Charlotte’s Industrial Fundamentals Stay Strong in Face of New Supply Added
Charlotte’s industrial market continues to see strong momentum in early 2019, and with healthy rates of absorption and rental growth despite record levels of new development, it remains the preferred asset class in the Queen City among institutional investors.
Industrial absorption totaled 5.2 million square feet in 2018, according to JLL research, making it the fourth consecutive year that the market has absorbed at least 4 million square feet. The demand for new space is driven in part by the growth of the Carolinas: North and South Carolina both ranked in the top 10 nationally for population growth over the past year, according to the U.S. Census Bureau, and Charlotte is well-situated geographically for distribution facilities that can cover both states.
E-commerce, of course, has been another major driver of demand and development. During the fourth quarter, Amazon received construction permits for its fourth and largest distribution center in the Charlotte region, a 2.4-million-square-foot facility that will be located on 100 acres north of Charlotte Douglas International Airport. A separate 1.2 million-square-foot distribution facility for Amazon in nearby Kannapolis is expected to open this year.
Industrial development continues to migrate to Charlotte’s surrounding counties, where land is more readily available and users can still enjoy proximity to major interstates. At the end of 2018, the eastern counties led the way in industrial development with 1.6 million square feet of the region’s 4.6 million under construction. That submarket was followed by the South Carolina suburbs, which accounted for 1 million square feet of new construction at the end of the year.
The market’s average asking rate increased to $4.35 per square foot during the fourth quarter, a 16 percent jump from a year earlier. The Class A market has been the primary driver of rate growth as developers continue to add speculative projects to the construction pipeline. In the Westinghouse submarket, for example, where the average asking rent is $5.30 per square foot, EastGroup Properties is nearing completion of a new 55,000-square-foot speculative building and recently began construction on a 125,400-square-foot building at Steele Creek Commerce Park.
And Black Creek Group is preparing to start construction on 600,000 square feet of new industrial product located on 50 acres near the intersection of Westinghouse Boulevard and South Tryon Street. Last year, the Denver-based real estate investment manager announced that institutional investors advised by J.P. Morgan would invest $400 million of equity into its industrial projects.
At the end of the year, Charlotte’s industrial vacancy rate stood at 6.2 percent, up from 5.3 percent a year earlier. The increase is due to a flight to quality by large institutional tenants, resulting in several older buildings being vacated, as well as construction deliveries. The tightest submarkets, all with vacancy rates below 4 percent, are the central, north and Westinghouse areas in Mecklenburg County, along with the northern counties and South Carolina suburbs.
Of the 3.7 million square feet in new deliveries last year, the Westinghouse submarket accounted for 1.1 million square feet, or 30 percent. That included a 600,000-square-foot build-to-suit distribution facility for Staples on Westinghouse Boulevard. Developed by The Keith Corp., the facility was completed in the spring and then sold to Chicago-based GLP for $54 million.
In 2018, large institutions like GLP invested more than $1 billion in industrial real estate in Charlotte, and while buyers continue to scour the market for deals, a lack of for-sale inventory remains a challenge. A large new development opportunity has become available in Concord, however, where the owners of The Grounds at Concord have announced they will demolish the 3.5 million-square-foot former Philip Morris manufacturing facility, creating a greenfield site with proximity to major interstates and substantial utility infrastructure.
— By Brad Cherry, managing director at JLL. This article originally appeared in the March issue of Southeast Real Estate Business.