Speculate on a spec

[rockhilljames]

OK, so we're seeing all kinds of condo activity that is going to dramatically reshape our skyline. We're also seeing the next major office project since Hearst come online with Wachovia's new project.

So, while clearly we've gone through a change in how high-rise residential developers view Charlotte, outside of BofA and Wachovia it seems that no one is building office towers. We keep waiting for Duke Energy to announce a project, but I'm not sure that's going to happen now.

My question to you is, do you think that Charlotte will ever see a series of speculative office tower developments similar to what goes on in other cities (Atlanta comes to mind)? As far as I can remember, the Carillion is the last spec office tower built in Charlotte. Cornerstone and 2 Corporate Center were to be, but never got built (ironically due to the banks not signing on as tenants).

Although I am certainly not in the development field, Charlotte's low vacancy rate would seem to me to be a positive indicator that the market would support new Class A office space. Do you think it will take an outside developer to become interested in Charlotte's market to get the ball rolling? Also, do you think the growing residential boom will actually help speculative office space based on the available work force or attractiveness of relocating to downtown? (wouldn't that be a switch?).

Thoughts?

[turbocraig]

I'd have to say that a downtown spec tower(s) would make all kinda sense. I work in Ballantyne and the Bissell family is throwing up spec buildings constantly (they're working on twin buildings now with plans for a third to break ground soon). They build'em spec and by the time they're done, they're fully leased. One would think a developer downtown would take a lesson... Granted, not all companies prefer downtown to the burbs, but c'mon... 6% vacancy is just ridiculous.

[DigitalSky]

Yes, I think within the next year we can expect a spec office tower - uptown is in dire need of office space, even with 4 Wach coming we are still short.

[rockhilljames]

The question would be, which developer would take on the project? Local developers have, in the past, shied away from downtown office spec buildings.

I wonder if it will take an outside developer like Novare to get the ball rolling.

[atlrvr]

I think that most spec office space on the horizon will be in true mixed-use highrises. I think that 300 S. Tryon will have about 200,000-300,000 sq. ft. of office space and will be built without an anchor tenant.

I see Novare partnering with an office developer at the 222 S. Church site and doing condos over office there as well.

The most likely spec office-only tower would be Portman Plaza, but I just don't see it happening as such. Faison could do one up on Levine's land, but I don't see that happening either.

[rockhilljames]

I acutally think the Levine property makes perfect sense for an office tower or two. I'd love to see more office development away from Tryon to stretch the skyline even more.

Of course, we may still see the office tower components for the Hall of Fame and/or Westin projects as well, although I know the last time it was mentioned the Westin tower was thought to be headed towards condos.

There certainly is enough open land around the BellSouth and Park Tower plots for some significant development.

[monsoon]

How much of the downtown office space is used by BofA, Wachovia, and Duke? While the downtown vacancy rate is 6% I think the real issue with building a speculative tower is what one of these 3 might do to cut costs, out source, etc etc. If Wachovia, for example, decided to shift 5000 people to Harris Blvd, or even more interesting move the jobs to its India subsidary, then all of a sudden that is a lot of office space that gets dumped onto the market. While it may or may not happen, I think the fact that so much office space is used by just 3 corporations, and there is no guarantee on what they will do, hurts any prospects for an outside party to come in and build a spec tower.

And there is a lot of other Class A office space on the market in Charlotte and more coming online everyday. For example, the Meridian complex (aka old IBM complex) is being rennovated into hundreds of thousands of sq ft of this type of space. In the last couple of years, Duke Energy re-located a subsidary out there, and Hewitt Corporation has moved more than a 1000 people there, that formerally were in the Trans america building. Strayer University went there instead of downtown. And so forth.

Then there is the issue of going mobile. A lot of corporations are offering this up to employees as a benefit. Have a laptop and phone and you can work anywhere, and it reduces the cost to the corporation as well as rent on these items is far far less than paying for office space. I think you will see more of the major corporations head down this path.

The only way a new tower will happen is if there is someone already ready to rent most of it.

[turbocraig]

And there is a lot of other Class A office space on the market in Charlotte and more coming online everyday. For example, the Meridian complex (aka old IBM complex) is being rennovated into hundreds of thousands of sq ft of this type of space.

I do see what you're saying, but the fact that Class A space is going up all over town (with the exception of downtown) certainly isn't going to help any company wanting space right now, instead of 3 years from now. They really have no choice but to locate to places like Meridian, Ballantyne, Arrowood, etc. I wonder if Hewitt moved partly because their space needs for 1000 people just wasn't able to be accomodated downtown.

It'd be nice if someone bit the bullet and announced a spec tower (kinda like Furman did with the residential craze) and begat another round of office construction because of pent-up demand. I guess we'll never know till someone rolls the dice... Too bad.

[turbocraig]

Hey, speaking of which (and I'm not sure this is the correct place for this, but...) yesterday I took the Arrowood Rd exit off 77N due to a traffic jam up and was heading east to go home. Well, about a 1/2 mile down Arrowood right after you get off 77 past the Amerisuites on the right side, there was always this half-constructed building, just one and a half stories of concrete and rebar just sitting there. Like the construction workers just up and left one day. It's been that way for years. So, yesterday I'm driving by and there's all sorts of work being done to complete it. Does anyone know what that's going to be and why the years-long work stoppage?

[49er]

office only towers are going to become a thing of the past in coming years. True mixed use buildings with condos and offices are the future. The RBC tower/condos in Raleigh is a great example and seems to be the type of thing Spectrum is planning at 300 s tryon.

David Walters had some interesting articles on this a year or two ago. He said such huge monolithic structures should see use 24 hrs a day, not just 9-5

[rockhilljames]

Hey, speaking of which (and I'm not sure this is the correct place for this, but...) yesterday I took the Arrowood Rd exit off 77N due to a traffic jam up and was heading east to go home. Well, about a 1/2 mile down Arrowood right after you get off 77 past the Amerisuites on the right side, there was always this half-constructed building, just one and a half stories of concrete and rebar just sitting there. Like the construction workers just up and left one day. It's been that way for years. So, yesterday I'm driving by and there's all sorts of work being done to complete it. Does anyone know what that's going to be and why the years-long work stoppage?

It was a hotel (not sure of the brand). Work stopped due to financial reasons and has been resumed now (obviously). Not sure if it's still the same hotel chain or if someone new has picked up the project.

[ElricSeven]

How much of the downtown office space is used by BofA, Wachovia, and Duke? While the downtown vacancy rate is 6% I think the real issue with building a speculative tower is what one of these 3 might do to cut costs, out source, etc etc. If Wachovia, for example, decided to shift 5000 people to Harris Blvd, or even more interesting move the jobs to its India subsidary, then all of a sudden that is a lot of office space that gets dumped onto the market. While it may or may not happen, I think the fact that so much office space is used by just 3 corporations, and there is no guarantee on what they will do, hurts any prospects for an outside party to come in and build a spec tower.

And there is a lot of other Class A office space on the market in Charlotte and more coming online everyday. For example, the Meridian complex (aka old IBM complex) is being rennovated into hundreds of thousands of sq ft of this type of space. In the last couple of years, Duke Energy re-located a subsidary out there, and Hewitt Corporation has moved more than a 1000 people there, that formerally were in the Trans america building. Strayer University went there instead of downtown. And so forth.

Then there is the issue of going mobile. A lot of corporations are offering this up to employees as a benefit. Have a laptop and phone and you can work anywhere, and it reduces the cost to the corporation as well as rent on these items is far far less than paying for office space. I think you will see more of the major corporations head down this path.

The only way a new tower will happen is if there is someone already ready to rent most of it.

Most of the several dozen big law firms Uptown (mine included) are dying for more space. Unfortunately, we've limited options at this point. Our building is full with another law firm that wants more space. Each law firm is trying to convince the other to move. If their needs are proportional to ours, I see that the Uptown legal community will need about 22 new floors in the next 18 months. We're all on top of each other.

[atlrvr]

I agree that a law firm is the most likely anchor tenant. Looking at atlanta, they have been the anchor for most of the midtown office activity.

[monsoon]

.... 22 new floors in the next 18 months. We're all on top of each other.

22 floors of laywers. There's something a bit depressing about that. J/K

[ElricSeven]

22 floors of laywers. There's something a bit depressing about that.

As compared to what?

[monsoon]

As compared to what?

Hmm. Butchers, bakers and candlestick makers. Maybe even some bankers, daleks, and newspaper creators.

[ElricSeven]

22 floors of laywers. There's something a bit depressing about that. J/K

interesting that you can change your previous post and it doesn't indicate that it was edited

[cinco]

As compared to what?

... not 22 floors of magistrates... now, thats a glum bunch.

seriously enough, i heard rumblings that charlotte (or someone named charlotte) was trying to get an immigration court located here. is there any truth to that? i know that atlanta has one, but with the growth of the immigrant community in the carolinas, wouldn't this be a smart move? if this were to happen, uptown really would be teeming with lawyers, who need space, and like to eat, and like to throw down. i say bring it.

[Sabaidee]

I think it was Sue Myrick's idea to bring an immigration court to Charlotte, it was later added to her plans when she proposed the situation with illegals driving drunk in NC causing deaths in the Charlotte area.

[monsoon]

interesting that you can change your previous post and it doesn't indicate that it was edited

My lawyer has advised me not to talk about that.

[Lady Celeste]

How much of the downtown office space is used by BofA, Wachovia, and Duke? While the downtown vacancy rate is 6% I think the real issue with building a speculative tower is what one of these 3 might do to cut costs, out source, etc etc. If Wachovia, for example, decided to shift 5000 people to Harris Blvd, or even more interesting move the jobs to its India subsidary, then all of a sudden that is a lot of office space that gets dumped onto the market. While it may or may not happen, I think the fact that so much office space is used by just 3 corporations, and there is no guarantee on what they will do, hurts any prospects for an outside party to come in and build a spec tower.

Interesting point Metro. Out of curiosity, what is the net absorption rate of office space in Uptown? I ask this question because Metro makes a great point. I'm asking purely out of curiosity because as time goes on I'm now starting to wonder what propels spec buildings. Being in Atlanta, logic seems to be thrown out the window. I hear often the vacancy rate mentioned but in some cities vacancy rates seem less important than net absorption rates.

I agree that a law firm is the most likely anchor tenant. Looking at atlanta, they have been the anchor for most of the midtown office activity.

This is a good point. Many law firms have anchored major buildings recently built in midtown. One is even a Columbia, SC based firm. Go figure. There is even rumblings of yet another law firm seeking more office space and will probably look into anchoring another major building in the Allen Plaza complex. This same lawfirm is in the 191 Peachtree tower, offering 1,000,000 square feet of office space. Instead of staying and aquiring more office space in this beleagured yet very handsome building, they may decide to leave and go anchor another building. It makes no sense.

I'm sure if Charlotte's largest law firms are busting at the seams, it will be only a matter of time before they decide to build. This however would take away the status as being a spec tower though wouldn't it?

p.s.- maybe Atlvr can help me understand this but how can a city have a high net absorption rate and a high vacancy rate. Does net absorption only includes newly release inventory? Any help you can offer will be appreciated.

[atlrvr]

Net absorption would be the overall increase or decrease in occupied space. If net absorption increased by 500,000 sq. ft., but 1,000,000 square feet were delivered, then the vacancy rate will continue to rise.

Even more important that net absortion would be gross absorption, which would be the total square footage of all new leases signed. A developer could care less if older buildings are losing tenants and vacancy rates are going up as long as there is some velocity of leasing in the market. Well, in the short term they don't care....what will happen is that cap rates will tighten up and that rents will pass a certain threshold that will have tenants returning to buildings like 191 Peachtree...and a lot of investors losing their shirt.

As far as Charlotte's net absorption, downtown absorbed 315,000 sq. ft. in 2005. First quarter numbers will be out in a week or two, but the preview is about 35,000 sq. ft. pushing the vacancy from 6.6% to 6.4%. The fall-off in absorption compared to last year is likely due to very limited inventory.

Another positive is that rents are up about 10% over the last year...another gain like that, and office could be as profitable as residential construction.

[Lady Celeste]

Thank you so much for your response Atlrvr.

I hate to be a pest but could you please do the absorption rate for the three top major submarkets in the Charlotte area?

[atlrvr]

For 2005 it was:

NC-51/Southeast - 474,259 (primarly in Ballantyne)

Downtown - 314,655

Northeast - 297,643 (this is University City area)

For 1Q 2006 it was:

North (Lake Norman area) and SouthPark tied at about 42,000 each

Northeast ~ 38,000

Downtown ~ 35,000

[rockhilljames]

Oh man, that kills me. Ballantyne had more absorption than downtown...there's something seriously wrong with that. If Bissell is building those cookie-cutter 5 story buildings and filling them, there shouldn't be a reason that we couldn't fill one to two towers a year in the downtown market.

Faison? Childress-Kline? Trammell? Lincoln Harris? Pope?....anyone?