Population Growth, Affordability Push Charlotte Office Market to New HeightsIt’s no secret that the Sunbelt states have been, and continue to be, the front-runners for corporations looking to relocate to cities with a much lower cost of doing business. With each state taking different approaches, North Carolina does not often offer the relocation incentives that can be found in states such as South Carolina and Texas. Instead, North Carolina favors a system that offers less up-front cash incentives, but tries to offset that with a tax structure and business-friendly climate in an effort to compete for the large, attractive relocations. Because of this, the catalyst for growth in Charlotte has only been moderately associated with the recruitment of out-of-market users looking to relocate headquarters to more affordable and attractive markets. In large part, Charlotte’s growth has been driven by organic growth of existing businesses. In fact, more than 70 percent of the positive absorption in the central business district (CBD) since 2010 has occurred through organic growth.
This expansion of existing business has provided for employment growth conditions that work hand-in-hand with the rapidly swelling population. In between new-to-market relocations that provide headline-grabbing bursts of employment, the diverse and impressive growth of Charlotte’s existing companies has attracted talent and allowed for a fluid employment market. At close to 40 percent, Charlotte’s population growth since 2000 has been the second-fastest in the nation according to the U.S. Census Bureau. Furthermore, ULI’s Emerging Trends in Real Estate report projects that Charlotte will have the fastest growing Millennial population in the Southeast over the next five years and the second-fastest nationally, with only Las Vegas being faster.
Shifting Investor Profile
With this attractive Millennial population growth within the urban core — which is one of the most often-cited criteria for investors analyzing the potential of secondary markets — Charlotte stands out as an “opportunity city” for real estate investors of all types. As institutional capital is being forced out of top-tier cities because of cap rate compression causing yield potentials to fall, Charlotte has become a target market.
Interestingly, the investor profile in Charlotte has been varied, from international investment such as EpicUK purchasing the Ally Center (395,000 square feet) to JFR Global Investments’ purchase of Charlotte Plaza (645,000 square feet). EpicUK, a London-based investment firm, purchased the Ally Center to add a highly stabilized investment to their portfolio. On the other hand, JFR Global purchased Charlotte Plaza after seeing greater opportunity for yield than they have been able to find in top-tier markets.
Vacancy within Charlotte’s trophy and Class A CBD assets is sub 5 percent, with upper elevator bank space being virtually non-existent. Across the entire market, Charlotte’s Class A assets continue to garner the most leasing, while also being the catalyst for growth in rental rates.
Furthermore, despite investor interest in the urban core, Charlotte’s suburban submarkets have generated the bulk of absorption post-recession.
Charlotte’s comparative cost of doing business is never more apparent than within suburban submarkets like the Airport and University submarkets. Both have seen rapid recovery over the last 24 months through active ownership and substantial growth in back office operations. Both of these submarkets offer lower cost and higher parking ratio assets, which function well for such back office and call center operations. Equally as important, SouthPark and Highway 51 / Ballantyne submarkets (due south of the CBD) have generated strong leasing in the wake of the recession, as they offer a live-work-play dynamic in a more accessible suburban environment.
Since its beginning in 1997, Ballantyne has been one of the fastest growing suburban destinations in the country. With nearly 4.5 million square feet built (nearly all speculatively), it is likely Ballantyne will be the next to announce another much-anticipated speculative development. Ballantyne and SouthPark have also been able to drive Class A asking rents to rival CBD levels. For that reason, these two markets were the first to see speculative development in the post-recession era. First, Ballantyne built two buildings in 2012, which were occupied by MetLife’s Retail Division headquarters and now SouthPark has seen the delivery of Sharon Square while Capitol Towers- South Office Tower nears completion.
Developments on the Way
Across the board, rental rates have been growing for the last four years, but never more than what we have seen in the last 12 months. Until recently, a $30.00 per-square-foot glass ceiling had existed in Charlotte’s office leasing market. Now, new developments are garnering pricing approaching the mid-$30s per square foot and existing assets in the suburbs and CBD are executing deals a full 10 to 15 percent higher than only 18 months prior. These numbers were the final piece to launch Charlotte’s development cycle.
With vacancy rates in the top 10 in the country, Charlotte’s relative lack of new development was stymying the growth potential for the office market. Fortunately, this excess demand gave way to rapidly rising rental rates that finally met the threshold needed to justify new development. Now developments are underway in Charlotte’s CBD, Midtown and SouthPark submarkets with several more on the short-term horizon.
— By Barry Fabyan, Executive Vice President and Co-Lead of Agency Leasing, JLL. This article originally appeared in the June 2015 issue of Southeast Real Estate Business.