CITY HIGHLIGHT, JANUARY 2008

RALEIGH CITY HIGHLIGHTS
Paul Reimel, Jim Scofield & Jimmy Barnes

Raleigh Downtown Market

Downtown Raleigh is capitalizing on a well-coordinated revitalization plan evidenced in streetscape enhancements, façade upgrades, and upwards to functional mixed-use buildings which transform the skyline daily. The infusion of more than $2.5 billion of investment from private and public partners during the next 5 years beckons downtown Raleigh to build upon its historical roots and provide opportunities for residents and visitors alike.

One prime catalyst for downtown development is best highlighted in the public investment in a 500,000-square-foot Convention Center, including an innovative, underground exhibit hall. The center will be adjacent to a new 400-room, four-star Marriott Hotel and both are slated to welcome inaugural groups in early fall 2008.

Raleigh Renaissance

The main thoroughfare of Fayetteville Street was opened again to vehicular traffic and functional pedestrian pathways will soon be complemented with the planned City Plaza project. This public meeting space will mobilize arts, entertainment, and retail venues as a showcase for the city and entire region.

Across from City Plaza will be Charter Square, a White Oak Properties and Craig Davis Properties’ $131 million mixed-use tower which will combine retail, restaurant, office, and residential development. The LaFayette, an Empire Properties’ planned boutique hotel project will also incorporate condo units, and glass elevator access to a rooftop bar, restaurant, and pool open to the public.

Among numerous privately financed projects under way are mixed-use tower complexes incorporating headquarters for Progress Energy and RBC Centura Bank (subsidiary of Royal Bank of Canada). And recently Optimal Technologies a Canadian software company announced plans to relocate their headquarters to downtown Raleigh and create 325 new jobs.

Downtown Raleigh hosts nearly 40,000 employees and serves as the hub for city, county, and state government employees whom occupy more than 5.1 million square feet of office space. Private commercial office space is more than 4.8 million square feet and the demand for this sector is on track to surpass the government office space level. The combined downtown commercial and government office space planned and already under construction is 1.7 million square feet.

Major downtown residential development is characterized by a mix of condos and apartments as well as single-family homes on the fringes of the central business district. Three projects completed last year introduced 184 condos and mixed-income rentals to the market. More than 20 residential condo and mixed-income projects are planned or are under construction, which will add 2,000 units by 2011. Currently, there are 20,647 residents in the central planning district with an anticipated growth to 22,870 by 2010 (Raleigh’s overall population estimate was 367,995 in July 2007).

Currently there are more than 100 restaurants and retail shops in downtown and momentum is building for more services and amenities to meet the demands of residents, employees working downtown, and visitors to the capital city.

In the face of inevitable challenges of revitalization efforts downtown Raleigh is proudly revealing a concentrated energy many predict will catalyze multi-sector successes.

— Paul Reimel is an economic development manager with the Downtown Raleigh Alliance.

Raleigh Multifamily Market

Investor demand, the growing economy and rising rental rates have turbocharged recent multifamily development in eastern North Carolina’s Raleigh-Durham-Chapel Hill market, known as the “Triangle.” In the nearly 91,000-unit market spread throughout Wake, Durham and Orange counties, 3,347 apartment units were completed in 2007 and another 3,188 are under construction, representing the highest number delivered to the market since 2002’s 5,412-unit milestone.

The majority of new development consists of luxury buildings with resort-quality features and amenities and unique interior floor plans, targeting highly educated, upwardly mobile professionals who are drawn to the submarkets surrounding centrally located Research Triangle Park, the economic engine of the Triangle. Land is at a premium in these submarkets, including the Cary-Morrisville-Apex, Northwest Wake, South Durham and Southwest Wake submarkets, which total 2,464 units or 74 percent of the total units delivered this year. Eighty-six percent of the 2,753 units presently under construction are also in these submarkets. Luxury buildings completed in 2007 include Fairfield Residential Group’s 334-unit Vista at the Park at 1200 Picket Branch Road in Cary-Morrisville-Apex; and Riverstone Residential Group’s 313-unit Alexan Brier Creek at 10100 Donerall Way in Northwest Wake.

If absorption is strong, new construction promises to continue at a robust pace with 6,497 units proposed. As would be expected, 44 percent of the planned projects are in the markets surrounding Research Triangle Park.

Rental rates are considerably higher in these luxury developments, averaging approximately $1,000 per unit or more and helping to push average weighted rents for the entire market up 2.9 percent from $780 a year ago to $800 currently. Still, 35 percent of the Triangle communities continue to offer concessions of one-half to one month of free rent or equivalent rent reductions.

Vacancy rates increased from 7.8 percent in March to 8.2 percent in mid-December due to new construction; increases were most notable in the Cary-Morrisville-Apex and Northwest submarkets, where an additional 2,100 units under construction — 1,100 in Cary-Morrisville-Apex and 1,000 in Northwest Wake — mean further vacancy increases are expected.

Investment demand from national — particularly private — investors pushed Triangle apartment sales to a record $1.1 billion in 2006 and drove average CAP rates down to 5.42 percent. Demand has continued strong in 2007 despite rising interest rates and the turbulent financial markets, and while closed sales of nearly $658 million as of mid-December are off 26 percent from 2006’s record pace, average CAP rates remain remarkably low at 5.55 percent. It has also driven average prices for higher-quality Class A properties from $110,000 to $115,000 per unit in 2006 to $125,000 to $135,000 per unit in 2007. The 323-unit Station Nine community in Durham sold for more than $173,000 per unit just a year after selling for $145,500 per unit in 2006.

South Wake is the only one of the Triangle’s 11 submarkets that is being nearly completely ignored, with only one 62-unit community under construction by CASA. Less demographically affluent than the other submarkets, South Wake is suffering from rising construction costs and land values creating difficult conditions for developers to pencil out a profitable project. However, it is worth keeping an eye on to determine if and when conditions may turn favorable for development to begin in that submarket.

Mid America Apartment Communities and The Goldberg Companies are two developers new to the Triangle who made their entry with the acquisition of existing communities, joining the ranks of Riverstone Residential Group, Crosland Group, Camden Property Trust and Fairfield Residential, all of whom have strong track records in the Triangle market. 

— Jim Scofield, SIOR, is a senior advisor for Sperry Van Ness in Raleigh.

Raleigh Office Market

Closing out 2007, vacancy rates in the office sector continued to be stable at 12 percent for this 50 million-square-foot market. Leasing activity slowed in the fourth quarter, as there appeared to be concern regarding the economy and the residential downward slide. However, vacancy rates continued to outperform those reported in 2003, 2004 and 2005 when vacancy stretched as high as 19 percent.

Although office rental rates continued an upward trend with 15 percent increases in some submarkets, the increases are projected to taper off in 2008 as new construction continues and the economy remains stagnant in this election year.

Office construction was strong in 2007 with over two million square feet completed or currently under construction. The majority of this construction is in the US 70/Glenwood submarket and the Downtown Raleigh submarket. American Asset Corporation continued development activity in the North Raleigh market with Brier Creek V under construction totaling 127,000 square feet. Highwoods Properties started construction on Glenlake Six, an addition to the highly successful project on Edwards Mill Road just west of the Glenwood Avenue intersection. In Downtown Raleigh, primary construction is for the approximately 700,000-square-foot RBC Plaza of which 276,000 square feet is office space. This 33-story project, being developed by Highwoods, has 100,000 square feet of office space preleased and a retail/residential component.

The industrial market continued its recovery during 2007. Vacancy rates will be 13.5 percent up slightly from 13 percent in 2006 but significantly better than the 20 percent high in 2003. The recovery has been fueled by more than 1 million square feet of absorption during the last 12 months while construction has been limited. Currently Duke Realty, one of the most active developers, has the only warehouse building reported under construction. Walnut Creek V, totaling approximately 100,000 square feet, is scheduled for completion in May 2008.

The Raleigh/Durham investment market continued at a strong pace in 2007 with over 1.5 billion in sales transactions. Activity has slowed at year-end, as the credit crunch has affected several deals. Large equity funds and institutional buyers are still attracted to the Triangle but will exhibit caution into 2008.

Job growth is the catalyst of our strong local economy. Preliminary numbers point to another year of over 20,000 new jobs being generated. The unemployment rate is also a positive sign for the Triangle as it remained at 3.5 percent, a drastic improvement over the 5 percent rate in 2002.

The Triangle has recently benefited from the announcements of several firms moving to the area: Butterball will build a new 50,000-square-foot headquarters in Garner, generating 50 new jobs. In addition, Campbell University announced the relocation of the Norman Adrian Wiggins School of Law from Buies Creek to the 100,000-square-foot Hillsborough Place building in Downtown Raleigh. PRA International, a medicine testing company, has announced the relocation of its headquarters to Raleigh, with plans to add more than 450 new jobs in the next few years.

In as much as 2008 is an election year, we expect the economy and our local real estate market to maintain a ‘wait and see’ attitude. Accordingly we do not anticipate many changes in our real estate statistics, which help paint the picture of our local market.

— Jimmy Barnes, SIOR, is president of Raleigh, North Carolina-based NAI Carolantic Realty, Inc.

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