The Charlotte industrial market is seeing significant tenant demand and investment activity at mid-year 2021 as the market begins to return to normalcy after the disruption during the early days of the pandemic.
Like many other Southeastern industrial markets, Charlotte saw a lag in activity through the second and third quarters of 2020. One year later, the impacts of the pandemic continue to burn off, creating an almost insatiable appetite for modern warehouse and distribution space.
Henry Lobb, Avison Young
Since the start of the year, the market has seen a strong increase in overall activity as local economies continue to open up, employment levels rebound and businesses move forward with decisions about space utilization. Tenants in the e-commerce, consumer goods, retail and light manufacturing sectors are particularly active.
While the market finished 2020 with nearly 5.3 million square feet of net absorption, a figure that outpaced 2019’s total of 2.7 million square feet and was on par with the nearly 5.4 million square feet absorbed in 2018, 2021 is expected to reach a net absorption for the calendar year that is equal or greater than 2020.
Many tenants expanding in or entering the market are taking mid- to large blocks of space, a sign that the market is maturing and is now seen as a more regional logistics hub. This activity, and ongoing demand in all size ranges, has led to a shortage of blocks of space larger than 150,000 square feet.
The market is also beginning to see a trend in larger bulk e-commerce related deals coming to the market in the 600,000-square-foot and larger range. Aside from Amazon, leases have been signed in 2021 by Best Buy (550,000 square feet), Home Depot (600,000 square feet), Tempur Sealy (200,000 square feet), MLILY (200,000 square feet) and FedEx ( 650,000 square feet), to name a few. There also is strong activity in the 1 million square feet and up range. There are two deals likely to be announced in the third quarter, both in the e-commerce/consumer goods category.
With the greater Charlotte MSA and greater Carolinas continuing to see strong population growth, the market is becoming a critical last-mile e-commerce location for Fortune 500 companies. Overall conditions should remain healthy for future bulk or shallow bay spec projects in the market due to strong economic and growth tailwinds attributed to Charlotte’s proximity to key East Coast transportation hubs.
Rents, prices increase
While there is north of 6 million square feet of new space in the pipeline in configurations that can accommodate larger size spaces, those buildings will not deliver until mid-2022. They are also impacted by higher development costs due to the pandemic and increased cost of steel and other building materials.
This environment is pushing rents higher and attracting a wider pool of investors to the market. At the end of 2020, Charlotte reached a new milestone of average base rent of $5.01 per square foot, which at mid-year has increased 4.7 percent year-to-date to $5.25 per square foot due to the demand for new space and limited supply. Given construction dynamics and market demand, rental rates are expected to increase in the short term.
While the majority of growth in the last 24 months has occurred in the Cabarrus County, Stateline and Airport/West submarkets, this year has seen a dramatic increase in absorption in the York County, I-77 North and Gastonia submarkets. The majority of this absorption has been due to the increase in demand, which has outpaced deliveries.
While absorption has been a tremendous bright spot in the market since the beginning of the year, capital allocation has rivaled or outpaced tenant demand. It’s no secret that capital is being reallocated from the retail and office sectors — and industrial is seen as the preferred sector for investors.
This trend is pushing cap rates below 4.5 percent for Class A product in Charlotte and is setting high-water marks across the board for owner-occupiers. Price per square foot is currently in the $85 to $100 range for modern, Class A distribution product.
Charlotte’s industrial sector is seeing unprecedented growth in leasing and investment, thanks to its business friendly climate, lower land costs and strategic position along major Southeast transportation and growth corridors.
This recent activity solidifies the market as a top contender to continue to build upon the growth and tailwinds the market has seen over the past three to five years. The market is poised to continue to be at the top of the list for investors and tenants looking for well-positioned real estate in the Southeast.
— By Henry Lobb, Principal, Avison Young. This article originally appeared in the June 2021 issue of Southeast Real Estate Business.