Thursday, June 20, 2024

NC trend: Uptown Charlotte ponders public support for developers of vacant Uptown buildings.

Charlotte Center City Partners held a design competition for ideas on how to reinvigorate older buildings. The Brooklyn and Church concept is pictured above.

Charlotte’s central business district is not the same bustling business hub that it was pre-pandemic, a similar fate facing many U.S. cities. Widespread retail vacancies are obvious, while eight Uptown buildings are at least 50% vacant.

Between 2019 to 2023, overall vacancy in center city Charlotte doubled from less than 10% to 21%, according to the CBRE real-estate services firm. Overall, the Charlotte market had the seventh-sharpest increase in office occupancy over the past four years, among 50 markets tracked by Cushman & Wakefield, another big real estate firm.

Vacancy rates are poised to rise even higher, as many leases are set to end this year.

The gloom shouldn’t be overstated. The district remains home to headquarters for Bank of America, Truist, Honeywell, Duke Energy and other big companies. The center city’s struggles are also tempered by growth in the South End neighborhood, which lies across a four-lane loop highway that circles Uptown. Office leasing volume gained 35% in South End last year, while the rest of the city experienced a 28% decline, according to the CoStar real estate data firm.

Still, to revive the center city and avoid a “ghost town” situation, city officials are considering supporting property developers through a combination of taxpayer funds
and incentives.

Charlotte Assistant City Manager Tracy Dodson

The property getting the initial incentives spotlight is 526 S. Church St., which became Duke Energy’s headquarters when it opened in 1975, then called the Electric Center. The building was acquired for $35 million in December 2022 by Washington, D.C.-based MRP Realty and Charlotte-based Asana Partners. The developers plan to convert the 13-story office building into 440 residences with retail properties on the first floor.

The $250 million project would include a separate adjacent retail building. In February, Assistant City Manager Tracy Dodson, who leads economic    development efforts, pitched the incentive program for MRP and Asana to the Charlotte City Council, which gave tentative approval. She promised to provide more details in the next few weeks.

Dodson and city officials say the incentives program can increase the city’s tax base, provide public parking and community spaces and create jobs. If the proposal is approved, developers may set aside some space for affordable housing, while improving adjacent pedestrian areas.

Developers say incentives are needed to ease the hefty expense of converting office space to livable units. Having public support also ensures that Charlotte officials have a voice in developers’ plans, potentially steering positive impacts.

526 Church St. served as the headquarters for Duke Energy when it was built in 1975.

“For office to multifamily conversions to be successful, the market rent has to be strong, the construction costs have to be manageable and the [cost] basis of the property has to be extremely low,” says Rob Cochran, senior managing director at Cushman Wakefield. “Given some of the current softness in the multifamily market, converting to residential will be difficult in downtown Charlotte right now.”

Most of all, the city wants to avoid empty buildings with declining property values, which depresses tax collections. Some former Uptown employers have moved a mile or two south to South End, often taking less space. Examples include the
Alston & Bird law firm and Grant Thornton accounting business. The vacancy rate for newer South End offices is less than 12%, according to CBRE.

“Right now the tax values are over-inflated on many highly vacant office buildings, and those tax values will continue to decline over time,” says Patrick Gildea, a CBRE vice chair in Charlotte. Conversions to different uses can lead to higher valuations and tax collections, he adds.

Cities such as Chicago and Washington have moved forward with conversion projects driven by tax breaks, though Charlotte’s effort is a rarity for North Carolina.

As an older building needing renovation and with a lower market value than newly built structures, the former Duke Energy site may make sense for a renovation. The project’s retail section probably needs to be “destination entertainment” that attracts people to the area, says Gildea.

“It is incredibly interesting because again we have service retail uptown, but we don’t have a lot of exciting destination or entertainment-focused retail, and that’s the brand that Asana is most known for,” he says. Asana focuses on redeveloping retail centers in older neighborhoods, including Park Road Shopping Center in Charlotte and Brightleaf Square in Durham.

Redeveloping Uptown Charlotte is challenging because many of its 1980s-era office towers “have a lot of core space, including elevator banks, that would require windowless bedrooms and other less-than-ideal layouts for apartments,” says Chuck McShane, CoStar’s director of market analytics. “Charlotte has a handful of buildings where it could work, but conversions won’t be a panacea to all of the vacancy problems.”

The COVID-19 pandemic forced downtowns to diversify away from their heavy focus on offices, McShane says. Charlotte, which emerged as a major office market largely because of its big banks’ growth, has to figure out a smart response to a changing world.        

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