CITY HIGHLIGHT, JANUARY 2010

RALEIGH/DURHAM CITY HIGHLIGHTS
Joaquin Canals, Gary Lyons, Daniel Eller, Robin Roseberry Anders

Raleigh/Durham Retail market

The retail sector in Raleigh/Durham has remained relatively strong despite the downturn in the national economy. More than 1.5 million square feet were added to the market in 2009, including a Walmart Supercenter, with almost 150,000 square feet; and the 125,000-square-foot SouthPark Villages. Also in 2009, hhgregg opened in an old Circuit City building, taking almost 28,000 square feet, and buybuy BABY leased more than 32,000 square feet of space once occupied by Linens ‘N Things at New Hope Commons in Durham. Harris Teeter opened at Stonebridge Village with 84,000 square feet, and Kohl’s opened at Wake Forest Crossing.

Current trends in retail development include downtown infill locations and the expansion and renovation of existing centers. Some of the most significant recent developments include the expansion of North Hills and the recently announced Whole Foods in North Raleigh. Retail Strategies is developing the more than 100,000-square-foot Bethany Village. Other developments are scattered throughout the area.

At the present time, there are no areas in need of major retail development, especially with additional big-box closings expected in the coming months. As owners make rental concessions to keep existing tenants, they are also being very competitive for quality tenants. The main concern of owners now is the upcoming refinancing uncertainty. 

Despite positive absorption, average rental rates are down compared to previous years; rents hover around an average of $16 per square foot. Smaller retail centers can be as low as $12 per square foot, with larger centers close to $30 per square foot. With retail vacancy hovering at 7 percent, 2010 could continue to be a challenging year for retail owners and developers. New, food-anchored centers were on the drawing board from Morrisville to Wakefield along with infill and redevelopments. However, many developers have now indicated they are putting future new projects on hold and hoping for an improved economy.

 In the future, as construction on the Outer Loop continues around Raleigh, new pockets of opportunity will be opened at the major interchanges. Other expected growth corridors to be considered in late 2010 and 2011 are the Cary/Apex submarkets.

— Joaquin Canals handles retail leasing at Raleigh-based NAI Carolantic.

Raleigh/Durham Industrial market

The Triangle region appears to be stabilizing as we enter 2010. After losing approximately 27,000 jobs from September 2008 to August 2009, the region was reported to have gained 7,200 jobs that August. This bodes well for the Triangle, as we see the region consistently being one of the first to stabilize when we exit a recessionary period.

Our industrial market, which includes Raleigh, Durham and Chapel Hill, comprises a three-county area that has a total of 24 million square feet of warehouse space and 15.5 million square feet of flex space. This industrial space is concentrated in three of the 15 submarkets that define the Triangle region — the Research Triangle Park/Interstate 40 corridor, the US 1/Capital Boulevard corridor and Eastern Wake County (along I-440 and US 64). These submarkets contain 77 percent of the leasable warehouse space and 73 percent of the leasable flex space. As these sub-markets go, so goes the Triangle.

Overall, the industrial market appears to be bottoming out, as warehouse vacancies have reached just more than 20 percent, and the flex vacancy rate hovers around 16 percent. When marketable sublease space is included in the equation, the warehouse vacancy rate reaches 26 percent and the flex space vacancy rate approaches 17 percent. There appears to be a substantial difference as well between the performance of Class A warehouse space and Class B or C space; users are opportunistically taking down the readily available Class A space at the expense of the Class B assets. Owners currently have an opportunity to shift to spaces with higher ceilings, better sprinkler systems, better telecommunication infrastructure and, in some cases, superior locations.

The RTP/I-40 corridor, which alone makes up 43 percent of the area’s warehouse space, had a vacancy rate of 8.38 percent at the end of the third quarter, up slightly from the previous quarter. Area experts believe the submarket’s vacancy could peak at 10 to 11 percent. The submarket’s appeal is driven by its phenomenal location.  As a result, the RTP/I-40 submarket should rebound more quickly than the other submarkets.

Transaction volume in the warehouse/flex arena dissipated substantially in 2009 largely due to the lack of available financing for investment deals. Several end-user transactions took place in 2009, including the purchase of the 450,000-square-foot warehouse, located at 4121 Surles Court in Durham, known as the Essex Center. This property was purchased by EMC, a data management company, in October and will be used as a data center and research lab. A large percentage of the facility currently is used by Sanmina-SCI, but it is our understanding that EMC will occupy 135,000 square-feet immediately. Another user transaction in 2009 was the sale of the 3211 Distribution Center, which is located at 3211 South Miami Boulevard in Durham, to LC Industries. The new owners will occupy approximately 50 percent of the building, while the remainder of the building is leased to Home Comfort Furniture and Mattress Center. 

On the investment front, one verifiable transaction was the sale of the FedEx facility located at 2600 Page Road in Durham. This 130,000-square-foot building, which boasts 24-foot ceilings, was built in 2007.  It sold for $13.3 million. The cap rate was extremely competitive, which is evidence that well located, A-rated credit tenant facilities will still fetch top dollar. 

It appears that the Raleigh/Durham industrial market is poised to rebound now that job losses have diminished. The region is projected to grow from 1.3 million to more than 1.9 million people during the next 10 years. This would put our region on par with the current size of San Antonio or Orlando. If this forecast is accurate, one would tend to believe that as soon as development financing is more readily available (for terms that work for our area developers), many developers will be back at it again in those submarkets that demonstrate positive absorption trends.

— Gary Lyons is the managing director of Raleigh-based Sperry Van Ness|AIM Real Estate Advisors.

Raleigh/Durham Multifamily Market

Throughout 2009, the Raleigh/Durham apartment market has been considered one of the best apartment markets in the Southeast. This trend should continue through 2010 due to the region’s diverse economy and rapid growth projections.

Despite the relative strength of the local economy and the diversity of the employment sector, the Raleigh/Durham apartment market currently has more supply than demand due to recent construction, and the effective rental rates of communities in lease-up have continued to fall. The overall vacancy rate is currently 10.5 percent due to the delivery of approximately 2,000 new units through the third quarter of 2009. At the end of the third quarter, just more than 1,000 units had been absorbed for 2009. With 3,362 units currently under construction and 2,583 units planned or in pre-construction, 2010 is not going to be any better in terms of increasing rental rates (currently averaging $900 to $950 per unit) or the absorption of newly constructed units in the market.

On the transaction side, 2010 will also bring the first wave of distressed assets to market. The sales that occurred in 2009 were mostly a result of two institutional owners (Equity Residential and AIMCO) exiting the market, and the region experienced only one or two truly distressed transactions. There will be two types of distressed sales in Raleigh/Durham during 2010: newly constructed assets and older apartment communities that are overleveraged or have distressed owners. Most of the newly constructed assets are distressed due to the fact that they are still under construction loans, and after lowering rents to boost occupancy, the developers are unable to secure permanent debt in an amount that takes out the existing lender.

Looking ahead, the fundamentals in the Raleigh/Durham market are strong. There are a few developers that are banking on the region’s long-term prospects and are taking advantage of lower construction costs. The most active developer is Charlotte-based Crosland. Crosland has focused most of its recent efforts on the Chapel Hill submarket, which is arguably the best multifamily submarket in the Triangle for new construction. Crosland, after completing the 129-unit Cosgrove Hill at the intersection of Erwin Road and US 15-501, is under construction on 123-units at Chapel Hill North near the intersection of I-40 and MLK Boulevard and on the 120-unit Chapel Watch Village on nearby Eubanks Road. Additionally, Crosland has current projects near Duke University in Durham and at the intersection of Harrison Avenue and Weston Parkway in Cary.

Raleigh/Durham does feel the effects of the correction in the market and is not immune to the national recession, but with strong fundamentals and a bright future in terms of growth, it is no surprise that developers and apartment owners continue to consider Raleigh/Durham the best apartment market south of Washington, D.C.

— Daniel Eller runs the Raleigh/Durham office of Southeast Apartment Partners.

Raleigh/Durham Office market

In May 2009, real estate pundit Barbara Corcoran named Raleigh/Durham second in the nation for markets likely to recover quickly on a segment for the Today show. True to form, the Triangle area continues to attract new businesses as well as domestic and international expansions, despite the economic downturn. The Triangle combined MSA added an average of 10,254 jobs per year (July to June) during the 7-year period ending in June 2009; this resulted in an average 1.5 percent annual growth rate. Companies like EMC Corporation announced plans for a $280 million expansion that will add almost 400 jobs in the next 5 years. Allscripts-Misys Healthcare Solutions will bring 125 new jobs to the area as the company utilizes $19 billion of government money to update health information systems. Deutsche Bank will open a technology development center creating more than 300 jobs and investing $6.7 million.

Though the Triangle market has experienced its share of bad news, some of the more discouraging stories have been offset by significant announcements. For example, emerging from Nortel’s bankruptcy is Avaya’s acquisition of a portion of Nortel’s local business, which will keep a large percentage of Nortel employees in the Triangle. On the heels of Sony Ericsson’s recent defection, the Baton Rouge, Louisiana-based IEM announced it is moving its headquarters to the Triangle, bringing 430 jobs in the next 6 years. Laid off workers are once again taking opportunities to start their own businesses. Consistently, the Triangle area is targeted for its innovation and highly educated workforce.

Clearly, however, national economic challenges are reflected in the local office market. Approximately 1.4 million square feet was added to the market during 2009. Rental rates dropped slightly, averaging $20.25 per square foot, with significant concessions offered on extended leases. With tenants downsizing, overall vacancy rose slightly to 14 percent with minimal net demand.  However, some submarkets are experiencing vacancy exceeding 23 percent. Except in rare occasions, the mood among landlords is grim.

In 2009, a significant amount of office construction took place in North Raleigh at the CapTrust Tower and Six Forks Place III developments. The 130,000-square-foot Dominion Partners building, which is fully leased by Genworth, was a welcome relief. Expected to receive Gold certification under the U.S. Green Building Council’s LEED program, the building reflects a trend toward environmentally friendly design, though it remains to be seen whether the market will bear the increased rental costs. 

Most believe it will remain a tenant’s market until at least 2011, with building owners aggressively targeting tenants in older Class B and C buildings. Looking forward, the Interstate 540 loop will continue to be a development area to watch.  Large mixed-use projects such as Veridia at U.S. 1/I-540 and 5401 North at 401/I-540 are under design. With the newest leg under construction to connect Research Triangle Park and southern parts of the Triangle by 2012, interchanges in this corridor will blossom, and one need only look at the Brier Creek, North Carolina, Highway 54 and North Raleigh submarkets for evidence of the development to come.

— Robin Roseberry Anders is a Class A office leasing specialist at NAI Carolantic Realty.

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