Development

HB2 fallout could hurt Charlotte’s market for new office space

Construction continues on the new office building at 615 S. College Street in uptown Charlotte.
Construction continues on the new office building at 615 S. College Street in uptown Charlotte. tsumlin@charlotteobserver.com

For the developers planning to open 1.5 million square feet of new office space in Charlotte within the next year or so, the timing of the controversy over House Bill 2 couldn’t be much worse.

New office towers are rising across the city, from Ballantyne to uptown, and almost all of them are being built as speculative projects, meaning they don’t have an anchor tenant yet. The new law has put Charlotte and North Carolina in the crosshairs of a national firestorm at exactly the time developers hoped to be luring new tenants and making splashy announcements about the first occupants of their new office towers.

“The timing on this is pretty sour,” said Maxwell Hanks of Spectrum Properties, which is developing a 25-story office tower at 300 South Tryon Street. They have an anchor tenant, Babson Capital, but still have about half the building left to lease. It opens in about a year.

Developers are particularly keen to land new tenants from outside the market, companies that want to open a Charlotte office or relocate significant operations to the city. That helps grow the overall office market more rapidly and fills new space without simply shuffling existing companies already in Charlotte between office space.

Perception is reality on the national stage.

Maxwell Hanks, Spectrum Properties.

But it’s those companies most likely to be put off by HB2, a state law passed in March that nullified a Charlotte ordinance which would have expanded nondiscrimination protections for LGBT individuals. Last month, the Charlotte Chamber said inbound inquiries about new economic development were down 58 percent since lawmakers passed the bill in March, and client visits down 69 percent from the same time last year.

“You really want as much demand from out of the market as possible,” said Hanks. He said he’s still seeing “pretty good” interest from prospective tenants, but is concerned some companies won’t relocate to Charlotte. “I think HB2 really hampers their ability to do that. Intuitively and logically, it’s got to hurt...Perception is reality on the national stage.”

No major leases have been announced yet for any of the speculative buildings planned or under construction.

In the most dramatic protest by a company so far, PayPal canceled a planned 400-employee office in Charlotte just weeks after the project was first announced. They had planned to lease office space in University City.

Now, because of the bad publicity, developers worry that they’re being crossed off potential clients’ lists before they even know they were under consideration.

“We don’t know if there are folks that would be calling us from outside the market if we didn’t have HB2,” said Mike Harrell of Beacon Partners. They’re building a seven-story, speculative office building in Dilworth that will open next year. “Everybody wants as many people coming to lease headquarters space as possible. I don’t think there’s a lot of those deals out there now. It (HB2) could be why we’re not seeing a lot of out-of-town prospects.”

Harrell said the new space coming online in the Charlotte market will get leased, even if it takes a little longer than anticipated. But if the issue drags on for months or even years, making it less attractive for companies to relocate to Charlotte, the next round of office development might be sidelined.

Still, developers are optimistic in the long term. Charlotte’s economy remains strong, the city is adding jobs and they’re confident state lawmakers and city leaders will reach a compromise – even if they’re not sure how. And last year, the vacancy rate for Class A office space dropped to 12.6 percent, according to Integra Realty Resources, the lowest it’s been in Charlotte since 2008.

“The big picture is still really solid,” said Hanks.

John Ball, senior leasing agent with Trinity Partners, is working to lease 615 South College, a 19-story office tower under construction. He said that while it would be ideal to land big tenants from outside the market, many Charlotte companies are growing and can also take more space.

“In a perfect world, yes,” he said. “We feel confident we can lease it to existing companies and growing companies in the market.”

For now, he said the controversy puts people pitching out-of-town companies at a disadvantage to office projects in other cities.

“Anytime you have to explain something your competition doesn’t,” said Ball, “that’s not a good thing.”

Brian Leary of Crescent Communities said the perception problem extends beyond office space. He said he was recently talking with brokers about marketing a planned new warehouse and industrial complex just over the state line in South Carolina. One of the first things they said the project has going for it: Since it’s not in North Carolina, there’s no HB2 issue to deal with when talking to possible tenants.

“It’s something people want to avoid,” said Leary. The reason, he said, is potential negative backlash and criticism, not anything actually negative with the state’s fundamentals. “If they could sign a lease and it never get out, that would be one story.”

He said the issue is even coming up now when he talks with potential investors.

“It’s the real deal,” said Leary. “When I talk to potential equity partners, they say listen, I’ve got 49 other states that aren’t causing heartburn with my funders.”

Still, Leary is hopeful that the controversy will fade after a deal is reached. He said Crescent is still talking to potential tenants for Tryon Place, a planned office tower at Stonewall and Tryon streets the company hopes to start work on later this year.

“I do believe once this gets resolved, the hangover will be fairly short,” said Leary. “However, the longer you go the greater the risk of the cure harming the patient.”

Ely Portillo: 704-358-5041, @ESPortillo

What’s hitting the market

Here’s a look at the major office buildings under construction or planned.

▪ 300 South Tryon: This 25-story office tower is anchored by Babson Capital, and has about 370,000 square feet left to lease. Planned opening: June 2017.

▪ 615 South College: A 19-story, 370,000 square-foot office tower developed by Portman Holdings. Planned opening: Early 2017.

▪ 500 East Morehead: A 7-story, 180,000 square-foot office tower developed by Beacon Partners. Planned opening: Early 2017.

▪ The Brigham Building, Ballantyne Corporate Park: A 10-story, 287,000 square-foot building developed by Bissell. Planned opening: Late 2016.

▪ Capitol Towers, SouthPark: A 10-story, 240,000 square-foot office tower, the second of two on the site. Planned opening: Early 2017.

▪ Planned future development: Crescent Communities plans to start work later this year on Tryon Place, a mixed-use development at Stonewall and Tryon streets that will include 700,000 square feet of office space.

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