SOUTHEAST SNAPSHOT, DECEMBER 2008

Raleigh Office Market

The worldwide financial crisis has pushed many real estate markets into a state of turmoil. While no individual area is immune to the global economic environment, the Raleigh/Durham office market continues to remain strong. The individual towns that make up the Triangle area consistently land on a variety of “Best Cities to Live and Work” lists. A recent Business Week article named Durham one of the top cities in which to ride out a recession; this was due to the number of jobs focused around public and private research positions and the educational and medical institutions that reside within the market. The market has yet to experience a steep decline, but symptoms of the wider economic downturn are beginning to show. Office vacancies increased from 12.4 percent a year ago to 13.5 percent during the third quarter of 2008. With 750,000 square feet of newly completed construction and an additional 1.6 million square feet scheduled for the coming months, rental rate increases are expected to slow because tenants will have more options. New project starts are slowing as developers face financing difficulties, which may allow demand to catch up to supply once the new space is filled.

Scientific Properties’ Golden Belt warehouse renovation in downtown Durham includes 70,000 square feet of office space.

For both Raleigh and Durham, two trends include downtown growth  and  environmentally friendly buildings. The downtown areas have undergone development explosions as the municipalities have pushed for higher density and smart growth within their urban centers. The 33-story, 292,000-square-foot RBC Plaza, developed by Highwoods Properties, is a revitalized high-rise development in downtown Raleigh. The RBC Plaza is scheduled for delivery at the end of 2008 and is almost 100 percent pre-leased. Similarly, downtown Durham has seen a combination of new construction projects and historic renovations. The Diamond View II office building features 156,000 square feet overlooking the Durham Bulls Athletic Park, home of the minor league baseball team made famous in the movie Bull Durham. The Golden Belt warehouse renovation includes 70,000 square feet of office space within a 150,000-square-foot mixed-use development. Diamond View II is being developed by the Capitol Broadcasting Company, and Scientific Properties is developing Golden Belt.

Two examples of new construction scheduled for delivery in 2009 pursuing LEED Certification are East 54 in Chapel Hill and the Quintiles Plaza in Research Triangle Park. Developed by East West Partners, East 54 will offer 113,191 square feet of office space in a mixed-use development. The project’s rates of $32 per square foot are pushing the top of the market, proving that green buildings can command above-market rates. The Quintiles Plaza, developed by Tri Properties, is 252,000 square feet. Other LEED projects scheduled for 2009 delivery include the renovation of the Time and Temperature Building by Tri Properties and the RDU Center III by Hamilton Merritt.

Select area submarkets continue to grow. Major projects include the 300,000-square-foot CapTrust Tower at North Hills, a joint venture between Kane Realty Corporation and Duke Realty Corporation. Located just outside the Interstate 440 beltline, this project is an expansion of Kane’s successful redevelopment of the former North Hills Mall site. Brier Creek, located in close proximity to RDU International Airport, houses medical office users. The Cary submarket is seeing growth in existing office parks as Highwoods, Capital Associates and others expand on existing pads. Research Triangle Park has experienced positive net absorption during 2008, an example of the strength of the Raleigh/Durham market.

Looking toward the future, development is expected to continue its downtown growth trend and to expand along potential transit corridors and areas with improved traffic flow. The expansion of Interstate 540 and the Triangle Expressway has led to increased access and development into what used to be the small commuter towns of Morrisville, Holly Springs and Knightdale. Multiple developers have gone through the entitlement process and have the capacity to bring buildings out of the ground during the next few years. The Triangle also has kept a close eye to the development of Charlotte’s light rail system. Government officials have made this a point of study in order to bring similar transit to this area.

Uncertainty lingers within the broader economy, and Raleigh/Durham is not untouched; however, the market’s diverse economy remains strong, and rental rate increases, job growth and low office vacancies continue. Development has slowed but not stopped, and the Triangle is well positioned for the future.

— Adam Pomerantz is a development associate with Durham, N.C.-based Tri Properties. 

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