from coast to coast when a lower vacancy was recorded: San Francisco's suburban office market in the first quarter of 2000 (0.3%) and Boston's central business district in the third quarter of 2000 (0.7 %). CBRE's available data goes back to 1985.

Uptown Charlotte has been on a record-setting pace for almost a year. The new CBRE report found its vacancy rate dropped to 2.6% in this year's third quarter from a national low of 3.1% in the second quarter.

"I really think Charlotte in general, and the CBD specifically, is entering it's golden era," says Steve Gassaway, managing director for CBRE's Charlotte office. "Uptown is the place people want to be for arts, entertainment, sports, and dining; and to live and work."

The vacancy rate is expected to further tighten when The Shaw Group Inc., an engineering company, takes the last available big block of space off the market, a deal slated to be signed by early next year. Shaw is negotiating for 120,000 square feet in the 121 W. Trade St. tower.

The market has been driven to historic lows by a lack of development and steady bank expansion. The latter has fueled growth among a range of tenants such as law and accounting firms.

The impact of the tight market can be seen on several fronts. Lease rates are climbing. Some tenants that would typically choose space in the center city are being forced into the suburbs. And office construction is on the march.

"I don't see this stopping," CBRE's Ryan Clutter says of the vibrant economy and its impact on commercial real estate. Clutter, executive vice president of investment properties at the real estate firm's Charlotte office, serves on the front lines of the capital markets, helping clients buy and sell multimillion-dollar buildings.

He says the number of investors interested in inking deals in Charlotte has doubled in the past 12 to 18 months.

"We've had a significant increase in interest, from many who were never interested in Charlotte before," Clutter says.

Part of the attraction for investors: He expects lease rates to spike 10% to 15% over the next year.

Four uptown office projects are under construction, plus a 300,000-square-foot tower planned for the Catalyst development, a joint venture between Atlanta-based Novare Group and Trinity Partners.

Clutter says those towers are targeting lease rates per square foot in the low- to mid-$30 range. That should drive rates up for all other center-city buildings. The average quoted lease rates for Class-A space in the central business district is $24.96. For the entire Charlotte market, it's $20.91.

When it comes to Class-A office buildings, space options are few and far between uptown, with only 1.5% vacant among the 10.5 million-square-feet considered rentable, according to CBRE.

And don't expect the new buildings to flood the market with available inventory.

Developers of the EpiCentre at College and Trade streets will deliver 140,000 square feet next year. Three other towers under construction -- the Wachovia Corporate Center, a Bank of America Corp. tower on College Street and the NASCAR Plaza adjacent to the NASCAR Hall of Fame -- will deliver a total of 2.49 million square feet in 2009.

CBRE says 61% of that space is off the market, with the banks and other large tenants already committed to leases.

Louis Stephens of Jones Lang LaSalle and formerly of Corporate Realty Advisors says the market isn't quite as crowded as it appears.

The banks, for example, are holding space in reserve.

"I don't see a major problem," he says, but he adds that a tenant seeking more than 20,000 square feet will need a broker who knows all the options.

Competition with the suburbs could also hold rates in check.

"Absolutely, it's a landlord's market," Stephens says. "But landlords are very aware of a softening in the suburbs."

Overall, the Charlotte office market boasts a vacancy rate of 11.6%. That's the lowest locally since the 11.3% rate in the third quarter of 2001.

But some submarkets are struggling.

Crownpoint/Matthews has a 43.8% vacancy rate, for example. To the east, the recent loss of a 43,806-square-foot Internal Revenue Service office at East Park added to that submarket's 23.1% vacancy rate.

Other areas have benefitted, including Midtown, where vacancy fell to 6.8%. That can be attributed in part to FairPoint Communications Inc. moving into 14,000 square feet at 521 E. Morehead St.

The biggest winner from uptown's tight market is SouthPark, where vacancy rates have hit 12.9%. CBRE analysts say that rate could drop to single-digits by the end of the year.

"The CBD will still be tight over the next five years," says Charles Jonas of Trinity Partners. "The typical businesses in the downtown market are forced to find alternatives. The closest thing is SouthPark. It's got the cachet."