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The Charlotte office space market grew in the third quarter of 2022 with a positive net absorption of 345,000 square feet. With the national flight-to-quality trend, Class A office space in Charlotte was particularly successful as it accounted for 270,000 square feet of that absorption.
Though still higher than a year ago, the overall vacancy has lowered this quarter to 18.5%, down from 19% in Q2 2022.
Charlotte’s economy has sustained an upward trend throughout this quarter as well. As the population continues to increase, the region has reached 1.5 million people employed, a 4.6% employment growth since the pandemic.
Recent activity, such as the Atlantic Coast Conference relocating their headquarters to Charlotte’s Uptown and UNC Kenan-Flagler Business School’s plans for opening an Executive MBA program campus in city limits, further underscores Charlotte’s positioning as an active business hub.
Charlotte is the 17th-most populous city in the United States, with a population of 872,498 people. Home to Bank of America’s corporate headquarters and the Carolina Panthers, Charlotte is an important business hub in North Carolina.
The Charlotte metropolitan area has increased over recent decades, rising from 1.24 million residents in 2000 to 2.45 million in 2019, nearly 98%. Its multifamily sector is one of the fastest-growing in the country.
The racial demographics of Charlotte are diverse; there is a significant Black/African-American presence and a growing Hispanic/Latino population. According to 2016 US Census estimates, 35.7% of Charlotte’s population identified as Black/African American; this is higher than the state average (22%), making it one of the most racially diverse cities in North Carolina.
According to US Census data, Charlotte’s median household income rose steadily between 2014 and 2018; the city reached $63,693 per household by 2018, a 5% growth compared to 2014 levels, while poverty rates decreased slightly from 18% (2014) to 17% (2018). Median home values also increased by 10%, reaching $213,200 in 2018.
Overall, Charlotte has seen steady growth throughout all demographic areas over recent years, and experts expect that trend to continue throughout 2022 and beyond. Office space is in high demand, and new businesses are expected to continue entering the market.
Office space in Charlotte submarkets saw an increase in vacancies this quarter due to the influx of new deliveries, with Midtown/Southend recording 17.5% and CBD/Uptown 12.6%. Much of this vacant space has been pre-leased, so the rate will decline when the pre-leased tenants occupy.
However, with the recent construction boom creating potential concerns about oversupply, developers are aiming to maximize absorption by prioritizing non-office portions of mixed-use projects.
Rents for Charlotte office space continued to increase to an average of $33.45 per square foot.
Tenants for Class A properties will pay a premium, with the average direct rental rate for this class at $35.24 per square foot, while the average direct rental rate for Class B is $28.50 per square foot. Rates are highest in the Midtown/Southend submarket averaging at $44.90 per square foot due to the quality builds in this high-demand area.
Rates are projected to continue to escalate, with speculation of some properties nearing $50 per square foot.
With over 376,000 square feet of leasing activity reported in Q3 2022, office space in Charlotte totals 2.1 million square feet year-to-date. Nearly 175,000 square feet of this activity was generated in the CBD/Uptown submarket alone.
Midtown/Southend is likewise creating its fair share of leasing activity at 77,500 square feet being transacted this quarter.
Several notable deals for office space in Charlotte took place this quarter.
These provide select examples among other sales and lease activities for Charlotte office space.
Charlotte’s most notable office space development activity is the Duke Energy Tower, which will provide around 1 million square feet of positive absorption.
The Duke Energy Tower, in combination with LoSo Station and SwitchYard, will bring a total of 1.25 million square feet delivered in Q4 2022 alone.
Another 1.4 million square feet are estimated to be delivered throughout 2023 from the development of Commonwealth, 2825 South Blvd, The Pass, and The Quarter 22 Thirteen.
The year is ending with forward momentum that will carry into Charlotte’s office space market throughout 2023.
Vacancy rates are expected to decline in the early quarters as tenants occupy the newly delivered product. Following that, vacancies will see an increase as more projects are completed.
This, however, is on pace with the demand that Charlotte is experiencing, so it shouldn’t be seen as a problematic indicator.
With upcoming lease expirations starting in late 2023, landlords will likely invest more heavily in their spaces to compete with new developments to capture the positive movement Charlotte is experiencing while seeking to keep up with the flight-to-quality trend.
The market for office space in Charlotte is active and appears to be in the early stages of what should continue throughout 2023, with even more notable developments taking place throughout different industries in Charlotte.
An investor positioned to get into this market at this time should consider doing so.
Regardless of the positive indicators seen, research and due diligence are always required for each to make the best decision for their situation.
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