Big spec office delivery pushes Charlotte to record vacancy rate

Charlotte is one of those Sun Belt cities that has been anywhere from resistant to immune from trends that have hit other markets across the nation, from the hollowing out of brick-and-mortar retail to population losses.

Not so with the nationwide trend of rugged conditions for office markets, a segment that recently set a record high for vacancies in the otherwise fast-growing city, the Charlotte Business Journal reported. Office vacancies in the Queen City reached 24.7 percent in the second quarter, according to Cushman & Wakefield, up from a range of 19 percent to 21 percent over the past year.

The numbers are setting off alarm bells on commercial development, where weak demand for office space and higher interest rates are combining to wreak havoc.

“The last time it came close was after the great financial crisis in 2008,” JP Price, Cushman & Wakefield’s senior research analyst for the Carolinas, told the outlet.

Price attributed the second-quarter increase in vacancies to the delivery of the 370,000 square foot office developed on spec by Florida-based Stiles Corporation and San Francisco-based Shorenstein. The building is at 110 East Boulevard in the city’s South End. 

“Pre-leasing has really dropped off in this market, so that was not unexpected,” he said. 

The analyst also noted a familiar trend around the nation taking hold in Charlotte, with vacancies concentrated in older buildings, in submarkets including the uptown and Ballantyne districts as well as the airport area.

Uptown stood out with a drop in its vacancy rate in the second quarter despite the larger trend, a turn owed largely to Ameriprise Financial taking 53,000 square feet at 300 South Tryon, and Truist Insurance Holdings signing on for 70,000 square feet at 550 South Boulevard.

Those deals, along with a conversion of the Johnson Building into a hotel and steep reductions in the pipeline of office developments helped notch the decline in vacancies in the city center.

New leasing in the second quarter totaled 400,000 square feet, with the bulk of it in suburban markets.

Price said weak demand and higher interest rates could combine to choke off Charlotte’s pipeline of office development altogether.

“If that’s happened before, it’s been a long time, but we’re keen on seeing what the next development is; who’s going to kickstart and lead the next project,” Price told the outlet. 

Chicago-based Riverside Investment & Development Company and Crescent Communities in partnership with Nuveen Real Estate have long-awaited mixed-use projects in the pipeline, but they appear to be waiting out the market when it comes to their office components.

“Riverside and Crescent are waiting for some pre-leasing to happen before they kick off,” Price said. “Those two are poised and well-located to capture some demand in leasing being in that buffer zone of South End and uptown.”

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