RE:SOURCE CHARLOTTE OFFICE 2Q 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 2Q 2011 Charlotte continues to entice current employers to retain and expand operations in Charlotte and for new ventures to move facilities and even headquarters to the area. ECONOMY On the face of it, Charlotte s recovery like that of the nation as a whole seems to have stalled during the past few months; from May 2010 to May 2011, the Charlotte MSA has created close to zero net jobs. However, this overall view of the metro obscures two major trends: while the government has shed a large number of employees, private sector officeusing employers have been significantly bolstering their payrolls. Officeusing sectors of professional and business services, information, and financial activities have been strongly adding jobs, creating a combined 7,100 new positions for a 3.2% increase in office employment year-overyear, whereas federal, state, and local employees have been reduced by 6,900 in the past year alone. With a May 2011 unemployment rate of 10.4 percent, Charlotte has finally lost its luster as an employment destination for hopeful job seekers, with the MSA s labor force declining by 14,200 over the past 12 months and its number of unemployed persons dropping 12,900 over the same time period. Charlotte s business friendly atmosphere and relatively low-cost but highly educated workforce continue to entice current employers to retain and expand operations in Charlotte and for new ventures to move facilities and even headquarters to the area. Local employers that have cemented their commitment to Charlotte this quarter include Electrolux and Compass Group, both of which are expanding their respective U.S. headquarters here by creating 200 new positions each, as well as Scor, the buyer of Transamerica Reinsurance, which will keep U.S. operations in Charlotte. Additionally, Extended Stay Hotels finalized its 63,418 square foot lease in Ballantyne for its headquarters relocation from Spartanburg, SC, while process and technology solutions provider Connextions signed a 61,151 square foot lease at Forest Park X to house its call center location that will eventually employ 1,200 workers. The metro made progress on its energy hub status this quarter, with Babcock & Wilcox expanding its nuclear division and expecting to add 120 new jobs, and Mitsubishi Nuclear Energy Systems starting up operations in Ballantyne with plans to hire 135 employees over the next five years. Lastly, eastern is making a move to tap into Charlotte s sizable bachelor s degree-holding population with a 13,000 square foot satellite graduate school campus at 101 Independence Center. OFFICE MARKET Overview The Charlotte office market achieved positive net absorption of 220,561 square feet during the quarter only the second quarter in three years to realize positive quarterly occupancy of more than 100,000 square feet. With net absorption gains made in every submarket except for the area, the metro s recovery appears to be fully underway. However, despite the robust move-in activity and the strong pipeline of signed leases summing to more than 762,000 square feet during the quarter, the metro s vacancy rate ticked up 10 basis points during the quarter to 20.7 percent. The reasons were twofold, as move-ins typically lag lease signings by approximately a quarter, and two new office buildings totaling 313,930 square feet delivered during the quarter which, in spite of 2,500, % ,000, % ,500,000 YTD % 1,000, % 500,000 Net absorption New development Overall vacancy ,632, , % 8.00% ,301 1,608, % 2009 (341,822) 855, % 500, % ,595 2,203, % YTD 2011 YTD , , % Net absorption New development Overall vacancy Occupied 34,009,472 Direct vacant 8,573,093 Sublease vacant 300,000 2Q Q MONTH FORECAST Market Supply (SF) 42,415,325 42,882,565 Under Construction (SF) 324, ,000 Under Construct. Preleased % 52.7% 0.00% Direct Vacancy Total Vacancy 21.2% 20.7% Total Net Absorption (SF) -382, ,561 YTD Net Absorption (SF) -400, ,151 Direct Asking Rent $20.44 $19.98 Class A Direct Asking Rent $22.94 $22.35 Class B Direct Asking Rent $16.75 $17.05 HISTORICAL VACANCY AND NET ABSORPTION 0.7% 79.3% Occupied Direct vacant Sublease vacant STATISTICS AND TRENDS SPACE BREAKDOWN 2Q 2011 page 1

2 One would think that the state of the economy would encourage the delivery of an abundance of sublease space to the market with tenants needing to downsize. However, surprisingly, a large percentage of tenant activity in Charlotte s office market over the last six months has been companies expanding rather than contracting. - Ted Haley, Vice President 54.5 percent preleasing activity wholly by the FBI at 7915 Microsoft Way, have not yet welcomed any tenants. For the overall metro, almost every segment of the market fared well this quarter with considerable net absorption gains as a rising tide seems to be lifting most ships. Metro-wide, suburban, and urban metrics have generally trended positively during 2011 for both product classes as Class A building enjoyed another upbeat quarter with 198,226 square feet of space occupied and Class B finally after nine consecutive quarters of bloodletting achieved modest positive net absorption of 22,335 square feet due to tenants moving up from Class C or smaller, untracked properties. The notable exception to growth is the urban area s Class B product that decreased occupancy by 64,014 square feet during the quarter as the Class A urban sector rebuilds tenancy to the tune of 148,378 square feet. Helped by increased interest in, downward trending rental rates in the overall market, and Bank of America s first positive contribution of 40,347 square feet since consolidation efforts were announced in 2010, Class A buildings in have been better able to win image-conscious tenants. The largest lease signed this quarter was corporate law firm Robinson Bradshaw s 10-year renewal at 101 Independence Center for 108,155 square feet. This lease is notable not only for its size, but also for keeping the firm s square footage requirement intact even amidst the changing fee climate for law firms. There has been a flurry of activity as office growth comes in three flavors: new companies, large expansions, and small expansions. The most obvious sign of Charlotte s burgeoning economic revival is the pace of announcements for sizable in-migration of new-to-the-market firms such as Connextions and Extended Stay Hotels, which have signed leases for a combined impact of more than 100,000 square feet, and Mitsubishi Nuclear Energy Systems, which has a lease pending at the Hayes Building for 26,000 square feet. Attracting new companies to the area speaks volumes for Charlotte s reputation, but a number of prominent companies with large local presences have also begun significant expansions: Lash Group has taken a 25,357 square foot floor at LakePointe 3, Babcock & Wilcox is expanding its footprint in Ballantyne, and PAETEC has leased the last remaining 11,602 square feet at Three Morrocroft Centre to take the entire building. Lastly, small and mid-size companies throughout the metro are experiencing incremental growth as evidenced by bolstering deal velocity and a myriad of 1,000 to 5,000 square feet expansions by tenants as diverse as Chelsea Therapeutics, HDR, ettain group inc., and Employers Assurance. Supply At the beginning of the second quarter, the office pipeline consisted of the FBI s fully preleased 171,000 square foot building on Microsoft Way in the submarket, as well as the Bissell Companies speculative and still 0.0 percent preleased 142,930 square foot Calhoun Building. Both of these buildings were completed during the quarter, with the Calhoun Building receiving its CO in May and the FBI building achieving its TCO in mid-june. After the deliveries of these two buildings, no substantial construction other than the two build-to-suit buildings for SPX and American Honda Finance, clocking in at 230,000 and 25,000 square feet, respectively $ $21.06 $17.62 $19.22 $ $24.08 $17.06 $ $23.48 $16.94 $20.77 $ $22.75 $16.28 $19.94 $ Q 2011 $22.35 $17.05 $19.98 $18.00 $16.00 $14.00 $12.00 was expected to break ground in the near-term. However, in mid-june, the Bissell Companies announced what is being hailed as the largest speculative project in the nation: two 275,000 square foot, 10-floor towers are now under construction at the northwest corner of Community House Road with planned completion dates towards the end of At ground-breaking, neither of these buildings had any leases signed or LOIs out, but the Bissell Companies must have seen significant interest in large blocks of space to wager such a large bet in a metro with vacancy north of 20.0 percent. Rental rates Direct average rental rates made incremental quarter-over-quarter gains, increasing 0.3 percent in second quarter to $19.98 per square foot. Interestingly, it was Class B space which had its first positive net absorption reading this quarter since year-end 2008 that has posted a strong comeback in direct rental rates during the past two quarters, jumping from $16.28 in fourth quarter 2010 to $17.05 per square foot in second quarter 2011, an uptick of 4.7 percent. At least with their face rates, the more well-appointed and competitive Class B properties have begun pricing themselves up closer to Class A projects, perhaps in order to recoup losses from the unfavorable differential in the two market segments vacancy rates (Class B s 23.3 percent versus the 19.4 percent of Class A). In contrast, Class A space has had a 1.8 percent decline in rates during the same period from $22.75 to $22.35 per square foot. Sublease prices have taken a step up recently, escalating from $16.71 to $17.12 per square foot since year-end 2010 as companies put sublease space on the market more strategically and typically for a longer term length. However, sublease space can still be had for as low as $6.00 per square foot in the suburban markets and for $10.00 per square foot in the urban core. Tenants in the market Q 2011 HISTORICAL DIRECT RENTAL RATES The number and average square footage requirement of tenants in the market that Lincoln Harris records jumped markedly during the second quarter to more than 2.4 million square feet compared to slightly more than 1.1 million square feet last quarter. The biggest differentiator is Sears, which is rumored to be looking in the greater Charlotte market for one million square feet for a potential headquarters relocation from Illinois. Even excluding the Sears 2Q 2011 page 2

3 requirement, roughly 370,000 additional square feet are being shopped in the market as several large, established tenants AXA/ Equitable, Transamerica, Shaw Group, Alston & Bird are surveying the market after having been in their respective spaces for more than a decade. Of those tenants, Shaw Group is anticipated to grow its space requirement the most and is expected to expand from about 280,000 square feet currently to 350,000 square feet in the mid-term. SUBMARKET ANALYSIS With leasing growth even in pockets that rarely see strong positive leasing activity such as Park Road,, and eight out of the nine submarkets experienced positive net absorption ranging from 11,851 square feet in to 71,149 square feet in. Only the submarket had negative occupancy this quarter of 20,275 square feet. Quarter-over-quarter, vacancy rates increased the most in the two submarkets that delivered new buildings with no accompanying move-in activity; the Highway 51/Ballantyne area upped vacancy by 190 basis points to 19.2 percent and the submarket saw vacancy rise from 25.4 to 27.2 percent. Alternatively, three submarkets saw vacancy rates drop by a percentage point or more during second quarter alone. 35.0% 35.0% 30.0% 30.0% 25.0% 25.0% 2Q Q Q % 2Q % 18.8% 17.4% 15.0% 19.1% 15.2% 15.0% 23.8% 19.1% 27.2% 15.2% 10.0% East & Southeast 16.5% 23.8% 19.2% 27.2% 10.0% 16.5% 5.0% Hwy 51/Ballantyn 24.0% 19.2% 5.0% Hwy 51/Ballantyn 24.3% 24.0% 22.4% 19.2% 0.0% Park Road 32.8% 24.3% 24.4% 22.4% 0.0% SouthPark Road 14.5% 32.8% 15.5% 24.4% SouthPark i 30.7% 14.5% 30.9% 15.5% i 30.7% 30.9% East & Southeast Hwy Hwy 51/Ballantyne 2Q Q 2011 Park Park Road Road SouthPark SUBMARKET-BY-SUBMARKET VACANCY TRENDS The Park Road submarket attracted 16,977 square foot HireRight to the Park Abbey building this quarter and is winding down the lease up of Tranquil Court with two new tenants, pushing vacancy from 26.9 to 22.4 percent. Additionally, the submarket has benefitted from a large surge in lease-up activity at the Linville Building, which welcomed Positec to its 24,703 square foot home, dropping vacancy from 26.9 to 22.4 percent. The Regus Group also just leased 12,651 square feet at the Linville Building, which could be an indicator of resuming business activity in this industrial-heavy submarket. The second quarter saw an acceleration in leasing activity that foretells a pending recovery, but several submarkets are capturing a large amount of signed deals due to their respective strengths. Three submarkets snapped up more than 100,000 square feet of deals this quarter: the low-cost but well-located area, the business-services laden center, and the boom town Highway51/Ballantyne submarket. With fewer than 40,000 square feet of signed leases, SouthPark was unusually quiet this quarter as rents crept up 1.9 percent quarter-over-quarter and 4.5 percent since yearend 2010 to a similar level sought in the urban core; in a gradual, accretive process, many SouthPark buildings have appended their rates and rate ranges by $0.50 to $1.00 per square foot since the beginning of The area also experienced a large upward shift in rental rates as BECO South, the owner of Innovation Park, uniformly raised pricing from $15.00 to $17.00 per square foot to better account for the improvements made at the properties. Rental rates in the Park Road submarket dropped 7.5 percent in just second quarter, as available spaces dwindle at Tranquil Court, the only Class A building in the area, and as the Park Abbey building readjusted its face rate from $17.50 to $14.50 per square foot. Sublease asdirect asking rate Southpark Park Road Hwy 51/Ballantyne Hwy 51/Ballantyn Southpark Park Road $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 Direct asking rate 2Q 2011 Net absorption Hwy 51/Ballantyne Park Road Southpark Park Hwy Road 51/Ballantyn Sublease asking rate SUBMARKET-BY-SUBMARKET ASKING RENTAL RATES 25, ,000 50,000 75,000 2Q 2011 Net absorption SUBMARKET-BY-SUBMARKET NET ABSORPTION 2Q 2011 page 3

4 LANDLORD/TENANT CONDITIONS Highway 51/ Ballantyne Park Road SouthPark UNFAVORABLE FAVORABLE Though negotiating power in Charlotte s office market remains firmly in the hands of tenants, landlords regained a modicum of leverage during the second quarter as they held firm on asking rental rates, but provided some leniency on the number of months of free rent per year of term; tenants are typically able to achieve one month free per year of term, but a variety of tenants of all sizes and terms have secured concessions in excess of the standard. This shift was particularly apparent during negotiations for Class B space, which has also been plagued with stubbornly high vacancy rates, as those direct asking rental rates rose 1.8% in the past year but effective rental rates have declined. One place where landlords have ceded some ground is in the length of deal term, with renewing tenants able to secure two-, three-, and four-year leases, though long term leases usually either five, six, or ten years are the norm. Additionally, expansionary leases have gained traction since the fourth quarter of 2010 and the pace of those deals have only climbed with each successive quarter. With rental rates in many segments of the market in a slight upswing, tenants who have been waiting on the sidelines or who are contemplating an early blend and extend renewal are, depending on specific submarket conditions, nearing the end of an opportunistic window. With available spaces still abundant but deal velocity ramping up, this is likely the ideal time for tenants to lock down desired rates without too much push back on term. Landlords have also been appropriately responding to rising build-out costs and have been granting renewals between $5 and $17 per square foot for improvements, and anywhere from $18 per square foot to full turnkey for new tenants. COMPLETED LEASE TRANSACTIONS LANDLORD TENANT TENANT ADDRESS SUBMARKET SF MARKET EFFECT Robinson Bradshaw One Independence Center 108,155 Renewal, same Extended Stay Hotels Everett Building Highway 51/Ballantyne 63,418 New Connextions Forest Park X 61,151 New Babcock & Wilcox Everett Building Highway 51/Ballantyne 41,000 Relocation, expansion N.C. Department of Revenue 301 McCullough 27,752 Relocation, expansion Akima Hayes Building Highway 51/Ballantyne 26,135 Relocation, expansion Ally Toringdon I Highway 51/Ballantyne 26,036 Relocation, expansion Lash Group LakePointe 3 25,357 Expansion American Honda Finance American Honda Finance Building Highway 51/Ballantyne 25,184 Relocation, expansion Coats America Toringdon II Highway 51/Ballantyne 24,715 Renewal, same Capgemini Charlotte Plaza 24,072 New HireRight Inc. Park Abbey Building Park Road 16,977 Relocation, expansion Principal Life Insurance Brixham Green Two Highway 51/Ballantyne 15,500 Relocation, contraction IKON Three Coliseum Centre 15,071 Renewal, same Employers Assurance Cullman Park Highway 51/Ballantyne 13,720 Renewal, expansion eastern One Independence Center 13,000 New The Regus Group Linville Building 12,651 New PAETEC Three Morrocroft Centre Southpark 11,602 Expansion 2Q 2011 page 4

5 OFFICE FORECAST With a solid quarter of occupancy gains behind it, the Charlotte office market remains on target to meet Lincoln Harris prediction of 500,000 square feet of net absorption in The more than 760,000 square feet of signed leases recorded by Lincoln Harris in the second quarter are expected to translate into approximately 332,000 square feet of net move-ins during the second half of the year. Though employment has plateaued as businesses and consumers continue to be skittish about the nation s winding path to recovery, the Charlotte metro has garnered accolades for its potential to emerge from this recessionary period as one of the country s top potential boom cities, per Forbes magazine. Having a company with a deep national brand like Sears consider Charlotte a candidate for a possible headquarter relocation venue is a gauge of the metro s currency among business executives. Additionally, the Bissell Companies groundbreaking of two 275,000 square foot buildings with an investment cost of $100 million is another clear signal of the strong fundamentals of the Charlotte metro due to the area s skilled workforce and inviting, business-friendly environment. 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 Associate tbona@lincolnharris.com 4725 Piedmont Row Drive, Suite 800 Charlotte NC office