Tightening vacancy rates have helped push asking prices for Charlotte office space to their highest level in more than a decade, new figures show.
The scarcity of space, fueled in part by a slowdown in post-recession office construction, is worrying business leaders who fear Charlotte might lose out on new jobs if relocating businesses can’t find enough room.
“Companies … will sometimes cross Charlotte off the map because there isn’t adequate space available for them to relocate to now,” said Charlotte broker Chase Monroe, real estate firm JLL’s market director for the Carolinas.
Average direct asking rents have risen to $22.32 per square foot, according to a third-quarter Charlotte market report by JLL, formerly known as Jones Lang LaSalle. That’s well above what they were in 2008, before the recession took hold locally.
JLL said Charlotte office rents haven’t been as high as they are since the firm started tracking the figures in 2000. (The figures cover the priciest office space category – Class A – as well as Class B office space over 15,000 square feet).
The report put the Charlotte market’s total office vacancy rate at 12.3 percent – the lowest point in at least nine years. In 2010, when recession-era joblessness spiked locally, the vacancy rate was 19.2 percent, according to JLL.
“When the supply decreases, the demand increases, which allows landlords to increase rental rates,” Monroe said.
Also a factor: The price of newly built Class A space, which is being pushed up by rising costs for steel, cement and other construction materials.
Since the late 1980s, Charlotte’s uptown has traditionally added more than 400,000 square feet of new office space each year, while companies absorbed a bit less than that, according to Andrew Jenkins, managing partner in the Karnes research firm’s Charlotte office.
But since 2010, no new office space has been built uptown.
Most of the construction cranes popping up around uptown Charlotte recently have been erected to build apartment complexes. But that could soon change.
The tight supply and rising demand have prompted a growing number of office developers to announce buildings this year.
Three office towers are on the drawing board for South Tryon Street alone – Trinity Partners’ 1000 South Tryon; 300 South Tryon, developed by Cornerstone Real Estate Advisers and Spectrum Properties; and Crescent Communities’ Tryon Place, at Tryon and Stonewall streets. Nearby, Portman Holdings wants to build a 15-story office tower on top of the Westin hotel’s parking garage.
But even with the economy rebounding, developers stung by the recession remain cautious about launching major office towers. Most won’t start construction without having the building’s major tenant signed on.
Among the towers proposed within the Interstate 277 loop, 300 South Tryon is the only one with an anchor tenant – Babson Capital Management – and a construction schedule in place. Developers have said they plan to start construction this fall, and complete the 25-story building in 2017.
Charlotte Center City Partners CEO Michael Smith said the recently announced projects would add about 2 million square feet of office space to the nearly 23 million square feet of existing space uptown.
“These office projects bring needed supply,” he said, “making it possible for us to recruit major employers to Charlotte.”
But those projects are several years from completion, at the earliest. It could mean Charlotte’s a tough sell for companies looking to relocate within a year, Monroe said.
In two recent high-profile examples, companies looking to expand have opted to construct new buildings themselves while renting a smaller space in the meantime:
• Fast-growing Charlotte software firmAvidXchange
announced last month that it is building a four-story, 115,000-square-foot headquarters building at the N.C. Music Factory. The company said it will lease 33,000 square feet in an existing building nearby while its new headquarters is constructed.
• Bubble Wrap makerSealed Air
announced over the summer that it is moving its headquarters from New Jersey to Charlotte and spending at least $58 million on a new building in the city. To fill its local space needs while it works on its new building, Sealed Air signed a lease early this month for 70,000 square feet in the Forest Park office complex in southwest Charlotte.
John Culbertson of Cardinal Real Estate Partners, one of the brokers involved in that deal, said even though construction costs are rising, building is becoming a more viable option for companies in part because developers can construct buildings faster now than they could a decade or so ago.
That, combined with the space crunch, could mean more new office buildings.
“The office developers are looking hard at pricing right now,” he said, “and dusting off plans they probably haven’t looked at for a decade.”
So how long will the office space crunch last?
“For the next two years, for sure,” Monroe said, “until the new product is delivered to the market – assuming that we’re going to continue to grow at the rates we’ve been continuing to grow over the last couple of years.”