Strong Tenant Demand Propels New Office Developments Underway in Charlotte
With 3.2 million square feet of new office space under construction, much of it in the city’s urban core, Charlotte’s skyline is in the midst of a significant transformation. Due to strong preleasing activity and solid economic underpinnings, however, the city’s office vacancy rate is projected to remain stable over the coming months as many of those projects deliver.
Approximately 60 percent of Charlotte’s construction pipeline has been preleased, according to JLL research, and 2.3 million is concentrated in the city’s central business district. In Uptown Charlotte, the 33-story Legacy Union office tower recently topped out, signaling the end of vertical construction. The 850,000-square-foot development by Lincoln Harris is scheduled to deliver early next year and will be anchored by Bank of America, which has signed a lease for 550,000 square feet.
Lincoln Harris recently revealed plans for a second office tower with 388,835 square feet of office space and 22,763 square feet of retail space at the high-profile site, which was once home to The Charlotte Observer.
Across the street from Legacy Union, construction is also underway on Ally Charlotte Center, a 26-story, 742,000-square-foot office tower by Crescent Communities. Last year Ally Financial announced that it had leased 400,000 square feet at the project, which will include ground-floor retail space and a 350-room hotel. Ally Charlotte Center is 83 percent preleased and is scheduled for completion in 2021.
Just outside of Uptown in the South End neighborhood, four significant projects are also moving closer to completion: The RailYard, a 300,000-square-foot office development by Beacon Partners, is expected to deliver early next year, and Dimensional Place, a 282,000-square-foot project by Dimensional Fund Advisors and Cousins Properties, is expected to be complete in December. Dimensional Place is a build-to-suit project for Dimensional Fund Advisors and will serve as the East Coast regional headquarters for the investment firm.
Nearby, The Refinery, a 109,060-square-foot office building with ground-floor retail space developed by Northridge Capital and Insite Properties, and 300 West Summit, a three-story, 64,000-square-foot office building by development firm Stiles, both topped out recently. Those two projects are both scheduled to deliver by January.
The new projects have been met with healthy demand. The RailYard has already leased more than 240,000 square feet to tenants including Allstate, Ernst & Young and WeWork. Another coworking company, Serendipity Labs, has leased the top floor (22,694 square feet) of The Refinery for its first Charlotte location, which is expected to open in early 2019. Coworking operators continue to make their mark as a new demand driver for office space. Of the 630,000 square feet of coworking space added in Charlotte since 2010, more than 400,000 square feet has been leased in the past two years, including 217,000 square feet so far in 2018.
At the end of the third quarter, Charlotte’s unemployment rate stood at 3.8 percent, a near record low that is further exacerbating the war for talent among the region’s employers. Now more than ever, Charlotte companies are looking for ways to gain an edge in recruiting and retaining top talent. From a real estate perspective, that means an active, engaging workplace that allows for a change of pace and opportunities to interact with colleagues in a different setting.
As a result, developers are increasingly looking for amenity-rich, mixed-use environments or neighborhoods such as South End, which emerged as ground zero for the multifamily development boom after the Great Recession. The neighborhood boasts walkability, access to Charlotte’s light-rail line and a wealth of popular breweries, restaurants and retail options. South End has historically been one of Charlotte’s tightest submarkets for Class A office space and it will remain so if the pace of preleasing activity continues at these new developments.
With average Class A office rents at an all-time high of $31.19 per square foot and total vacancy holding steady at 12.7 percent at the end of the third quarter, office investment sales continue to gain momentum, with multiple Class A buildings trading hands. Since January, office sales in Charlotte have totaled $873 million, including the record-setting sale of the 615 South College office tower for $222 million, or approximately $590 per square foot.
During the third quarter, noteworthy deals included the $88.5 million sale of 500 East Morehead, a new, Class A office project in midtown Charlotte developed by Beacon Partners. Both 615 South College and 500 East Morehead were completed in 2017, illustrating the demand among investors for first-generation office product.
With its strong market fundamentals and high rate of growth, 2018 is shaping up to be a banner year for office investment sales, and Charlotte will continue to attract increased attention from institutional and foreign investors seeking opportunities outside of the high-priced traditional gateway markets.
Chase Monroe is the Carolinas market director for JLL. This article originally appeared in the November issue of Southeast Real Estate Business.