Speculate on a spec

[dubone]

People really like beltway-interchange office space, sadly. It is a formula, and it does well nationally.

The cultures of every other city in the nation have come here and it will be impossible to stop. We just need to bring the culture supporting the downtown office space here with it. But most of the companies that support downtown space are also companies that support their home town and won't leave to come to the sunbelt. The ones that are moving their HQs to Charlotte, or building regional offices here, are the ones that support suburbia.

[fulcrumsf]

I think Charlotte still is missing some elements before we will start to see growth in the Spec Tower market. The banking industry obviously is the strongest industry that holds a presence in Uptown. Beyond that Im not even sure what other industries are largely represented Uptown besides Power (Duke Energy) Telecommunications (Bellsouth), and Communications (Hearst). Im sure there are more, but those are the major ones that come to mind. Unless some other local/regional companies start needing more national attention, I don't really see other companies coming into the Centercity, unless they would benifiet from being in close proximity to the companies listed above. In other word I think they need a benifiet to justify the cost of having an office Uptown.

Personally I think we need more major educational institutions not only in Charlotte Centercity, but in Charlotte period. That would help diversify our workforce. We certainly lack in skilled professions like tech, medical, and law. I really wish we had something similar to a Georgia Tech, or even better a Caltech or MIT.

[AuLukey]

I think Charlotte still is missing some elements before we will start to see growth in the Spec Tower market. The banking industry obviously is the strongest industry that holds a presence in Uptown. Beyond that Im not even sure what other industries are largely represented Uptown besides Power (Duke Energy) Telecommunications (Bellsouth), and Communications (Hearst). Im sure there are more, but those are the major ones that come to mind. Unless some other local/regional companies start needing more national attention, I don't really see other companies coming into the Centercity, unless they would benifiet from being in close proximity to the companies listed above. In other word I think they need a benifiet to justify the cost of having an office Uptown.

Personally I think we need more major educational institutions not only in Charlotte Centercity, but in Charlotte period. That would help diversify our workforce. We certainly lack in skilled professions like tech, medical, and law. I really wish we had something similar to a Georgia Tech, or even better a Caltech or MIT.

The "tech" school is the budding Charlotte Research Institute, which is still in its sophmore year. The "law" school is in progress, not sure how long until it opens though. Kannapolis has the biotech university under construction. There are numerous nursing schools in the area. Charlotte (UNCC) and CMC have long had talks on and off about building a medical school but I haven't heard anything about that in years. That was originally why I chose to go to Charlotte was under the prospects that a medical school would be open by the time I graduated. Think I may have made a mistake there. I feel the most likely medical school may be Northeast Medical center in Cabarrus county working with the biotech campus in the next decade. That's really just a dream though.

[fulcrumsf]

The "tech" school is the budding Charlotte Research Institute, which is still in its sophmore year. The "law" school is in progress, not sure how long until it opens though. Kannapolis has the biotech university under construction. There are numerous nursing schools in the area. Charlotte (UNCC) and CMC have long had talks on and off about building a medical school but I haven't heard anything about that in years. That was originally why I chose to go to Charlotte was under the prospects that a medical school would be open by the time I graduated. Think I may have made a mistake there. I feel the most likely medical school may be Northeast Medical center in Cabarrus county working with the biotech campus in the next decade. That's really just a dream though.

Wow I had no idea that UNCC was working on the Charlotte Research Institute (CRI), hopefully it will distigush itself apart from UNCC. Is there mission to be on the scale of an MIT type institute?

[AuLukey]

Wow I had no idea that UNCC was working on the Charlotte Research Institute (CRI), hopefully it will distigush itself apart from UNCC. Is there mission to be on the scale of an MIT type institute?

I doubt it will get to MIT caliber in the next few years, but I think that is their plan. CRI is technically independent of UNCC as diplomas and grants dealt to that school are not associated with UNCC. They have two buildings build right now but they are planning for it to be an entire campus upon itself. It is really Charlotte's (UNCC) effort to get more involved with the many businesses in the area. It is working pretty well so far. It has several partners including NASA and Boeing and even has affiliations with several NC colleges like State and Duke.

http://www.charlotteresearchinstitute.com/....asp?level1Id=6

http://en.wikipedia.org/wiki/Charlotte_Research_Institute

[atlrvr]

There is more positive news...I guess.

CBRE has released it's 1Q estimates (slightly different methodology than the locally generated number I reported yesterday) for the 51 largest office markets in the country (Charlotte is 33rd largest).

We had the lowest DOWNTOWN vacancy of the 51 markets at 5.7%. Next closest was Midtown NYC at 6.3%.

However, we had the 5th highest suburban vacancy rate at 19.8%.

It would be nice if some national REIT who reads this thought, hmmm...Charlotte has had the lowest (or tied for lowest) downtown vacancy rate for 5 straight quarters now, maybe that would be a good market to build in.....though to Lady Celeste's point, there doesn't appear to be enough momentum to justify it....though taking it a step further, there might be a lack of momentum because there isn't enough space to be absorbed....we could be in a Catch 22.

[Richhamleigh, DC]

There is more positive news...I guess.

CBRE has released it's 1Q estimates (slightly different methodology than the locally generated number I reported yesterday) for the 51 largest office markets in the country (Charlotte is 33rd largest).

We had the lowest DOWNTOWN vacancy of the 51 markets at 5.7%. Next closest was Midtown NYC at 6.3%.

However, we had the 5th highest suburban vacancy rate at 19.8%.

It would be nice is some national REIT who reads this though, hmmm...Charlotte has had the lowest (or tied for lowest) downtown vacancy rate for 5 straight months now, maybe that would be a good market to build in.....though to Lady Celeste's point, there doesn't appear to be enough momentum to justify it....though taking it a step further, there might be a lack of momentum because there isn't enough space to be absorbed....we could be in a Catch 22.

I think it's a Catch-22.

Ron Tober's point about 100K workers downtown isn't far-fetched when one considers the increasing likelihood of (major) retail and service firms being built to satisfy the needs of a rapidly growing residential and day-time populations.

I wonder if - as the market is changing - if one or more of the condo towers won't dedicate a portion of their space to office, rental apartments and maybe even - a couple of (pre-signed) major retail tenants?

[Richhamleigh, DC]

I just looked at those CB Ellis reports. I'm impressed by Charlotte in any case, but am really impressed by how the city and region stack up to the competition. No matter how you cut it, those downtown numbers are impressive - the industrial numbers aren't bad either. I was struck though, by how poorly Atlanta, GA appears to be doing in all cases. What's up with that?

Does any one know what the vacancy rate would be for downtown if a 1 million sq. foot building came onto the market completely empty?

[atlrvr]

About 12.6% (using the locally reported inventory and vacancy rate)...not great, but still not catastrophic.

Assuming that Wachovia comes online half full (650,000 out of 1,300,000), our vacancy rate would be 10.1%....about right on the mark of what is considered healthy.

Best case, there won't be any office space delivered besides 60,000 sq. ft. at EpiCentre until 2009. By then we have a serious shortage of space.....

I think downtown could support an additional 300,000-400,000 sq. ft. of space before 2009......anyone got about $70M laying around?

[rockhilljames]

Bank of America does....

...whoops. Better not get ahead of myself...

[SmellyCat]

I was struck though, by how poorly Atlanta, GA appears to be doing in all cases. What's up with that?

I think the entitlement and permitting process in and around Atlanta for all property types is quite leniant. Too many spec properties were allowed to go up in the late 90s - some, to this day, still have not been fully leased.

[Lady Celeste]

I just looked at those CB Ellis reports. I'm impressed by Charlotte in any case, but am really impressed by how the city and region stack up to the competition. No matter how you cut it, those downtown numbers are impressive - the industrial numbers aren't bad either. I was struck though, by how poorly Atlanta, GA appears to be doing in all cases. What's up with that?

I think the entitlement and permitting process in and around Atlanta for all property types is quite leniant. Too many spec properties were allowed to go up in the late 90s - some, to this day, still have not been fully leased.

You are correct SmellyCat. I don't necessarily want to say that the permitting process was lenient as much as there was such high expectations placed on Atlanta from alot of outside developers. Remeber, Buckhead had a moratorium for a few years while the sewage system in the area was being updated.

Even with the vacancy rate, there have been a few more buildings this year started. 1180 Peactree just came online. While it was not spec, it was not completely filled when construction started. Terminus, also not quite spec, is filling up but not completely full and the developer of this complex is slated to start construction on another office tower sometime this year. 3344 Peachtree, the 635 ft behemoth going up in Buckhead is spec in it's office component. Further down the street you have Pope's 3630 Peachtree tower scheduled for construction this year. That's purely spec. There's Peachtree Point in Midtown currently under construction. I don't know if they have a lead tenant for that building. Barry may go ahead with his 50 Allen Plaza may go ahead and start construction without a lead tenant signed. There is a tower in Atlantic Station currently under construction. While this one is not purely spec, there is space available.

I could go on and on but you guys don't want to hear about towers under construction in Atlanta. The main question I asked Atlrvr was about net absorption and he explined it nicely. The reason why I asked his explanation is because Atlanta seems to defy the vacancy rule. I have seen 2005 net absorption figures for Atlanta's primary office markets range from 1,500,000 square feet to 4,500,000 square feet. That's alot of office space. While not limited to the downtown market, imagine how many office buildings that presents. The BOA tower in Atlanta I think is 1.2 mill sq feet so that could be like four 50 story towers....EVERY year. What that tells me is that businesses here may want to always be in the newest and best buildings so when they tire of their old surroundings, they just hire some firm to build them another building. While this exacerbates the vacancy rate, it keeps spec buildings constantly in the pipe line.

Even far suburban office markets like Alpharetta have spec buildings currently under construction.

I guess the more I learn about commercial real estate the more baffled I become. Charlotte has a low vacancy rate so I would assume that a spec tower in the 30 story range would be a safe bet. Perhaps in the future more will come online. Maybe some developers are waiting to see what the Wachovia tower will be like. If Wachovia presents a 1.6 million sq foot tower, then unless net absorption increases or more companies will have to set up shop in Uptown.

[atlrvr]

Lady Celeste....

Success feeds success, and I think that is the case of Atlanta spec office development. It really is vacancies be damned.

The flip side is that Charlotte is being "punished" for its now very low vacancy rate. In 2002, when Hearst was completed, Charlotte had over 900,000 sq. ft. absorbed in Uptown alone.....obsiouly BofA took a good chunk of that space, but the availability of new space allowed some firms to expand and others to move into the submarket.....now that no new space is being delivered firms that would expand can't, which is surpressing the demand (net absorption).

[dubone]

My employer at the time when Hearst was first starting to be built really wanted to get into that building. But it was already leased. So eventually they stayed put, not taking up any additional space. A few years later, with no new buildings, the only way to get space was to look at the SouthPark area.

[Lady Celeste]

Lady Celeste....

Success feeds success, and I think that is the case of Atlanta spec office development. It really is vacancies be damned.

The flip side is that Charlotte is being "punished" for its now very low vacancy rate. In 2002, when Hearst was completed, Charlotte had over 900,000 sq. ft. absorbed in Uptown alone.....obsiouly BofA took a good chunk of that space, but the availability of new space allowed some firms to expand and others to move into the submarket.....now that no new space is being delivered firms that would expand can't, which is surpressing the demand (net absorption).

I very much so trust your intellect on the matter.

I would ask you then....why aren't companies in the Charlotte market building more or anchoring more towers. Say I'm the CEO of a company....we will call it Celeste Corp....couldn't I put up say $150 million dollars for a 35 story tower, lease maybe 40 percent of the space and turn around in five years and sell this same building to some REIT out of Chicago for $220 million? I could retain naming rights because I'm a 40 percent occupant of the building while at the same time making $70 million in the process. With such a low vacancy rate and a pretty healthy net absorption rate, how could I lose? Perhaps Goodrich could do it. I mean even doing a mixed use tower...maybe the first 10 floors a Four Seasons, the next 20 floors office and the top five floors residential could lessen the exposure.

Maybe I'm over thinking this.........maybe I'm wishing I could come into $150 million dollars because outside of Atlanta, Dallas and Houston (in the south of course), I surely would place my bet on the Charlotte office market.

[rockhilljames]

Celeste, you make some good points. I think it all boils down to which companies/developers are willing to take the plunge. I think if we ever see one or two towers built on spec, that would really start the ball rolling.

Charlotte still has kind of a provincial "close to the Square" mentality that needs to be fixed as well. If folks could convince themselves that an office tower built on Stonwall is just as nice as one on Tryon we might have something.

I know we have surface lots, but not as much as folks might think. Anyone think land costs might be holding back speculative building?

[monsoon]

I know we have surface lots, but not as much as folks might think. Anyone think land costs might be holding back speculative building?

Well that and construction costs in general. Steel and concrete have become much more expensive over the last year. I am not so sure these costs may not derail one of the announced projects in CLT.

[atlrvr]

I very much so trust your intellect on the matter.

I would ask you then....why aren't companies in the Charlotte market building more or anchoring more towers. Say I'm the CEO of a company....we will call it Celeste Corp....couldn't I put up say $150 million dollars for a 35 story tower, lease maybe 40 percent of the space and turn around in five years and sell this same building to some REIT out of Chicago for $220 million? I could retain naming rights because I'm a 40 percent occupant of the building while at the same time making $70 million in the process. With such a low vacancy rate and a pretty healthy net absorption rate, how could I lose? Perhaps Goodrich could do it. I mean even doing a mixed use tower...maybe the first 10 floors a Four Seasons, the next 20 floors office and the top five floors residential could lessen the exposure.

Maybe I'm over thinking this.........maybe I'm wishing I could come into $150 million dollars because outside of Atlanta, Dallas and Houston (in the south of course), I surely would place my bet on the Charlotte office market.

Except that there are Atlanta, Dallas, and Houston, so if you have a finite amount of captial as all REIT's do, then you go with the proven winners...and right now Atlanta is probably next after NY, LA and Chicago as an office market.

As far as why a company wouldn't necessarily do this, its because most shareholders wouldn't view it as a responsible use of company funds. If Goodrich had $150M laying around to invest, then I think shareholders would demand that they invest in R&D and production line equipment.

The third part of the equation that we haven't discussed is rents. While improving, they are still below where they were 6 years ago. An example of bad investment is out last spec tower, Carillon. It was built in 1992 for ~ $98M, and sold several years later for about $71M ...granted it had a low occupancy rate at the time, but it sold again last year for $82M with high occupancy.....still the rents were far below the original pro forma, and even with low cap rates, Cornerstone bought it more than 15% off the cost to build.

The point in all of that is that if the professionals can't make money with a spec tower, then a corporation wouldn't even try.

[Richhamleigh, DC]

I wonder if - as the market is changing - if one or more of the condo towers won't dedicate a portion of their space to office, rental apartments and maybe even - a couple of (pre-signed) major retail tenants

Thoughts?

[Charlotteman]

That is astonishing that such a fabulous tower as the Carillion is worth less than what it cost to build it!! How can that be????

[atlrvr]

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.

I've heard that the Westin Phase II is rumbling again as a condo tower......in fact, beside this and TWELVE, there are at least 2 more condo/hotels in the preliminary planning stages inside Uptown and one just outside the 277 loop.

[UrbanCharlotte]

Any of these? Four Seasons, Hyatt, or Intercontinental? Just speculating.

[atlrvr]

Hahaha.....well, to be honest I don't know. I was told the one outside the 277 loops was in a "questionable" location for such a product. The Smith Curry condos may have been included...I don't know if they will offer hotel amenities or not.

It wouldn't surprise me if the InterContinental is being proposed, since they are undergoing major expansion.

I doubt Four Seasons would be coming yet. I think they will see how the Ritz performs first.

[Rickydavisfan21]

I've heard that the Westin Phase II is rumbling again as a condo tower......in fact, beside this and TWELVE, there are at least 2 more condo/hotels in the preliminary planning stages inside Uptown and one just outside the 277 loop.

I don't know how I feel about that, I mean a westin residences would be nice and dandy, but.....

I love john portman, and I think next to Tommorrow Square and PanPacific the westin charlotte is one of his more striking buildings, and it would be a shame for it not to be visible, well unless one thing happens, its a taller, more striking building that complements the westin in everyway, oh and it has to be built by portman. i would love to see 277 in that corridor lined with skyscrapers 15-30 stories, flush to the highway, on both sides, would give such a big city feel to the CBD

[atlrvr]

Not sure where to put this, but Hines just bought Charlotte Plaza. Not that its a big deal in itself, but I assume they also acquired the attached parcel fronting 3rd St. Hines, is an active developer (as opposed to Californias Retirement System, who was the seller), so maybe, just maybe, they will look to develop another office building. I hope so, because they usually bring in good architects