Growth Still Ahead For Charlotte Office, But So Are Stiffer Challenges
Since the end of the recession, the Charlotte office market has had a very good run in all the ways you can measure its success, such as more absorption, more development, high rents. The market's still healthy, but the challenges it faces now are the most serious since the recession, according to speakers at our Charlotte Office Development Forum.
First the good news: office developers in Charlotte have adapted in recent years to the changing demands of tenants and their employees, our speakers said. Demand for new space is focused on the CBD and suburban locations, as long as they're part of a live/work/play urban-like environment. That's where Millennials want to be, and Charlotte has been adept at providing those kinds of places.
Even as recently as the early 2000s, all that mattered in new office development was the fundamentals of the market, and the structure of the deal itself. Those are still important, but now developers have to ask, what's going on around the office building? Tenants want neighborhood amenities, access to transit and walkability. There's more focus on the quality of life outside a building, because it's part of the formula for a successful office development.
Here are CitiSculpt managing partner Charles Lindsey McAlpine, Trinity Capital Advisors partner Walker Collier, Portman Holdings VP Charles Pinkham, and Moore & Van Allen partner Palmer McArthur, who moderated.
Our speakers believe overbuilding isn't very likely in the Charlotte office sector. Banks and equity providers are haunted by 2008 and '09, and are showing better discipline about lending than before the last recession. Spec office, for instance, is difficult to finance. Not impossible, because a few banks are relatively aggressive, but even so, debt and equity are more conservative on the whole.
On the debt side, the lenders are strict, which keeps developers disciplined. The deals getting done are fundamentally sound. On the equity side, there's a lot of capital, including foreign capital, but relatively few deals. Those deals getting done are being driven by real estate, not the capital stack. The equity is there, focusing on strong sponsorships and existing relationships.
Shown: Simpson president Sam Simpson and Spectrum president John Boylan.
Among the most serious challenges to growth for Charlotte office, two seem the most significant, our speakers said. One longer-term challenge is that labor is in short supply and is expensive, especially in the construction sector. A lot of people left the construction industry after 2008, and some major contractors simply don't have the labor they need, while those still in the business can name their price. In the long term, we have to encourage more people to go into the building trades, the speakers said, and one of them joked that in the short term, if you're doing a project, you'd better cater lunch, because the workers will be hired away during their break if you don't.
HB2 is a very serious impediment to growth in the state, though hopefully it will only be a short-term problem, with action taken after the election to fix it. For now, companies that have a consumer brand don't want to be seen in North Carolina. Not only are they announcing they aren't moving here—that's bad enough—but presumably a lot more companies simply aren't considering the state as part of their site selection, while they would have a year ago. It's impossible to know the extent of how the law's affecting site selection, but those who believe it's having no impact have their heads in the sand, our speakers agreed.
Above: Crescent Communities president Brian Leary and Stewart Title Commercial Services business development officer Elsa Simaan, who also moderated.