CBD In-Depth Market Study
Over the past 5 years, Charlotte’s Central Business District (CBD), Uptown, has undergone significant change.
Taking a look at the catalyst of the decline, the aftershocks that have followed and where we are now compared to 2019.
Prior to the COVID-19 Pandemic (COVID), Uptown was one of Charlotte’s strongest and most vibrant submarkets. With the vacancy rate at less than 7% and positive net absorption of over 1.3 million square feet, it was a location where businesses and the workforce wanted to be. Although the primary catalyst for its decline has been centered around COVID, there have been additional aftershocks that have resulted in its continued decline. High-level, these issues have manifested into users downsizing into smaller, more efficient footprints and moving to newer, better-designed and amenitized buildings. These buildings are primarily located in SouthEnd/Freemore West or the south side of Uptown (flight to quality) to avoid the increased presence of the homeless population. Vacancy in Uptown has ballooned to 23%-24% in 2022 and 2023 from a low of 6.68% in 2019.
“A Rising Tide Raises All The Ships”
In spite of these negative forces, rates have continued to rise; though not due to demand, as was the case prior to COVID. The only explanation for this trend is that new buildings and existing trophy assets and their higher rates have “raised allships”, with many older, 2nd generation assets lifting their rates to within $4-$6 of these buildings.
There are multiple reasons for these inflated rates in 2nd generation assets. The increase in construction prices directly impacts rates due to higher costs of materials and labor. As a result, Landlords are being forced to offer additional concessions (free rent and tenant improvement allowances) to be competitive. Additionally, many building owners are preparing for refinance events. Current interest rates remain 2-4% higher than the rates on the existing building loans. If low tenant demand persists and interest rates remain high, there will be significant turbulence in the office market as Landlords will be unable to refinance their buildings. Landlords, in an attempt to protect their returns, are looking to pass through these increases directly to tenants; however, to win deals, Landlords are having to share in these increased costs.
Ultimately it Boils Down to Supply and Demand.
There is irrefutable evidence of the damaging effects that the COVID Pandemic has had on real estate, as a whole, but more specifically, to older, 2nd generation buildings. Many of these buildings are located in CBDs all over the country. Very few locales have been immune to this experience. The graph below depicts how this story played out in Uptown. In 2019, there was Gross Leasing Activity (Demand) of 1.8 million square feet that resulted in positive net absorption of 1.3 million square feet (7.5% of the total office square footage in Uptown). Positive net absorption can manifest in one of two ways, expanding users from within the CBD or relocations to the CBD from other submarkets or locales. After 2019, Uptown has experienced negative net absorption every subsequent year, most significantly between 2021 and 2023. Over the past 5 years in aggregate, Uptown has experienced negative net absorption of over 1.5 million square feet (8.7% of the total office square footage in Uptown).
Positive Outlook…
As mentioned before, new and trophy assets in Uptown have been very successful at attracting new and existing tenants. Vacancy for these assets are less than 10%. Despite being at a higher price point, they continue to attract users who are moving to the safer, better side of Uptown (south side), downsizing from larger footprints, and seeking more efficient and better amenitized buildings. Many times, shedding the extra space makes this a cost-neutral move despite the higher lease rate. If users continue to make decisions like they have over the past couple of years, it will undoubtedly have an effect on the health of poorly located, amenity deficient, and inefficiently designed 2nd generation buildings in Uptown. Only time will tell.
