Friday, October 17, 2014

Rising demand pushing Charlotte office rental rates to post-recession highs

Rental rates for office space in Charlotte have risen to their highest point in more than a decade, according to new third quarter figures from real estate firm JLL.

With the economy rebounding and employment gains accelerating, average direct asking rents have risen to $22.32 per square foot, according to JLL. The company said office rents haven't been that high in Charlotte since it started tracking the figure in 2000. (The figures cover Class A and Class B office space over 15,000 square feet).

What's pushing prices up? Simple supply and demand, says Charlotte broker Chase Monroe, JLL's market director for the Carolinas. "When the supply decreases, the demand increases, which allows landlords to increase rental rates," he said. According to the company's third quarter report on the Charlotte office market, there's just one block of office space greater than 200,000 square feet available. That means for companies looking to expand, it's becoming cost-effective to just build new rather than rent existing space, Monroe said.

He pointed to recent examples: fast-growing software firm AvidXchange, which announced last month that it is building a four-story, 115,000-square-foot headquarters building at the N.C. Music Factory; and Bubble Wrap maker Sealed Air, which announced this summer that it is moving its headquarters from New Jersey to Charlotte and spending at least $58 million on a new building somewhere in the city.

Charlotte Center City Partners CEO Michael Smith has been banging the drum for a while now about the lack of large blocks of available office space in the city. JLL's latest figures seem to support that contention, putting the Charlotte market's total vacancy rate at 12.3 percent -- the lowest point in at least nine years. It could mean Charlotte's a tough sell for companies looking to relocate quickly.

"Companies that are looking at Charlotte will sometimes cross Charlotte off the map because there isn't adequate space available for them to relocate to now," Monroe said. "Those are the ones that are looking to do something in 12 months. The ones that are looking at a little bit longer term, and Sealed Air is a good example of that, they will look at coming in and building a facility."

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, build-to-suit is becoming a more viable option for companies. That's at least in part because developers can erect buildings faster now than they could a decade or so ago. "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."

We've seen more developers announcing plans for new office towers. There's three on the drawing board for South Tryon Street alone (1000 South Tryon, 300 South Tryon and Tryon Place, at Stonewall Street). Nearby, Portman Holdings wants to build a 15-story tower on top of the Westin Hotel's parking garage. And in SouthPark, Lincoln Harris has its twin 10-story Capitol Towers project well underway.  (Lincoln Harris was one of the few developers to start construction without an anchor tenant lined up. All of the others say they won't move dirt until they get that main tenant on board).

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."




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