The KARNES Tri-City Market Overview for the Appraisal Institute 2013 Real Estate Valuation Conference

Posted on April 18, 2013 by - Charlotte, Commercial Property Exchange, Construction Update, Greensboro/Winston-Salem/High Point, In the News, Industrial, KARNES Perspective, Office, Raleigh, Retail, Triangle

2013 Tri City Market Overview

Andrew Jenkins, managing partner of KARNES, was a speaker today at the Appraisal Institute 2013 Real Estate Valuation Conference, which took place in Charlotte. The panel event featured various industry experts including Mark Vitner (Senior Economist, Wells Fargo), Roger Cobb ( Broker, Selwyn Property Group), Jon Morris (Broker, Beacon Partners), and Henry Breaux (Broker, The Providence Group).

Mr. Jenkins’s discussion provided an insight into commercial market data, analysis and trends, from the largest regions across North Carolina.

Click here to download a PDF version of the presentation and read on for a transcript of the presentation’s key points:

Andrew Jenkins, Managing Partner

Tri-City Market Overview

April 18, 2013
Presented by Andrew Jenkins, Managing Partner, KARNES

Tri-City Market Overview Introduction

  • KARNES began producing the Tri-City Commercial Real Estate Market Report in 2012 in an effort to bring a standardized analysis method across the state.
  • The intention of the report is to provide an annual review, at a high level, of the commercial markets in the three major NC regions.


Office Market (Vacancy)

Charlotte:

  • Vacancy rates in Charlotte increased 4.9% points between 2008 and 2011.
  • The 18.4% reported at the end of 2011 was the highest year-end rate reported in Charlotte since KARNES began tracking the market and was well above the 13.2% averaged between 1988 and 2011.
  • New supply (completions) totaled 5.8 million square feet between 2008 and 2011, while net demand (net absorption) totaled 1.7 million square feet.
  • The vacancy rate decreased 1.1% points to 17.3% during 2012 as modest completions totaling 987,415 square feet were outpaced by 1.3 million square feet of net absorption.

Triangle

  • Vacancy rates in the Triangle market increased 1.6% points between 2008 and 2011.
  • The 16.1% vacancy rate reported at the end of 2011 was down however, from the high of 17.5% reported in 2010.
  • New supply totaled nearly 4 million square feet while net demand totaled 2.3 million square feet.
  • For comparison purposes the Triangle market reported greater demand during the period than Charlotte, while also delivering less new office space.
  • The vacancy rate in the Triangle decreased 0.5% of a point to 15.6% during 2012 as minimal completions totaling 196,942 square feet were outpaced by nearly 500,000 square feet of net demand.

Triad

  • Vacancy rates in the Triad market actually declined 2.2% points between 2008 and 2011.
  • A little over 400,000 square feet of new office space was completed during the period, while net demand totaled more than 500,000 square feet. A few buildings were also purchased or removed from the inventory for redevelopment, which also aided the decrease in vacancy.
  • The vacancy rate in the Triad decreased 0.7% of a point to 15.2% during 2012 as net absorption totaling 371,513 square feet outpaced new completions totaling 297,000 square feet.

Overall

  • All markets reported declining vacancy rates during 2012.
  • Total vacant square footage is down approximately 700,000 square feet.
  • The Charlotte market maintains the highest share of vacancy space with 45% of the vacant inventory (8.6 million square feet)

Office Market (Absorption)

Overall

  • Over 6.7 million square feet of office space absorbed between 2008 and 2012.
  • Charlotte accounted for approximately 45% of the office demand and Triangle accounted for approximately 41% of the office demand.
  • At the current rate of annual absorption – roughly 1.34 million square feet per year – it would take about 15 years to absorb all of the vacant office space in the Tri-City markets.
  • That does not even include the introduction of new office space, which totaled over 11.7 million square feet during the past 5 years.

Office Market (Completions)

Overall

  • Of the 11.7 million square feet of office space completed during the past 5 years, 58% was completed in the Charlotte market, while 36% was in the Triangle.
  • A total of 1.4 million square feet was completed during 2012. This was up from the 354,769 sf completed in 2011. Charlotte accounted for 70% of the new office completiond during 2012.
  • At the end of 2012, there was only 500,000 square feet of office under construction in the Tri-City regions, but with some of the recent announcements we expect that office construction (and even speculative office construction) will increase during 2013.

Office Market (Completions Buildings)

Ballantyne

  • As mentioned earlier, the Charlotte market accounted for 70% of the new office supply during 2012. The majority of that new supply can be attributed to construction activity at Ballantyne, an office park in South Charlotte.
  • The Woodward and Gragg buildings were the largest completions during 2012, with each building totaling about 276,000 square feet.
  • As you are probably aware, MetLife announced plans to lease the entire Gragg building and two floors (55,224 square feet) of the Woodward building. Both buildings were built on speculation.
  • Another significant completion at Ballantyne was the new SPX headquarters building. The 238,991 square foot build-to-suit building will allow the firm to add an additional 180 jobs over the next five years, with an anticipated average salary of about $83,000.

Medical Space

  • The completion of medical office space was also pronounced during 2012.
  • The Midtown Medical Plaza II expansion in Charlotte, which totaled 171,000 square feet, allowed for the Levine Cancer Institute to create a headquarters facility for creating a network for cancer care systemwide.
  • In the Triangle, WakeMed also continued to grow, with the completion of a 87,397 square fooot facility in South Raleigh. This facility became home to several Children’s health operations as well as the Capital City Surgery center.

Measurement Building

  • In a continuing trend of downtown mixed use development, Downtown Durham reported the completion of the Measurement Building. The 74,000 square foot office and retail building featured ground floor retail and 60,000 square feet of office space. Tenants in the building include a law firm and Measurement Incorporated.

Renovations

  • Winston Salem’s central business district also reported the completion of a 242,000-square-foot renovation of two former R.J. Reynolds Tobacco Co. warehouses.
  • These warehouses were redeveloped into a biotech research laboratory, called the Wake Forest Biotech Place, anchored by the Wake Forest Baptist Medical Center.

Office Market (Top Occupancies)

  1. Wells Fargo Securities completed its move into Duke Energy Center, taking approximately 300,000 square feet of space at the uptown Charlotte building.
  2. SPX, as mentioned early ranked 2nd during 2012, as the firm occupied 238,991 square feet.
  3. Wake Forest University Health Sciences occupied approxmately 200,000 square feet at the Wake Forest Biotech Place.
  4. United Technologies, which purchased Goodrich Corporation, renewed and expanded its lease at Coliseum Center Four, taking a total of 190,479 square feet.
  5. Levine Cancer Institute’s occupancy of the Morehead Medical Plaza II expansion.

Office Market (Top Vacancies)

  1. Wells Fargo was allowed to terminate their lease at Charlotte Plaza, totaling about 233,192 square feet. This was to make way for the Charlotte School of Law to take the space.
  2. SCOR Global Life Americas moved from 139,636 square feet at Transamerica Square and into 140,000 square feet at Bank of America Plaza.
  3. Bank of America vacated 103,122 square feet at 525 N. Tryon St. as part of the consolidation process out of third-party owned properties.
  4. UNC School of Dentistry relocated from about 71,500 square feet at 4301 Research Commons into expansion space built on their campus.
  5. Alcatel-Lucent downsized out of 49,167 square feet at the Crabtree Overlook building in Northwest Raleigh.

Retail Market (Vacancy)

Charlotte:

  • Vacancy rates in Charlotte increased 2.1% points between 2008 and 2011.
  • The 9.0% reported at the end of 2011 was down from the 9.8% reported at the end of 2010. That was the highest year-end rate reported in Charlotte since KARNES began tracking the market in 1998.
  • New supply (completions) totaled about 4.9 million square feet between 2008 and 2011, while net demand (net absorption) totaled 2.7 million square feet.
  • The vacancy rate decreased 0.4% of a point to 8.6% during 2012 as completions totaling 343,100 square feet were outpaced by 371,754 square feet of net absorption.

Triangle

  • Vacancy rate in the Triangle market increased 1.0% point between 2008 and 2011.
  • The 7.5% vacancy rate reported at the end of 2011 was down however, from the high of 8.2% reported in 2009.
  • New supply totaled 3.8 million square feet while net demand totaled nearly 3.0 million square feet.
  • For comparison purposes the Triangle market reported greater demand during the period than Charlotte, while also delivering less new retail space.
  • The vacancy rate in the Triangle decreased 0.5% of a point to 7.0% during 2012 as minimal completions totaling 166,138 square feet were outpaced by about 375,000 square feet of net demand.

Triad

  • Vacancy rates in the Triad market increased 1.9% points between 2008 and 2011.
  • Over 1.6 million square feet of new retail space was completed during the period, while net demand totaled about 550,000 square feet.
  • The vacancy rate in the Triad decreased 0.5% of a point to 11.0% during 2012 as net absorption totaling 234,511 square feet outpaced new completions totaling 32,544 square feet.

Overall

  • All markets reported declining vacancy rates during 2012.
  • Vacancy rates remained up in all markets from those reported in 2007.
  • Over 12.5 million square feet of vacant space. The Triad market accounts for about one-third of the vacant space with only one-fourth of the inventory.

Retail Market (Absorption)

Overall

  • Over 7.2 million square feet of retail space absorbed between 2008 and 2012.
  • The Triangle accounted for appoximately 47% of the retail demand, while Charlotte accounted for approximately 42%.
  • At the current rate of annual absorption – roughly 1.44 million square feet per year – it would take about 9 years to absorb all of the vacant retail space in the Tri-City markets.
  • That does not even include the introduction of new retail space, which totaled over 10.5 million square feet during the past 5 years.

Retail Market (Completions)

Overall

  • Of the 10.5 million square feet of retail space completed during the past 5 years, 50% was completed in the Charlotte market, while 38% was in the Triangle.
  • A total of 541,782 square feet was completed during 2012. This was the lowest level reported since we began tracking the markets.
  • At the end of 2012, there was 1.5 million square feet of retail space under construction in the Tri-City regions.

Retail Market (Completions Buildings)

University Pointe

  • Approximately 70,000 square feet was completed at this Wal-Mart anchored center in Northeast Charlotte during 2012. Anchored by Cato, Shoe Show and Anna’s Linens.

Sharon Square

  • Home to Charlotte’s first Whole Foods. The 42,000 square foot retail phase of a mixed used development is located in SouthPark.

Park West Village – Expansion

  • The 91,215 square foot expansion brought a ROSS Dress For Less and a Gander Mountain Morrisvile, NC in the Triangle.

Poyner Place – Expansion

  • The 59,901 square foot expansion brought a combination Babies R Us and Toys R Us to Northeast Raleigh, behind the Triangle Town Center Mall at the intersection of I-540 and Capital Blvd.

Shoppes at Stratford

  • A 16,325 square foot strip retail center in Winston Salem on a site once home to a Wendy’s and Kentucky Fried Chicken.

2913 Battleground Ave

  • A 16,219 square foot expansion to an existing center.

Retail Market (Top Occupancies)

  1. Dunham’s Sports leased 89,000 square feet at the Holly Hill Mall and Business Center, a renovation project of the old Burlington Square Mall.
  2. Academy Sports openned a 71,000 square foot store off Dave Lyle Blvd in Rock Hill, SC.
  3. Virgina College leased 60,218 square feet at Holden Crossing in Greensboro.
  4. The previously mentioned Babies R Us / Toys R Us at Poyner Place, which totaled 59,901 square feet.
  5. LiMing’s Global Market openned a 51,851 square foot market at the Greensboro South Shopping Center.

Retail Market (Top Vacancies)

  1. Wal-Mart closed its Eastway Crossing store, which totaled 114,513 square feet as they moved to a new owner-occupied store off Independence. About a third of that space was backfilled by Chef Store.
  2. Furniture Row Oulet vacated 54,006 square feet at Windsor Square. The space was renovated and was occupied by JC Penney during early 2013.
  3. A 46,685 square foot Roses closed at Sunset Plaza in Fuquay-Varina.
  4. Old Navy vacated 40,512 square feet at Carolina Pavilion in Pineville.
  5. Babies R Us vacated 38,493 square feet at Emporium Plaza in the Northeast Raleigh and moved to the new Poyner Place store.

Warehouse Market (Vacancy)

Charlotte:

  • Vacancy rates in Charlotte increased 1.5% points between 2008 and 2011.
  • The 13.3% reported at the end of 2011 was down from the 14.4% reported at the end of 2010.
  • New supply (completions) totaled about 657,000 square feet between 2008 and 2011, while net demand (net absorption) totaled 735,000 square feet.
  • The vacancy rate decreased 0.8% of a point to 12.5% during 2012 as completions totaling 270,400 square feet were outpaced by 885,969 square feet of net absorption.

Triangle

  • Vacancy rate in the Triangle market increased 6.3% points between 2008 and 2011.
  • The 15.4% vacancy rate reported at the end of 2011 was down however, from the high of 15.7% reported in 2010.
  • New supply totaled 412,940 square feet, but warehouse net demand contracted by 733,783 square feet between 2008 and 2011.
  • The vacancy rate in the Triangle decreased 1.7% points to 13.7% during 2012 as no completions were reported while net demand totaled 338,809 square feet.

Triad

  • Vacancy rates in the Triad market increased 0.1% of a point between 2008 and 2011.
  • Approximately 1.2 million square feet of new warehouse space was completed during the period, while net demand totaled about approxmately 1 million square feet.
  • The vacancy rate in the Triad decreased 5.5% pointd to 16.8% during 2012 as net absorption totaled 2.16 million square feet and no new completions were reported. In addition to some substantial leases, the demolision of some outdated space at a few properties attributed to the vacancy decrease.

Overall

  • All markets reported declining vacancy rates during 2012.
  • Vacancy rates remained up in Triangle and Charlotte markets from those reported in 2007.
  • Over 15.5 million square feet of vacant space. The Triad market accounts for about 56% of the vacant space.

Warehouse Market (Absorption)

Overall

  • Over 4.3 million square feet of warehouse space absorbed between 2008 and 2012.
  • The Triad accounted for appoximately 72% of the warehouse demand, while the Triangle reported contracting overall net demand totaling just under 400,000 square feet.
  • At the current rate of annual absorption – roughly 860,000 square feet per year – it would take about 18 years to absorb all of the vacant warehouse space in the Tri-City markets.
  • That does not even include the introduction of new warehouse space, which totaled over 2.5 million square feet during the past 5 years.

Warehouse Market (Completions)

Overall

  • Of the 2.5 million square feet of warehouse space completed during the past 5 years, 47% was completed in the Triad market, while 37% was in the Charlotte market.
  • A total of only 270,400 square feet of warehouse space was completed during 2012. All of it was in Charlotte and all of it was at one property.
  • At the end of 2012, there was 517,600 square feet of warehouse under construction in the Tri-City regions – all of it in the Triad market.

Warehouse Market (Completions Buildings)

Ridge Creek IV

  • A 270,400-square-foot speculative Warehouse building in Southwest Charlotte. Current tenants include Averit Express, which leased 68,000 square feet.

Warehouse Market (Top Occupancies)

  1. Pepsie Bottling Ventures leased 526,320 square feet at Union Cross III in Winston Salem.
  2. An undisclosed tenant occupied 300,000 square feet at 645 North Park in Kernersville.
  3. Rock-Tenn Converting leased 220,500 square feet at 520 Northridge Park Drive in Winston Salem.
  4. DMSI leased 215,000 square feet at Ridge Creek II in Charlotte
  5. United Medical leased 142,557 square feet in Davidson County in the Triad market.

Warehouse Market (Top Vacancies)

  1. Forward Air vacated 215,000 square feet at Ridge Creek II in Charlotte.
  2. An undisclosed tenant vacated 117,400 square feet at CrossPoint Center I in Charlotte.
  3. Cormatech vacated 103,570 square feet at Research Tri-Center South in the Research Triangle Park area.
  4. OEM vacated 80,000 square feet at Township Business Park in Charlotte.
  5. CFS Logistics vacated 76,800 square feet at West Pointe I in Charlotte.

Flex Market (Vacancy)

Charlotte:

  • Vacancy rates in Charlotte increased 1.8% points between 2008 and 2011.
  • The 20.0% reported at the end of 2011 was down from the 20.3% reported at the end of 2010.
  • New supply (completions) totaled about 257,000 square feet between 2008 and 2011, while net demand (net absorption) contracted by 21,642 square feet.
  • The vacancy rate decreased 1.0% point to 19.0% during 2012 as completions totaling 46,000 square feet were outpaced by 149,018 square feet of net absorption.

Triangle

  • Vacancy rate in the Triangle market increased 4.2% points between 2008 and 2011.
  • The 16.4% vacancy rate reported at the end of 2011 was down however, from the high of 19.3% reported in 2010.
  • New supply totaled 333,051 square feet, but flex net demand contracted by 121,000 square feet between 2008 and 2011.
  • The vacancy rate in the Triangle decreased 1.0% point to 15.4% during 2012 as no completions were reported while net demand totaled 117,000 square feet.

Triad

  • Vacancy rates in the Triad market decreased 0.9% of a point between 2008 and 2011.
  • Approximately 22,150 million square feet of new flex space was completed during the period, while net demand contracted by 14,000 square feet. The removal of a few vacant buildings that were sold during the period accounted for the vacancy decrease.
  • The vacancy rate in the Triad decreased 2.1% points to 13.9% during 2012 as net absorption totaling 119,216 square feet outpaced the 25,500 square feet of new flex completions reported.

Overall

  • All markets reported declining vacancy rates during 2012.
  • Vacancy rates remained up in Triangle and Charlotte markets from those reported in 2007.
  • Over 5.5 million square feet of vacant space. Charlotte has the smallest inventory but the highest share of vacant space at 36%.

Flex Market (Absorption)

Overall

  • Only 228,282 square feet of flex space absorbed between 2008 and 2012.
  • At the current rate of annual absorption it would take about 122 years to absorb all of the vacant flex space in the Tri-City markets.
  • That does not even include the introduction of new flex space, which totaled 682,901 square feet during the past 5 years.

Flex Market (Completions)

Overall

  • Of the 683,000 square feet of flex space completed during the past 5 years, 48% was completed in the Triangle market, while 44% was in the Charlotte market.
  • A total of only 71,500 square feet of flex space was completed during 2012.
  • At the end of 2012, there was no flex space under construction in the Tri-City regions.

Flex Market (Completions Buildings)

Northlake Commerce Center Phase II

  • A 46,000 square foot spec flex building. The only tenant at the end of 2012 was CrossFit Vitality (5,062 sf)

South Park Business Center

  • A 25,500 square foot build-to-suit building in Kernersville, NC. Home to Carolina North Manufacturing.

Flex Market (Top Occupancies)

  1. Undisclosed tenant took 102,000 square feet at Rock Creek Center in Greenboro.
  2. Kestrel Heights Charter School took 50,950 square feet at 4900 Prespectus Drive in the Triangle.
  3. SunGard took 50,000 square feet in High Point.
  4. An undiclosed tenant took 46,500 square feet at 4320 Enterprise Drive in the Triad.
  5. Undisclosed tenant took 31,818 square feet at Steele Creek Business Park in Charlotte.

Flex Market (Top Vacancies)

  1. Kendle vacated 81,370 square feet at the Triangle Business Center.
  2. Solstas Labs Partners left 54,377 square feet at Airport Center in Charlotte.
  3. Undiclosed tenant left 30,423 square feet and Agrix left 30,384 square feet at Coffee Creek II.
  4. Undisclosed vacated 23,922 square feet at Renaissance Center.