Charlotte Sees New Construction, Renovations of Second-Generation Office Space

by John Nelson

It’s impossible to ignore the ongoing boom of new commercial real estate development in downtown Charlotte. Get a glimpse of the skyline from the Interstate 277 loop and you can see the already-present structures standing tall among the handful of cranes and half-completed construction filling in the gaps. More than a dozen projects are currently underway in Center City, with more expected during the next 12 to 18 months.

New and Improved
Recently opened towers, like 300 South Tryon and 615 South College, have attracted major corporate relocations to downtown CBD, including Regions Bank and Sitehands. Ally Bank just announced its 400,000-square foot move to Ally Charlotte Center, and Crescent Communities just kicked off development of a new tower in the burgeoning Stonewall corridor for a 2020 completion date.

Ann-Fleming Powell, Trinity Partners

Ann-Fleming Powell, Trinity Partners

Companies seeking the top-of-market space in the city’s newest downtown office developments want to have a presence in the heart of Charlotte’s energy. There, they can recruit elite talent and build their brand. Of course, that presence comes with the highest rental rates and parking costs, in addition to elevated tenant-buildout budgets in a market where construction costs continue to rise.

At the other end of the spectrum, some are finding opportunity in established, older Charlotte buildings. Savvy investors have taken advantage of this end of the market, acquiring existing buildings and adding value through meaningful improvements. Recent transactions involving older office CBD buildings include The Arden Group’s $148.5 million purchase of the BB&T Center in June and the Cameron Brown building trade to the Fallon Co. in July for $24.5 million. Both buildings will undergo extensive common-area renovations and rebranding as new ownership looks to remain competitive through the addition of modern tenant amenities and design.

Asana’s recent purchases of an older downtown building in downtown’s Stonewall corridor and the Design Center of the Carolinas include major improvements for both mixed-use developments. DRA Advisors and Trinity Capital Advisors purchased 400 South Tryon in 2015 and recently completed close to $20 million in renovations, including a new lobby, fitness center, pre-built suites and new retail corridor along Church Street, fully leased to popular fast-casual restaurant options. Other owners of existing buildings such as Rabina at Charlotte Plaza are following suit.

Landlord’s Market
The success and popularity of the city’s commercial real estate market continues to support and favor landlords. Tenants, whether seeking brand new or second-generation space, must work harder to find opportunities and leverage in the market. As the city’s rental rates continue to rise steadily, with a clear $4 to $5 per square foot difference between the old and the new, that opportunity may lie in the city’s older buildings. Landlords are eager to show the market the added value their building renovations and improvements provide.

What can office tenants do to find leverage in a market that favors landlords? Giving themselves plenty of time (at least 12 months before a lease expiration or renewal notice deadline) and location flexibility will lead to more options, ultimately putting them in a better negotiating position. Additional factors like simple, uncomplicated office build-outs, solid credit and larger footprints create additional leverage.

The city’s sustained flight-to-quality will continue to support development and improvement among second-generation space as owners invest in capital improvements to keep up with market asking rates. Older buildings that maintain the status quo, with no planned improvements, will be forced to stick with below-market asking rates, creating more opportunity for tenants to find value in unimproved second-generation space.

— By Ann-Fleming Powell, Director of Office Tenant Representation of Trinity Partners. This article was originally published in the November 2017 issue of Southeast Real Estate Business.

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