Think small: Economy has brokers, developers taking different routes
Lee Howard, Charlotte Business Journal
Everyone says the same thing: "We're seeing a lot of activity right now."
It's the optimism of the world of commercial real estate at work. Activity in a depressed environment for development and brokerage, though, is often a euphemism for, "I'm working a lot harder for a lot less." Evidence of the torpor in the office market can be summed up briefly.
Top-grade, class-A space is going at cut-rate prices, meaning companies that have been in marginal, suburban offices can shop uptown Charlotte. Meanwhile many small businesses -- CPAs, orthodontists, one-attorney law firms -- are buying office space instead of renting it. With interest rates at historic lows, financing acquisitions hasn't been this painless in many years.
"For the tenants, there's opportunity here," says real estate consultant Frank Warren. "Real lease rates have declined, and people are relocating to better space. The price differential between the suburbs and uptown is diminishing."
Yet low interest and lease rates haven't yet sparked the broader economic activity needed to get development back on its feet.
"Right now, everything is in flux," Warren says. "People are seeing a lot more activity, but nothing is getting signed."
Barely two years ago, a 50,000-square-foot office expansion was commonplace, and First Union Corp. had designs on a 100-story tower in uptown Charlotte.
Now, 50,000-square-foot leases still occur in Charlotte, but they require a string of eight to 10 deals. And no one's talking about developing office towers anymore.
Now is the time of the art of the small deal.
Leasing activity is generally restricted to small spaces, and development is following suit. That's been evident in the advent of for-sale office condominiums.
With interest rates so low, many entrepreneurs see no advantage in paying rent when a 10-year mortgage means they can own their office space long before they're ready to retire.
Concessions: To bite or not to bite
Landlords are reacting to that threat by offering concessions.
Steve Farnie, president of SonShine Construction Inc., says tenants shouldn't bite. Taking advantage of short-term lease giveaways works just fine, but just for the short term.
"But in the long term, we're going to get back to a stable market," Farnie says. "If you buy your space now, you can lock in your costs for the balance of your career."
Farnie isn't entirely unbiased in his view of the market -- SonShine specializes in building for-sale office condos.
Other developers, though, see similar desires by tenants to own their space. Among recent for-sale office developments are:
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Preferred Investments South, a Charlotte-based development company, is targeting 4 acres southwest of town for a $4 million, 35,000-square-foot office park. The multiple-building development, which the company is calling Steele Creek Professional Center, will be built on N.C. 49 at Moss Road and Carowinds Boulevard.
The project will be aimed primarily at professionals wishing to own their own space, says Kent Olson, a partner in Preferred Investments with Everett Curlee of Evco Construction. The company prefers to sell the space as office condominiums, but will lease, Olson says. Sales prices and lease rates have not been set.
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The first building is nearing completion at Prosperity Park, a $5.5 million mixed-use development that will eventually contain 65,000 square feet in nine buildings. Prosperity Park is being developed on speculation at 10220 Prosperity Park Drive, near a planned leg of Interstate 485. The development team is Southern Projects Group and The McAlpine Co. Space is available for lease at $16.50 per square foot; the sales price at Prosperity Park is $135 per square foot.
Joel Gilland, Southern Projects president, says, "With interest rates the way they are right now, there's a real opportunity for professionals, especially those who want to stay for a while and make an investment in their building."
Operating in survival mode
Other market factors come to bear for some companies, and leasing remains their best option. And for those companies, it's a tenant's market. For the big development firms, it's a matter of serving clients' needs -- keeping the tenants they already have. Dearly.
"We serve our own space," says Landon Wyatt, a partner at Childress Klein Properties Inc. who specializes in industrial development. "That means we chase anything that serves our portfolio. But we have a customer base. That means we serve their needs."
If a company needs to move, Childress Klein does what it can to make sure that happens in another Childress Klein property. If that means dropping rates, providing special services that might not have been an option two years ago, so be it, he says.
"When you have an imbalance in supply and demand," Wyatt says, "rates get adjusted to meet that demand."
But some tenants just won't stay put. Especially if they can get class-A space at class-C rates.
"Tenants have been upgrading," says Peter Conway, a partner at brokerage firm Trinity Partners. "Landlords are having to be a lot more aggressive."
Conway breaks from his profession's traditional sunny mold in his projections for the coming year.
"The landlords we're working with are making totally flat projections for the rest of 2003," he says. "We're assuming a recovery in 2004, but when we do our assessments again in October, I think we'll be in the same spot."
The stock market's inclinations for swooping and diving has helped commercial real estate, says Steve Heffner, a director at investment firm L.J. Melody & Co.
Compared to the stock market, the often-volatile real estate market looks like a sound place to put money for investors with the cash to invest, he says.
"And what's keeping everybody alive is the low interest rates," he says. "With stocks doing so poorly, a lot of money is going into real estate."
Not all sectors safe
But not all sectors of real estate are safe. Apartments, for example, are seeing renters leave to become first-time buyers.
But that, too, will change, he says.
"It's really just a matter of hanging on for a year until the market gets better."
But hanging on doesn't necessarily mean there's no movement. For brokers, everything is a deal. If a company decides to move to a better location, even if that space is smaller, it generates a fee all the same.
"If a company moves, whether it's a move up or down, the broker makes money," says Anne Vulcano, director at CB Richard Ellis.
Brokers get paid whether they do 20 deals with 20 downsizing companies or one with an expanding company.
"It's not heartless," Vulcano says. "It's just practical."
The most costly expense of running most businesses is payroll. Rent follows closely behind. If a company can cut costs, it will usually lay off employees first. Then it will consider where it can go to reduce rent.
"It's always a give and take," Vulcano says.
Despite the current market, she remains upbeat about the months ahead.
"Charlotte has a very healthy economic climate," she says. "I feel that by the next time the lease cycle comes around we will have recovered."
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