SOUTHEAST SNAPSHOT, AUGUST 2006

Raleigh/Durham Industrial Market

The Raleigh/Durham industrial market is comprised of more than 19.4 million square feet of warehouse space and 14.8 million square feet of flex space. Together, the 34.2 million-square-foot market has a current vacancy rate of 16.9 percent, which is well below the vacancy rate recorded for each of the past 4 years. The warehouse market has shown particular vigor so far this year, declining 4.2 percentage points since the end of 2005 and 2.4 percentage points during the last quarter alone. Flex space has been the slowest to recover but is now showing an overall trend of improvement. Net absorption has been strong with more than 2 million square feet of flex and warehouse space absorbed since the first of the year. The vast majority of that occurred within the warehouse sector, which accounted for 87.6 percent of all space absorbed. The RTP/I-40 Corridor, which is not only the largest industrial submarket but has long been plagued by high vacancies and steadily declining asking rents, has turned the corner and now has a vacancy rate that, at 16.6 percent, is actually below that of the entire market.

Average rental rates for industrial space in Raleigh/Durham are beginning to stabilize but it will likely take until at least the end of 2006 for rates to begin to edge upward to any notable degree market wide. While a steadily declining vacancy rate has certainly created momentum in the leasing market it has not yet been pronounced enough for any aggressive rental rate growth. Still, as leasing activity continues to pick up, some landlords are beginning to price the recovery into their rents with incremental gains at some area developments beginning to appear.

One thing is certain — a steady and marked broad-base recovery is clearly underway. Both large companies and venture-backed start-ups in nearly all industries have participated in absorbing flex and warehouse supply throughout much of the Triangle. There has been an increasing level of activity among pharmaceutical companies, tech-related firms and suppliers of home goods. Additionally, economic growth, relatively low interest rates, and fairly favorable transaction terms have all served to fuel the recovery.

Speculative construction within the industrial market is virtually absent with only 50,600 square feet underway. The only notable project is a 33,000-square-foot warehouse building under construction on Corporation Parkway in Eastern Wake County, due for delivery later in the summer. Continued restraint on the part of developers will ensure that supply does not outpace the rate of demand, although the steadily rising costs of fuel and building materials have already served to temporarily hamper the urge to build.

Heading into the third quarter GVA Advantis expects continued strong economic fundamentals to fuel leasing activity within the local industrial market. Sustained employment growth should remain a notable trend and the area’s unemployment rate, barring a significant shock, should remain well below state and national levels.

— David Oddo is managing director for GVA Advantis in Durham, North Carolina.

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