Charlotte continues to enjoy robust growth.

But it is healthy growth or a case of too much of a good thing? At the end of September, the Federal Deposit Insurance Corporation (FDIC) released a report, Ranking Metropolitan Areas at Risk for Commercial Real Estate Overbuilding (available at http://www.fdic.gov/bank/analytical/regional/). It lists Charlotte as one of 13 U.S. markets at risk for overbuilding in the area of commercial real estate, which includes office, industrial, multi-family, retail and hotel development. It’s the third straight year the FDIC has included the Queen City on the list.The FDIC isn’t alone in casting a wary eye at Charlotte.

Donaldson, Lufkin & Jenrette has included Charlotte in its list of cities to watch for overbuilding in office development. And Moody’s Investors Service has given the city a code yellow for high supply and declining demand in the office market. Meanwhile, Charlotte’s business leaders wonder if the people here and the authors of these reports are looking at the same city.

“I see no reason or cause for alarm in this market,” says Tony Crumbley, who compiles research data for the Charlotte Chamber of Commerce. He points to Mecklenburg County’s annual figures for 1999: 1,051 new and expanding firms; a record 19,758 jobs created; and 14.5 million square feet of new commercial space for a capital investment of $1.4 billion. In the first half of 2000, there were 552 new and expanding firms; 9,628 new jobs created; and 9.6 million square feet of additional commercial space for a capital investment of $1.3 billion.

Jim Palermo, executive vice president at Bank of America in Charlotte, is even more direct. “I’m mystified — I can’t figure it out,” he notes. “I’m sitting here in my center city office looking out the window, and I wonder, ‘Where’s the over-building?’ We have an office vacancy rate in the center city of 1.7 percent, and there are companies that would like to move here, but go to the suburbs because there’s no space available for them.”

Adds Landon Wyatt, who heads up the industrial division for Childress Klein, “I read about the report in The Wall Street Journal, so I called my bankers. They were scratching their heads because they didn’t understand it — especially in the office and industrial markets.”

Mark Vitner, an economist with First Union Capital Markets, is another one of those scratching his head. “I didn’t think a whole lot of it [the report],” he says, “Their concerns are well-intentioned, and what they’re doing probably makes sense. If you’re looking for fire, the best place to look is where there’s smoke — and that’s about all they’ve done.”

What Vitner is referring to is the methodology the FDIC used for its report. Using year-end data for 1999, the country’s metro areas were ranked according to new construction as a percentage of existing stock in each of the five main commercial property types. To be considered at risk, a metro area had to rank in the top 10 for any two of the categories.

“If you’re looking for over-building, the best place to look is where there’s a lot of building,” he points out. “But in Charlotte, construction is keeping pace with demand.”

The Chamber’s Crumbley agrees: “They’re not factoring in demand, which is the most important component.”

Says Frank Warren, president of Karnes Research Co., which tracks the local commercial real estate market, “They analyze so many cities, they don’t understand the dynamics of the local market. They’re just looking at raw construction statistics and not pre-leasing activity and other factors in the market.”

“I’m not witness to the over-building they’re suggesting — we’re keeping pace with demand in distribution and warehouse, and in uptown, there’s virtually no office space at all,” says Terry Orell, vice president, business development for the Chamber. “Actually, from an economic development viewpoint, space availability is key — if you don’t have space immediately available, you can’t attract companies.

“I don’t think anyone makes a relocation or expansion decision based on one piece of information,” Orell adds. “Decision-makers read business sections and magazines, look at trends. One announcement by the FDIC is not going to have a considerable effect on Charlotte’s economic development.”

Looking for Signs

The FDIC’s first concern is healthy banks, and it wants to avoid the devastating effects the last recession had on banks which had over-extended themselves in commercial real estate in the late 1980s and early 1990s. That’s why it looks for signs of commercial overbuilding.

The goal of the report is to “raise awareness about substantial growth in real estate development and the corresponding increases in risk exposure to financial institutions.” The FDIC report also ranks the cities according to their community banks’ median ratio of C&D loans to total assets. Of the 22 Charlotte community banks, only two had C&D exposure of more than 10 percent and the number of past-due loans was also low. So Charlotte’s community banks are in good shape.

The Big Bank Effect

The report concludes, “Local bank asset quality may be affected more by the indirect economic effects of cost-cutting and job losses in the financial sector.”

Read that to mean concern about the major layoffs and cost-cutting moves by Bank of America and First Union in recent months. In fact, the report mentions, “Recently announced planned cost-cutting and workforce-cutting in the financial sector may exacerbate the threat of weaker absorption and could create the potential for office market oversupply.”   

Local leaders are aware of that, too, but they are not deeply worried. Vitner says while employment growth in the financial sector was 9 percent last  year, he expects it will slow down to 3 percent this year. “But that’s enough growth to absorb everything we’ve built so far,” he comments. “People tend to overestimate the banks’ importance here. While I can’t imagine Charlotte without them, there’s a lot going on here that doesn’t involve the banks, such as the growth of high tech firms.”

“As a suburban developer, we’re not affected by the bank layoffs that much,” says Ned Curran, president of The Bissell Companies. “Charlotte has a more balanced economy than people realize.”

Childress Klein’s Wyatt agrees: “The banks are not a factor in the suburban office market, although we may see a trickle-down effect. But the market is so tight, that even a slowdown isn’t going to sour the marketplace.”

Warren has the figures to back up that contention. At the end of the second quarter in 2000, he says, 3.2 million square feet of office space was under construction in Charlotte.

Just under 60 percent of that was occurring downtown, and 80 percent of that was pre-leased. “A lot of that space is spoken for,” he says.

Where the Vacancies Are

Charlotte’s suburban office vacancy rate was 11.9 percent in the third quarter, and countywide it was 8.6 percent, among the lowest it’s ever been. In a survey of its members released by the Charlotte Region Commercial Board of Realtors in October, 60 percent of the brokers disagreed that the office market was overbuilt. “There’s room for more speculative space to be absorbed,” Warren observes. “I wouldn’t argue the vacancy rate won’t increase, but it won’t be to unacceptable levels.”

But 60 percent of the brokers did agree that the apartment market is overbuilt. Warren, however, doesn’t see it that way. Some 2,800 units were absorbed in 1999, and 5,600 units are under construction, scheduled for staggered completions. “The vacancy rate may peak out at 8.5 to 9.5 percent, but ultimately the demand will hold up,” he believes.  

While developers and bankers in Charlotte aren’t particularly worried about Charlotte’s commercial development, they are not totally discounting the FDIC report, either. Says Bank of America’s Palermo, “You always pay attention to governmental agencies, and we’re respectful of their authority. As a lender, we want loans to be paid back, and so we do business cautiously.”

“We’re spec builders, so we monitor things like the FDIC report,” Curran says. “What also helps prevent overbuilding is that lenders are doing a better job of being careful, and credit requirements are stronger than they were 10 years ago. That’s a good thing.”

But builders know they still need to take chances — even if they’re smart ones. Notes Curran, “During the last recession, people got so tentative they would wait for 50 percent of the building to be pre-leased before breaking ground. You can’t do that now — people want space immediately, and so the threshold to gamble has been lowered. Still, I don’t think we’ve gotten to the point of overbuilding in Charlotte.”

And no one is saying Charlotte is invulnerable, by any means.

“Growth will continue in Charlotte — barring a major national slowdown or the relocation of one of the major banks,” Warren says.

Palermo looks at things that people in Charlotte-Mecklenburg have more control over. In addition to the effects of an airline merger, he mentions the potential loss of a professional sports team and the inability to solve the problems of roads, air pollution and schools as major hindrances to continuing the successes of the last decade.

Others agree. In the commercial brokers’ survey, they listed traffic and schools as the top two threats to the commercial real estate industry.

The fact that the FDIC report is giving people pause and making them realize continued growth is not a given, but something to work on, may be just what the city needs to keep its commercial real estate industry healthy — as long as people take action, that is. Stay tuned.