SOUTHEAST SNAPSHOT, DECEMBER 2004
Raleigh-Durham Industrial Market
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Elizabeth Raiford
Director of Marketing and Research
Grubb & Ellis|Thomas Linderman Graham
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Industrial development in Raleigh-Durham, North Carolina,
remains minimal. Most developers have wisely been holding
off on speculative construction for the last 3 years.
Conditions in the Raleigh-Durham industrial market remain
incredibly soft, but the bleeding of space and resulting increases
in vacancies have slowed dramatically since 2003, says
Elizabeth Raiford, director of marketing and research with
Grubb & Ellis|Thomas Linderman Graham.
The market has been moving sideways for the last few quarters.
Activity has picked up somewhat, but most new leases have
been offset with new vacancies. Traditional industrial space
is faring worse than flex space, which typically is used as
office space in this market.
There have been few large tenants seeking space in the market
in 2004. The majority of deals have been signed with tenants
needing 10,000 to 40,000 square feet. The few large tenants
that have sought space in recent months have typically opted
to build or purchase rather than lease. For some older
facilities, we are beginning to see a trend of buildings being
redeveloped or adapted for alternative uses, such as sports
and entertainment complexes or churches, Raiford says.
While recent development has been minimal, the majority of
speculative construction that has occurred has taken place
in southeastern Wake County. The construction of industrial
and flex space at Walnut Creek and Greenfield North is significant
because it represents two rare instances in which developers
were willing to build in the face of soaring vacancies. Lower
land prices and a nearby booming population (and therefore
employment base) have caught the attention of developers.
Both projects have been relatively successful in attracting
tenants. Industrial development will remain slow for the foreseeable
future, but what does occur is likely to happen in southeastern
Wake.
Land prices are substantially less in southeastern Wake County
than those in the Triangles traditional industrial hubs
(Research Triangle Park and Capital Boulevard in Raleigh).
The pharmaceutical and high-tech companies that are opting
to build their own space, however, are doing so in and around
Research Triangle Park. Being in this area places them in
or near the largest research park in the United States. Companies
that have recently announced plans to build space in order
to enter or expand in the market include Merck, which purchased
land in Durham County to build a 250,000-square-foot vaccine
manufacturing facility, and semiconductor maker Cree, which
plans to expand on its own Research Triangle Park campus.
Asking rates for traditional industrial space are falling
between $2.50 and $4.50 per square foot, triple net. These
rates, however, are highly negotiable, and concessions are
widespread, Raiford notes. Asking rates for flex space
are ranging between $8 and $10 per square foot, triple net.
Vacancy for traditional industrial space fell for the first
time since 2002, ending the third quarter at 28.6 percent.
Absorption was also positive for the first time since 2002
at 132,643 square feet. The activity was not enough, however,
to bring year-to-date absorption into the black. It stands
at negative 218,870 square feet. It is interesting, however,
to compare these figures with those from 2003. Vacancy has
increased by just 1.4 percentage points so far in 2004. In
2003, vacancy rose by 6.2 percentage points as the market
witnessed more than 1.2 million square feet of negative absorption.
Thus, while the numbers for 2003 are not pretty, they do represent
an improvement over the previous year.
As previously mentioned, the flex sector has fared somewhat
better, and as an alternative to traditional office space,
it stands to rebound more quickly than warehouse/manufacturing
space. Vacancy fell slightly in the third quarter and currently
stands at 22.3 percent. The decrease came in tandem with positive
absorption of approximately 200,000 square feet, bringing
the year-to-date total to 241,000 square feet.
For the near future, Raiford suggests keeping an eye on Research
Triangle Park. It is the engine that drives the regions
economy and is also the areas largest industrial submarket,
she explains. Both Research Triangle Parks office
and industrial submarkets have been Raleigh-Durhams
hardest hit. Industrial vacancy here stands above 30 percent.
Once we begin to see significant improvement in Research Triangle
Park, we will know that a sustained recovery has truly taken
hold.
Southeastern Wake County will also be important to watch as
affordable land prices are expected to continue driving more
development in that direction. Duke Realty began bringing
Walnut Creek on line as a speculative project in 2001. It
completed another building in the park in the second quarter
in spite of soft leasing conditions, bringing the total park
to 428,000 square feet. The last building came on line with
44,000 square feet pre-leased. The 122,000-square-foot Greenfield
North was also constructed on a speculative basis in 2004.
Pergo recently leased 61,000 square feet.
While U.S. industrial vacancy has fallen below 10 percent,
Raleigh-Durham holds the dubious distinction of being the
softest industrial market in the nation. It is important to
note, however, that unlike its neighboring markets in Greensboro,
Charlotte and Richmond, Raleigh-Durham is not a traditional
distribution hub. Rather, the region has a small, rather undeveloped
market (totaling just 34.6 million square feet of warehouse
and flex space) that relies heavily upon a service economy
and will depend on a rebound in the tech sector for a significant
recovery to take hold. The news is not all bad, however. The
region is gaining traction in luring new industry to the area,
including biotech, pharmaceutical, high-tech and medical device
manufacturing companies. We are also beginning to see
signs of improvement in the local tech sector with major players
such as IBM, Cisco and Ericsson adding jobs, says Raiford.
With three major research universities within close proximity
of each other and robust population growth, Raleigh-Durham
is ripe with talented workers. Combined with a world-renowned
research park and a high quality of life, the long-term outlook
for the region is bright.
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