2 min read February 2023 — Invest: spoke with Johno Harris, president of real estate owner and developer Lincoln Harris, to discuss the dynamics of Charlotte’s real estate market and how the firm has succeeded in pushing ahead with innovative office real estate Downtown. “Most think of us as developers but our core business is service,” he said.
What are your key takeaways from the past 12 months?
2022 was a busy year for Lincoln Harris. Our biggest project has been a 23-story; 440,000-square-foot office tower we’ve started in Uptown Charlotte; 600 S Tryon. It’s a huge accomplishment considering how many businesses are balancing work from home with getting their people back into the office. It’s an evolving cycle. Companies are trying to find more ways to add amenities in their space to attract people back, such as on-site gyms and outdoor spaces to work. We’re even seeing spaces designed for podcast studios and golf simulators — anything to keep employees engaged. That’s what we’re making room for with this new building. There is a lot of creativity and innovation for the businesses that move in.
How are rising interest rates impacting your plans for 2023?
Fundamentally, we’re being more thoughtful about our underwriting. That’s a lot easier when there is consistency in the market, whether rates are high or low. But the volatility we’ve seen over the past year has made underwriting that much more uncertain, so we’ve had to shift our focus a bit.
2023 will be an interesting year if only because interest rates will continue to put pressure on the development and acquisition side. Typically, in a non-inflationary environment, costs go up based on supply and demand relative to development. In this current environment with rates and inflation, you’re not seeing that. That dichotomy is occurring in the real estate market in a way that we haven’t seen in years. The positive is that there is a lot of capital sitting on the sidelines waiting to see where the best place to play is. For the long run, we are in a much better place than we were during the Great Recession in 2008.
What is your assessment of office real estate right now?
There’s a differentiation between new and old office buildings. The asset class I worry about the most is generational assets that were built five or more years ago. Everyone was raising money around value add, buying buildings and investing millions to bring them up to standard and ride the wave of growth relative to population and rentals. The problem is that there are a lot of assets out there that have done 50% of their business plan, or they are 50% or more leased and there is no end in sight relative to leasing it up. A lot of groups, whether through financing or equity, don’t have the capital to continue to either lease it up with tenant improvements or finish out their business plan. If you build new in Charlotte, there is still good activity compared to other major markets across the country. But a majority of those tenants that are looking at space are looking at new assets because that’s one way to functionally get employees back to work.
How is Charlotte managing the growing development in the city and region?
Charlotte has a lot of positives and its underlying platform and foundation hasn’t changed. It’s a growth market where people want to live. The big challenge is that Charlotte is now on the radar and underwritten by big institutional investors to create a market that has become more dynamic. We’re seeing land value go up based on underwriting and density applied to these pieces of land. It goes back to the volatility of the current market as it’s getting harder to get a new product done there unless you’ve owned the land for a long period of time and your basis is low. So they, the ones with low basis, can be more creative about how to underwrite it.
What is your outlook for the next two to three years?
Most think of Lincoln Harris as a developer, but our core business is service, whether that’s serving an institutional investor through an acquisition or development, or serving an institution relative to managing their product. For Lincoln Harris, our people drive that service. I have to make sure we have the right people in the right place doing things the most efficiently. At the end of the day, if we’re doing our job and servicing our client, then it has a reverberating impact on the economic development of the city. Our outlook is good because our fundamentals are exceptional and we don’t have to live and die by the next acquisition or development. Our philosophy has always been that where there is smoke there’s fire and when there’s fire we run to it because that’s where the opportunities are.
For more information, visit: