RE:SOURCE CHARLOTTE OFFICE 3Q 2011

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1 L I N C O L N H A R R I S R E : S O U R C E C H A R L O T T E 3Q 2011 Charlotte s office market enjoyed another strong quarter with net absorption reaching 333,414 sf as past job creation announcements came to fruition and a number of organic expansion set into motion over the summer were realized. ECONOMY After more than a year of regular out-of-market branch and headquarters relocation announcements, the third quarter of 2011 was quieter, though several companies with current local presences revealed a mix of office and industrial expansions. Time Warner Cable plans to add more than 300 positions in the next several years as it not only develops an updated corporate office building off Arrowood Road, but also establishes a national data center on the campus. The Huntersville and Concord areas, which typically attract manufacturing-oriented companies, garnered another expansion from Celgard, to the tune of $105 million in investment and 250 additional positions, and from Positec, which has expanded its North America headquarters in Charlotte and moved its retail distribution operation to Huntersville. Lime Energy has also committed to moving its headquarters and corporate operations to Huntersville before year-end and expects to add 50 to 75 new positions during the next year. All of these announcements are in line with the area s push to diversify towards energy and distribution-related companies, especially as banking giant Bank of America grapples with Countrywide s legacy loan issues and a changing landscape of banking fees as parts of the Dodd-Frank financial regulation package are rolled out. Accordingly, Bank of America mentioned the possibility of upwards of 30,000 company-wide job cuts across the country in the next several years. On a macro level, the Charlotte metro economy is slowly improving, with moderate employment gains clocked from August 2010 to August of 2011 totaling nearly 4,100 positions. With a labor force that is declining slightly despite the creation of new jobs the labor force shrank by nearly 4,700 people in the past year Charlotte s unemployment rate has dropped 30 basis points to 11.1% in August from a year ago as the recovery crawls forward. However, the three primarily office-using employment sectors information, financial activities, and professional and business services grew by 1,000 combined positions in the past 12 months, while the largest growth of over 1,000 net jobs each occurred in the leisure and hospitality services, other services, and transportation, trade, and utilities sectors. Government and manufacturing employment took the greatest hits during the past year, losing 2,000 and 1,500 people from the payroll, respectively. Despite this modest improvement, Charlotte continues to be ranked well among its peer metros and has garnered accolades during 2011 alone for being the #2 Best Value City (Kiplinger) and #5 in both Economic Potential (fdi Magazine) and Most Desirable Place to do Business (Area Development Special Magazine). OFFICE MARKET Overview Charlotte s office market enjoyed another strong quarter with net absorption reaching 333,414 square feet as several past job creation announcements came to fruition and a number of organic expansions set into motion over the summer were realized. Accordingly, the vacancy rate in the metro was down 80 basis points quarter-over-quarter to 20.1 percent the lowest overall rate since the beginning of 2010 despite the challenges that accompanied the delivery of more than 2.5 million square Net absorption New development Overall vacancy 2,500, ,631, , % 24.0% ,776 1,608, % 2,000, , , % 20.0% ,918 2,205, % 1,500,000 YTD , , % 16.0% 1,000, , , % 0.7% Occupied 33,788, % Direct vacant 8,200, % Sublease vacant 300, % 20.10% 42,288,737 3Q Q MONTH FORECAST Market Supply (SF) 42,314,956 42,783,914 Under Construction (SF) 468, ,000 Under Construct. Preleased % 36.5% 0.00% Direct Vacancy 19.5% 19.6% Total Vacancy 20.3% 20.1% Total Net Absorption (SF) 372, ,414 YTD Net Absorption (SF) -12, ,381 Direct Asking Rent $19.91 $20.33 Class A Direct Asking Rent $22.41 $22.74 Class B Direct Asking Rent $16.67 $ YTD 2011 Net absorption New development Overall vacancy 79.9% Occupied Direct vacant Sublease vacant STATISTICS AND TRENDS 12.0% 8.0% 4.0% 0.0% HISTORICAL VACANCY AND NET ABSORPTION SPACE BREAKDOWN 3Q 2011 page 1

2 As pockets of the market improve more swiftly than others, changing the perception in the marketplace amongst tenants is a major challenge. With tenants focused on negative news surrounding job growth and unemployment, they need to realize that well-positioned landlords come to the negotiating table with different requirements and expectations than less well-capitalized owners. - Campbell Walker, Vice President feet over the same time period amidst the backdrop of a recession and a slow-moving economic revival. With year-to-date net absorption of 314,381 square feet, Charlotte s resurgence does seem to have momentum. The largest move-in activity during third quarter was the FBI s possession of its 171,000 square foot build-to-suit property off Arrowood Road that consolidated many of the agency s regional offices. Other notable occupancies included SnapAV s down-the-street move to 30,000 square feet at 1800 Continental Boulevard from industrial space at Brookwood Business Park, Lash Group s full floor expansion at LakePointe 3, Babcock & Wilcox nearly doubling its space in Ballantyne to 52,244 square feet at Everett, and Extended Stay Hotels also completed half of its move from Spartanburg to Everett. In terms of large expansionary third quarter signed leases, MNES inked a deal for a full floor at the Hayes Building, with occupancy expected in October, while Compass Group renewed its space at One & Two Coliseum Centre and also committed to expanding onto another floor at One Coliseum Centre in One interesting development during the third quarter was the uptick in sublease activity, which accounted for 19.2 percent 63,851 square feet of the metro s quarterly occupancy gains, and was most prevalent in high-cost areas like, Midtown, and SouthPark. During the third quarter alone, welcomed Dykema and CNL Crosland/Crosland Southeast to sublease space, Midtown saw Carolinas HealthCare System take former New Dominion space at Metropolitan Plaza, and SouthPark enjoyed sublease move-ins or expansions by TruPoint Partners, Lockton, New American Mortgage, and Nucor (which took back part of Keystone Partners former sublease space). The market s ongoing stratification intensified during the third quarter as Class A product garnered an unprecedented 97.2 percent of the quarter s total net absorption, showing that new, expanding, and relocating firms overwhelmingly preferred to tap into the amenities and cyclically low rental rates that Class A product offered. Consequently, the metro s Class A vacancy rate shrank from 19.2 percent in second quarter to 18.3 percent during the third quarter, while Class B vacancy remained steady at 23.2 percent during the same period. Year-to-date, the bifurcation is even more stark with net absorption summing to 400,845 square feet for Class A buildings and falling into negative territory by 86,464 square feet for Class B product. A similar split occurred during the third quarter and during 2011 as a whole between activity levels in the urban core and the suburban submarkets, with tenants tending towards lower cost, more convenient suburban office parks; during third quarter, the urban submarkets eked out 25,751 square feet of net absorption while suburban product pulled in 307,663 square feet of net occupancies. Supply With the completion of the FBI s build-to-suit 171,000 square foot office building off Arrowood Road in June 2011, all of the office construction in Charlotte is now concentrated in Ballantyne. The Bissell Companies is not only currently developing build-to-suit office facilities for both American Honda Finance and SPX, but also broke ground during the third quarter on twin 275,000 square foot, 10-story towers named Woodward and Gragg on North Community House Road. The Charlotte City Council also approved Bissell Companies rezoning petition for 520 acres in Ballantyne Corporate $26.00 Class A Class B Overall market 2006 $20.60 $16.64 $18.80 $ $21.07 $17.63 $ $24.09 $17.06 $20.71 $ $23.49 $16.94 $20.77 $ $22.17 $16.11 $ Q 2011 $22.74 $16.91 $20.33 $18.00 $16.00 $14.00 $12.00 Park, which will increase the allowable office square footage by more than 1 million square feet, while also permitting roadway improvements to help relieve congestion in the Park. Outside Ballantyne, no major construction is currently planned, though several large tenants in the market have been in discussions with a number of development groups about the possibility of build-to-suit opportunities. Accordingly, the construction pipeline could change quickly with a firm commitment from any of these tenants. Rental rates Metro-wide direct asking rental rates were driven up 1.8 percent quarterover-quarter to average $20.33 per square foot due to the impact of the Bissell Companies $28.00 per square foot pricing of the 550,000 square feet under construction in Ballantyne; removing the impact of the pricing of the Woodward and Gragg buildings results in an average rate of $19.89 per square foot, which is a modest 0.5 percent decline from second quarter as high-vacancy submarkets such as,, and absorb additional rental rate corrections. Despite the continued expansion of Class A occupancy, and simultaneous stagnation of interest in Class B product, direct asking rental rates for both segments of the market (excluding the two under construction buildings) fell 0.5 percent to $22.23 per square foot and 0.8 percent to $16.91 per square foot, respectively, as landlords price their properties to lease quickly. However, including the two under construction buildings, Class A products saw rates rise to $22.74 per square foot a 1.74 percent premium over second quarter. Tenants in the market Q 2011 Class A Class B Overall market HISTORICAL DIRECT RENTAL RATES In third quarter 2011, Lincoln Harris counted total tenants in the market of 1.42 million square feet. Since the second quarter, Sears has been removed. Shaw, Chiquita, and Scor/Transamerica Re (which is close to signing a lease for roughly 151,000 square feet at Bank of America Plaza) are among the largest companies looking around for space; there are also several additional out-of-market firms with needs between 100,000 and 150,000 square feet rattling around and contemplating a move into the Charlotte area. 3Q 2011 page 2

3 SUBMARKET ANALYSIS In the way that a rising tide lifts all ships, so too was the abundance of net absorption during the third quarter spread among all but one of the metro s submarkets; the submarket, which is struggling with unclear implications of the new Independence Boulevard plan, saw tenants leave 7,075 square feet. The and Highway 51/ Ballantyne submarkets garnered nearly 70.0 percent of this quarter s occupancy activity combined and individually racked up over 100,000 square feet of move-ins as tenants seeking large, contiguous blocks of space made moves. In the submarket, despite SunGard s consolidation from two buildings to one at Vanguard Center and Cigna s closure of its 117,941 square foot call center at 200 Regency Executive Park Drive, the well-located and low-cost nature of the area lured the FBI, Connextions, Lash Group, SnapAV, and QuikTrip to relocate to or expand in the vicinity with net absorption of 122,000 square feet. The Highway 51/Ballantyne area expanded not only by its usual means with Ballantyne attracting large headquarters relocations like Extended Stay Hotels and expanding its current tenants such as Babcock & Wilcox and Akima but also because of tenants such as Progressive Insurance opting for low-cost space on Carmel Road while downsizing. Sublease asking ect asking rent $17.09 $24.55 Hwy 51/Ballantyn $15.39 $23.94 Midtown $20.50 $23.41 Southpark North $20.10 $22.05 North $ $19.01 Southpark $14.56 $16.68 Midtown $10.66 $16.65 $14.67 $15.77 $17.49 $15.45 $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 Direct asking rent 3Q 2011 Net absorption North 6416 Midtown Southpark Southpark North Hwy Midtown 51/Ballantyn Sublease asking rent SUBMARKET-BY-SUBMARKET ASKING RENTAL RATES Vacancy rates followed suit with net absorption gains, with the biggest winners, Highway 51/Ballantyne, North, and submarkets seeing vacancy rates fall by 1.5 percent or more during the third quarter alone. benefitted from the completed leaseup for Tranquil Court on Selwyn Avenue as Tribek Properties, IBID2SAVE, and Yoforia s headquarters occupied the last remaining spaces. In the North submarket, Regus s 12,651 square foot operation began at the Linville Building and IMG Worldwide occupied 7,084 square feet at Kenton Circle III; the revival of activity in the North during 2011, totaling year-to-date occupancy of 91,447 square feet, has caused rental rates to grow 1.1 percent during third quarter and 1.5 percent during the past 12 months. The Midtown and SouthPark submarkets continued to have the lowest vacancy rates in the metro, at 14.4 and 15.3 percent, respectively, due to their steady ability to appeal to and retain tenants. These strong submarkets have also enjoyed stabilization in their direct asking rental rates, increasing quarter-over-quarter by 2.4 percent in Midtown to $23.41 per square foot and holding steady in SouthPark at $22.05 per square foot. Conversely, the submarket struggled with a number of large, vacant buildings, leading to the highest vacancy rate in the metro at 29.7 percent that only decreased 20 basis points during third quarter., the largest submarket in Charlotte, saw the smallest dip in vacancy, down 0.1 percent to 17.2 percent in the third quarter, as Bank of America persevered in shifting employees from leased to owned locations and the majority of leasing activity was limited to current tenants like Martineau King and McGuireWoods moving buildings but keeping a similar space size. One exception was 13,000 square foot newcomer Northeastern opening its campus at 101 Independence Center. 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 3Q Q % 17.2% Midtown 17.4% 14.4% 23.4% 25.8% 15.2% 20.0% 0% Hwy 51/Ballantyn 22.6% 19.5% North 25.4% 19.9% 28.2% 22.5% SouthPark 16.1% 15.3% 31.6% 29.7% Midtown North SouthPark 3Q Q 2011 SUBMARKET-BY-SUBMARKET VACANCY TRENDS -25, ,000 50,000 75, , ,000 3Q 2011 Net absorption SUBMARKET-BY-SUBMARKET NET ABSORPTION 3Q 2011 page 3

4 LANDLORD/TENANT CONDITIONS Though the metro s office vacancy is currently at 20.1 percent, there have been two strong quarters of positive occupancy that indicate a nascent recovery is underway for tenants and landlords alike. Landlords have been taking advantage of incrementally increased economic confidence to raise direct asking rental rates, which have increased in seven of the nine submarkets during the past year and range from 1.5 percent in the North submarket to 12.0 percent in Highway 51/Ballantyne; the exceptions were, which was hurt by NASCAR Plaza s post-sale repricing in January, and s falling rental rates now that Class A Tranquil Court is fully leased. Sophisticated tenants seem to understand the changing winds, which have shifted slightly more towards lessors despite tenants still having the majority of the power in most submarkets and buildings. It should come as no surprise then that the three largest leases signed during the third quarter were lease renewals by companies that had lease expirations in 2013 or beyond but wanted to secure rents and concessions in line with the market s near trough. Also, with sublease spaces being snapped up in the most expensive and desirable submarkets, there are now fewer well-priced opportunities in sought-after locations, narrowing tenant possibilities to primarily direct options unless the leasing bonanza inspires other tenants to experiment with subleasing. On the direct leasing front, concessions have steadied as landlords witness more activity and conditions improve, but there is a noticeable difference in Class A and B lease terms; for leases signed during 2011, Class A deals average nearly 69 months even though Class B leases average barely over 60 months. This could indicate that Class B landlords, typically dealing with higher vacancy than their Class A counterparts, are more permissive on deal terms in order to get leases signed, though it s unlikely that these decisions will spill over too much into Class A negotiations. COMPLETED LEASE TRANSACTIONS TENANT ADDRESS SUBMARKET SF MARKET EFFECT Compass Group One & Two Coliseum Centre 214,507 Renewal, expansion Piedmont Natural Gas One Piedmont Town Centre SouthPark 113,663 Renewal, same Alston & Bird Bank of America Plaza 90,000 Renewal, same Mayer Brown Hearst Tower 36,113 Renewal, contraction SnapAV 1800 Continental Boulevard 30,000 New (from industrial) Mitsubishi Nuclear Energy Systems Hayes Building Highway 51/Ballantyne 25,000 New SunGard Business Systems Center Drive 21,800 Renewal, contraction Dimension Data Hall Building Highway 51/Ballantyne 18,024 Renewal, same Bradley Arant Bank of America Corporate Center 16,987 Renewal, expansion Diagnostic Devices One Harris Corners North 15,785 Renewal, same Charotte City Market (CCCP) Seventh Street Market 13,589 New Jones Lang LaSalle Rotunda Building SouthPark 13,556 Relocation, contraction Towers Watson 1 Bank of America Center 13,275 Relocation, expansion Heels.com NASCAR Plaza 12,483 Relocation, expansion NASCAR Media Group NASCAR Plaza 11,000 Expansion INDS Holdings Two Harris Corners North 10,953 Renewal, same Deb Group Four Coliseum Centre 9,994 New Pavillion Development Carnegie X SouthPark 8,113 Renewal, same LANDLORD TENANT Garfinkel Immigration Law Firm Southpark Towers I SouthPark 8,101 Relocation, expansion Midtown Highway 51/ Ballantyne North SouthPark UNFAVORABLE FAVORABLE 3Q 2011 page 4

5 OFFICE FORECAST Heading into the last quarter of 2011, Lincoln Harris stands by its year-end 2010 prediction that Charlotte s office market is robust enough to produce 500,000 square feet in net absorption during the year. With Lincoln Harris capturing nearly 775,000 square feet of leasing activity during third quarter, which is approximately 15,000 square feet more than in the previous quarter, all indications point to 2011 ending on a positive note. However, most worrying is the strong preponderance of local companies with sizable presences to renew for the same amount of space as large renewal leases dominated third quarter activity. Direct asking rates and signed rates are trending upwards and are expected to extend their gains in the coming months as activity and occupancy firm up. Charlotte has reaped a significant amount of attention not only because of the upcoming Democratic National Convention, but also as its impressive amenities world-class international airport, central location on the East Coast, highly skilled labor force, and low-cost locale catch the attention of business decision makers. SUBMARKET MAP ABOUT LINCOLN HARRIS Lincoln Harris, an affiliate of Lincoln Property Company, is a full-service corporate real estate company focused on development, commercial brokerage, corporate real estate services, retail services, land services, project services, property management and asset management. Based in Charlotte, NC, Lincoln Harris has twenty-three service offices across the country. More information about Lincoln Harris can be found at. CONTACT INFORMATION Sarah Godwin Research Manager sgodwin@lincolnharris.com Jubal Early Senior Vice President jearly@lincolnharris.com Chris Wasko Senior Vice President cwasko@lincolnharris.com Adam Colvin Senior Vice President acolvin@lincolnharris.com Marshall Williamson Vice President marshall.williamson@lincolnharris.com Campbell Walker Vice President cwalker@lincolnharris.com Ted Haley Vice President thaley@lincolnharris.com Trey Dempsey Vice President tdempsey@lincolnharris.com Chris Swart Vice President cswart@lincolnharris.com Faith Lampkins Leasing Associate flampkins@lincolnharris.com 2011 Lincoln Harris. All rights reserved. All information provided in Lincoln Harris research reports are from sources deemed reliable, but no warranty or representation is made as to its accuracy thereof and same is submitted subject to errors, omissions, or other conditions. Trevor Bona Leasing Associate tbona@lincolnharris.com 4725 Piedmont Row Drive, Suite 800 Charlotte NC office