BIG CHANGES ON WAY FOR CHARLOTTE’S OLDER TOWERS
August 25, 2017 | Ashley Fahey, Charlotte Business Journal
The Dilweg Cos. bought the First Citizens Bank Plaza uptown in April for $79 million with big plans in mind.
And not just for the tower, which was only 29% occupied at the time.
Durham-based Dilweg had already bet on Charlotte several times in recent years, seeing big returns on the purchase and sale of several office buildings.
“You can understand risk better by being in the market and underwrite risk that someone from out of town might not be comfortable with,” said Steve Campbell, managing director at The Dilweg Cos. “We’re aggressively pursuing buildings and other acquisitions in the Charlotte market.”
Dilweg’s local office arrives at a time of intense interest for Charlotte office properties.
Institutional capital is flowing into high-growth mid-tier markets such as Charlotte. Investors are buying up older office buildings, investing in renovations and leasing up at fast-rising rental rates.
So far in 2017, more than $258 million in property has traded uptown. Across the city, more than $1.3 billion in investment sales have occurred, with the record sale of Ballantyne to Northwood Investors earlier this year accounting for 76% of the volume, according to data from JLL.
A wide net of owners have acquired mostly older office buildings — First Citizens, BB&T Center and the Cameron Brown Building key among them.
Several recent transactions saw Class B office buildings in uptown sold to institutional, out-of-market owners new to Charlotte, including:
• The Arden Group in Philadelphia, which paid $148.5 million in June to acquire the BB&T Center.
• The Fallon Co., based in Boston, bought 301 South McDowell in July for $24.5 million with plans to open a regional office in the building.
Dilweg’s interest in adding to its Charlotte portfolio is best understood by looking back. The company purchased 121 West Trade for $59.6 million in 2013 before selling it to Lincoln Property Co.Lincoln Property Co. in December 2015 for $71.6 million. In SouthPark, Dilweg acquired One and Two SouthPark Center for $33.5 million in 2013 before selling the properties for $46.5 million in May 2016. It also owns the historic Johnston Building in uptown, which it acquired for $25.3 million in 2015, and the Park Abbey building off Park Road.
First Citizens Bank Plaza, a 476,393-square-foot tower at 128 S. Tryon St., fit squarely within Dilweg’s investment criteria. For two years, the firm pursued a portfolio held by Osprey that included First Citizens Bank Plaza before closing on the sale earlier this year, Campbell said.
“I think the magnitude of the (First Citizens Bank Plaza) project is probably the largest we’ve done in Charlotte,” he said. “Charlotte looks like a fantastic place to be for us, with job growth, the employee base … things that make for a dynamic market.”
Capital improvements totaling more than $10 million at First Citizens Bank Plaza will include revamping the building’s Tryon Street entrance — currently tucked away from the sidewalk — updating the lobby with a new color scheme and finishes, adding a tenant hub, repositioning shops on the ground floor and upgrading the building’s systems, including mechanical, HVAC and elevator cabs.
“The idea is to bring (the building) up to match the quality of the location,” said Tom FitzGerald, vice president at the Charlotte office of JLL, who is leasing the building’s office space with Barry Fabyan, executive vice president at JLL. “Whether it’s a corporate relocation from out of town or somebody that’s on the other side of town that wants to move closer to the park and baseball stadium, there’s a lot of different opportunities to pull off of.”
Already, Dilweg has signed two tenants at First Citizens Bank Plaza since acquiring the building — Charlotte-headquartered fintech company Passport, which is taking about 28,000 square feet on the top two floors, and Jebsen & Jessen, a trading company based in Hamburg, Germany, that’s leasing nearly 1,300 square feet for its North American headquarters.
Leases with retail tenants The Boardroom and Jersey Mike’s have not been renewed. Hair salon Studio 212 will relocate to the Fourth Street side of the building, which will be repositioned to include a tenant hub, new lighting and technology, a bike room, soft seating and space for a barista tenant. Adam Williams, partner at Legacy Real Estate Advisors, is leasing retail space at the building, which includes a possible restaurant location fronting Tryon Street.
Since it was listed for sale in 2015, First Citizens Bank Plaza saw a significant drop in vacancy with Westinghouse Electric Co.’s 10-floor departure to LakePointe Corporate Center last fall. That represented more than 170,000 square feet in the building. A total of 315,000 square feet, including a contiguous block in excess of 200,000 square feet, is currently available.
In conjunction with the big blocks of space available at First Citizens Bank Plaza, Dilweg and JLL are hoping to attract tenants looking for modern, tech-driven, open-concept workspaces that, in turn, attract a competitive labor pool.
Dilweg and JLL partnered with PMC Commercial Interiors to build out a marketing floor on the 18th floor to show prospective tenants different ideas for finishes, flooring, ceiling heights, furniture and layouts, in addition to views overlooking Third Ward’s Romare Bearden Park and BB&T Ballpark.
Alliance Architecture was hired to create a lobby renovation unique to the area. Barringer Construction is the general contractor for the renovation.
“We’re certainly trying to market this to folks that want to be uptown but don’t want to be in conservative space, which this building has been in the past,” Fabyan said. “The spaces were not left by prior tenants in a condition that’s easy to visualize, so this was the first step we wanted to take. You can start to … have a clear view” of the potential, he added.
Campbell said that beyond new space in Charlotte, which is leasing at well above the new central business district average of $30 per square foot, there aren’t many opportunities to take big blocks of creative space, especially along Tryon Street — perceived as a high-profile corridor but typically containing more traditional office space.
“We think we’ve identified a target market with creative office space that attracts a wide spectrum of tenants,” Campbell said. “They’re all hiring the millennial employee that’s a pretty dynamic group here. We’re offering an opportunity that has heretofore been in places like South End.”
The story at First Citizens Bank Plaza isn’t unique.
Many owners that have purchased uptown buildings in the past several quarters are investing millions to help attract a new generation of tenants:
• Charlotte Plaza is getting a $14 million update to the lobby, escalators, common corridors and parking deck. A new conference center and wellness room are also in the works.
• 101 North Tryon, formerly 101 Independence Center, is undergoing a significant repositioning with an overhauled lobby and updates to common spaces throughout the building.
• Several owners have added ground-floor retail spaces to office buildings, including at 400 South Tryon and Bank of America Plaza.
A few common themes have emerged with the properties that have traded recently in investment sales in the central business district.
Many loans have matured in the past 24 months, leaving landlords with the decision to either sell or refinance. As evidenced by the number of transactions in the past couple of years, many have chosen to sell.
“It seems like in every case, rents have been below market,” said Ryan Clutter, senior managing director and co-head of HFF’s Carolinas office. “As these buildings’ existing leases are expiring, there’s an opportunity to push those rents maybe a couple of dollars — in other cases, maybe several dollars.”
HFF is marketing the Wake Forest University Charlotte Center building at 200 N. College St. The weighted average of in-place rental rates at that 455,749-square-foot building is $11.26 per square foot on a triple-net basis — well below the central business district average, which recently topped $30 per square foot.
As long as population and job growth continue in Charlotte, experts say the region will continue to be attractive for institutional investors — and price-per-square-foot rates are likely to increase once newer product hits the market.
“I think there was probably a lot of concern at the start of the recession about this being a heavily banking town — how was that going to affect the city?” said Richard Buttimer, co-director of the Childress Klein Center for Real Estate at UNC Charlotte. “The city as a whole has done a remarkable job in terms of one, maintaining its banking presence and two, expanding its base to other areas, including energy and healthcare. I think there’s a sense that we’re a more diversified economy now — much less reliant on the monoculture of banking — which drives real estate growth.”
Those anticipated sales could push price-per-square-foot rates to new highs. Clutter said first-generation product, once stabilized, could command up to $400 per square foot, which would subsequently push per-square-foot rates to the mid-$300s for buildings delivered in the last cycle and the upper $200s for 20- to 30-year-old product.
According to data from JLL, the Carillon Tower, which sold to KBS for $147 million in early 2016, traded for $309 per square foot — one of the highest per-square-foot rates in recent history. This year, BB&T Center sold for $260 per square foot and First Citizens Bank Plaza sold for $166 per square foot.
“It may be hard to visualize but this has happened in other markets,” Clutter said. “Dallas had a whole price reset over the past 24 months because they started to have some first-generation product trade. Denver has seen this, Austin has seen this, Portland, Ore., has seen this — it’s coming to our part of the world.”