New Industrial Construction is Easing the Supply Squeeze in Charlotte

by John Nelson

In recent years, the fundamentals in Charlotte’s industrial real estate market have continued to improve. Overall, the market can be characterized by an increase in tenant activity and the emergence of new submarkets more active on the development front than in the past.

Tenant growth can be attributed to organic growth from users expanding, velocity of new deals, as well as emerging submarkets within the market. Charlotte’s central location near the transportation arteries of I-77 and I-85 continues to make the city’s industrial space very attractive to logistics and distribution companies. Charlotte is growing by approximately 20,000 residents per year, according to U.S. Census Bureau data. The population growth, coupled with the trend of brick-and-mortar retailers transitioning portions of their business to e-commerce, makes for a positive outlook on Charlotte’s industrial fundamentals.

Tim Robertson, Beacon Partners

Tim Robertson, Beacon Partners

The strongest tenant activity is in the 25,000- to 75,000-square-foot range, with tenants looking to upgrade the quality and functionality of their space. Beginning in fourth-quarter 2015 and continuing into first-quarter 2016, there was noticeable activity among tenants relocating from owner-occupied facilities to leased spaces. This trend has been driven by a limited supply of options for purchase, historically high construction prices and a steady economy. Furthermore, the consensus among brokers is that a larger number of smaller tenants are relocating from single-tenant buildings into more modern, multi-tenant facilities.

As a result of tenant activity and demand, there has been a decreasing supply of available buildings, which despite escalating construction pricing and development constraints, has led to an increase of new product from developers on a speculative basis notably in emerging submarkets.

Hot Submarkets
As 2016 progresses, a variety of factors indicate that a geographically driven surge in new construction promises to impact the dynamics of vacancies and expand leasing opportunities to grow the market. Charlotte’s Southwest (Westinghouse Boulevard), North (North 1-77) and Central (interchange of I-85 and I-77) submarkets have long been the largest industrial submarkets with the highest occupancy rates. This trend is tied to two factors: an existing supply of product in sought-after locations and increased growth within the Charlotte region along the I-85 distribution corridor.

But as second-quarter 2016 progresses, a new geographic reality begins to gain more attention in commercial real estate circles. A trend is emerging as the market continues to improve, and there is a scarcity in land in the traditionally strong Southwest, North and Central submarkets. This scarcity has driven the Charlotte industrial market to expand into the Northeast and Airport West submarkets. While neither of these submarkets have historically been considered established industrial territories, they still provide well-located sites with good proximity to the labor force and the interstates, two of the biggest drivers of industrial development.

In the Northeast submarket, more than 1.1 million square feet of space has been completed within the last 18 months, and another 562,000 square feet is currently under construction. The pipeline is poised to accommodate another 1.75 million square feet, which will lead to future growth. The evolution of the Airport West submarket is driven by similar land constraints as the Southwest submarket as national developers and investors continue to deliver new speculative projects. Approximately 800,000 square feet has been delivered or is under construction within the last 18 months, and another 750,000 square feet is in the pipeline in established parks and sites.
Going forward, the market will remain healthy — driven by new construction in an ever-expanding market, allowing Charlotte to continue to become a key regional distribution hub along I-85, through the Carolinas and into the Mid-Atlantic.

— By Tim Robertson, Director of Industrial Leasing, Beacon Partners. This article originally appeared in the June 2016 issue of Southeast Real Estate Business.

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