CCP’s interest in the Charlotte, NC market started in 2014. After studying the market for two years, we made our first acquisition in March of 2016 with the purchase of two office buildings comprising 241,000 SF in the SouthPark submarket. We successfully sold the buildings in early 2020 before the COVID pandemic. All throughout 2020 and 2021, we kept a close eye on the market’s performance and resiliency during the pandemic. The continued positive market fundamentals and growth within the South End and Airport submarkets particularly showed strong potential growth metrics, which resulted in our acquisition of the Forest Park portfolio in Charlotte’s Airport submarket.
According to the most recent “Emerging Trends in Real Estate” market report by PwC and the Urban Land Institute (ULI), Charlotte ranked 6th out of the 80 U.S. markets to watch in overall real estate prospects for 2022. As part of the major group of “Magnet” cities, markets like Charlotte are migration destinations for both people and companies, and most are growing more quickly than the U.S. average in terms of population and jobs. Their demographics are also skewed toward faster economic growth prospects with higher proportions of millennials and gen-Xers. These metro areas are also the preferred markets for investors and builders, with the highest average “Overall Real Estate Prospects” ratings of any group in the “Emerging Trends” survey by a wide and growing margin.
Charlotte is one of the leading metro areas in the now-classic “Emerging Trends” category of “18-Hour Cities.” This category faired relatively well during the pandemic recession, a testament to their enduring appeal. Though growing less affordable over time – partly due to price pressures from transplants from more expensive establishment markets – these medium-sized cities nevertheless continue to attract in-migration due to lifestyle, workforce quality, and development opportunities according to “Emerging Trends” interviews. The dynamic economies of “18 Hour Cities” continue to make them popular with developers and investors alike. Four of the seven markets in this grouping rate among the top 20 markets nationally for overall prospects, led by Charlotte, followed by Salt Lake City, Denver and San Diego. Charlotte, in particular, is the focus of much new construction, including the Vantage South End and Design Center Tower projects in the hot South End neighborhood. In addition, Charlotte ranked 2nd in “Emerging Trends” U.S. Office Property Buy/Hold/Sell Recommendations for 2022.
According to Cushman & Wakefield’s recent Q4 2021 “Marketbeat Charlotte” office report, Metro Charlotte’s unemployment rate continued to improve throughout the final months of 2021, falling below 4.0% from an astounding 13.9% back in May 2020 at the height of the pandemic. Since that time, Charlotte has recovered 216,500 jobs, or 99.3% of pre-pandemic employment. The Queen City continues to attract large corporate tenants, with more headquarters of hub announcements expected in 2022 to join the likes of Honeywell, Lowe’s, Centene, and Hayward Holdings.
Leasing activity for the fourth quarter of 2021 totaled 418,434 sf, driving the annual figure to 2.7 msf, an improvement over the previous year. Most impressive was the 607,825 sf year-to-date leasing activity in the Airport submarket which ranked #1 out of 13 Charlotte submarkets in 2021. The flight to quality persisted, as 70.2% of new lease transactions signed in 2021 occurred within Class A assets. For tenants seeking larger spaces, this preference was even more evident. In total, 10 deals of 30,000 sf or larger were signed throughout the year on Class A product. At more than 712,000 sf, Charlotte recorded the strongest quarterly direct occupancy gains in Q4 since before the onset of the pandemic. The healthy Q4 performance drove the market to nearly 1.2 msf of annual net absorption. Rental rates continued to climb, pulled by the influx of high-quality vacancies available for lease. At $32.04 per square foot (psf), the direct average gross asking rent, which excludes sublease vacancies, rose 9.7% year-over-year (YOY).
The outlook for Charlotte in the coming year is very positive. Rental rates should remain stable in the coming months, increasing further in certain submarkets as more high-quality product delivers. Rather than lowering asking rents, landlords of second-generation space can be expected to provide increased concessions to attract prospective tenants. Following several record-setting sales of office assets in 2021, capital market transaction volume should be robust in the coming year.
