Charlotte commercial builders busier, but earn less

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The number of commercial building permits issued in Mecklenburg County last year rose over 2009. But the value of construction continued to drop and remains dramatically off its 2008 peak, reports the Charlotte Observer.

The sharp drop illustrates that while more construction work may be planned or under way, clients are choosing smaller jobs, such as renovations versus building new, or paying lower prices. Developers expect this trend to continue, particularly for as long as financing remains tight.  Mecklenburg County issued 5,517 commercial building permits during 2010, up 2.5 percent over the previous year. The value of construction, however, dropped 16 percent to $647 million, or less than one-third of the work permitted just two years ago.

Developers say they expect to see the number of permits stay flat in upcoming years. They also say they’re not surprised to see construction values stay low, given how most real estate companies have scaled back on projects designed before the recession. And while the number of permits issued in 2010 is half that seen during the boom days, real estate analysts say that could be good because it shows supply is adjusting to meet demand.

‘”There’s some excess supply that needs to be absorbed before they start going gangbusters on building properties,” said Andrew Jenkins, a managing partner with Karnes Research Co. “You should see a lower level of new supply.”  Vacancy rates for commercial properties have risen sharply in recent years as new buildings planned in better times became available. The Charlotte office market, for example, hit 18.1 percent vacancy in the third quarter, the highest reported rate in eight years.

A few developers forged ahead in 2010. The Bissell Cos. in south Charlotte bucked trends by announcing two speculative buildings. Developer Chad Hagler with Woodfield Investments continued with an apartment complex in Elizabeth.  But most permits – roughly two-thirds – were issued for renovations, continuing a shift that emerged last year. Hospitals, hotels and office upfits dominated the permits granted last year, with Carolinas Medical Center receiving the largest permit for $83.5 million worth of work on its Pineville campus.

Permits issued ranged from work on a new multimillion-dollar worship center for Elevation Church in south Charlotte to upfits being done at the Duke Energy Center, which opened to tenants early this year, and from a new pool at a hotel on Independence Boulevard to insulation upgrades in an attic space.

“There’s still work occurring and each permit carries a separate set of architectural and engineering plans,” said Ned Curran, Bissell Cos. president and CEO. The Bissell Cos. spent $50 million last year on new construction and interior upfits. “Somebody’s got to build it. Somebody’s got to inspect it. It’s good for the economy,” he said of the smaller jobs expected to dominate the industry.

Real estate experts don’t expect to see much of the speculative construction that fueled Charlotte’s development spurt in the mid-2000s. Future projects are more likely to resemble one finished this year by Beacon Partners in north Charlotte.  Last June, the Charlotte firm finished a $1.1 million, 93,000-square-foot distribution facility it built for WESCO Distribution Inc., which distributes electrical construction products and electrical and industrial maintenance, repair and operating supplies.

The industrial building features energy-efficient light fixtures and low-flow toilets. The aisles where products are stacked have motion sensors, which turn lights on and off as people and forklifts pass by. In November, the building received a gold-level LEED certification for meeting national environmental-design and energy standards.

Beacon Properties, which once focused on speculative development, has switched gears and plans to partner with cities and counties this year to build projects and offer property management and other services. Beacon Partners’ senior construction manager Matt Lucarelli said that last year his firm focused on finding tenants for buildings the company constructed in 2009. The firm completed 14 upfits and built three buildings combined worth $9 million last 2010. It worked on 16 upfits and two speculative industrial buildings worth $7.4 million in 2009.

“There’s still mixed signals out there,” Lucarelli said of development prospects. But, he added, more companies are telling him they are open to constructing a new building because they’re finding existing properties old and technologically outdated. “There’s a lot of inventory out there, ” he said. “But people are coming in asking for newer buildings.”

Of the permits granted last year, 281 were granted for offices and retail buildings, 22 for industrial buildings, 90 for multifamily complexes and 124 for institutional. Illustrating the weak Charlotte condo market, 63 permits were issued for condominiums, down from a high of 2,472 in 2006, when the national housing market started to slow.

Jenkins, the analyst, said it will be good for the market if new supply of commercial buildings is depressed for at least another year because it will help lower vacancy rates and boost falling rents. “Everyone’s still nervous… and there’s always worry the other shoe could drop,” he said of the commercial real estate market. “Still, I’m more optimistic that 2011 will be lackluster but not completely bad.” Read More.

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