CITY HIGHLIGHT, JANUARY 2012

RALEIGH CITY HIGHLIGHTS
Daniel Eller, Christopher Norvell, Banks A. Hunter, Karen Christy, Corey Liles

Raleigh Multifamily Market

During the last 12 months, the Raleigh/Durham apartment market has continued to maintain a lofty appeal in the eyes of local, regional and institutional investors. The fundamentals of the region, including its growth projections, the diversity of employment and the driving force that is created by three major research universities, has continued to offer good reasons for investors to inject capital into the Raleigh/Durham apartment market.

After a slow start in 2010, many developers have set their eyes on taking advantage of the reduced development pipeline that was a casualty of the recession. The institutions as well as local and regional developers with strong balance sheets were those that were in the best position to take advantage of being the first to break ground. The number of new construction starts and new developments in the planning stages during 2011 exponentially increased. However, the number of new apartment units added to the market in 2011 were the lowest in recent memory.

Part of the reason for this increase in development activity is that the investment sales market has been so strong in the Raleigh/Durham marketplace, arguably as strong or stronger than any other market south of Washington, D.C. The 370-unit Oberlin Court near Cameron Village in Raleigh which sold this past November for $72.25 million, just over $180,000 per unit, and was reported to represent an approximate 4.5 percent cap rate for the multifamily component.

Institutional money is flowing into the Triangle due to its strong fundamentals, and many of the acquisitions teams acting on behalf of pension funds and insurance companies have a directive to seemingly acquire the best assets in the Raleigh/Durham marketplace almost regardless of price. At the end of 2011, the aggregate value of multifamily transactions in the Triangle was projected to exceed $750 million, compared with approximately $500 million in 2010.

The developments that are currently underway in the Raleigh/Durham marketplace are generally those that are in the best locations. Developers and lenders want projects modeled after success stories such as Oberlin Court. Most of the projects that are currently in the pipeline align with this description as opposed to the large number of lower quality projects that were built in mediocre suburban locations prior to 2008.

After years of having very little rental product, the Downtown Raleigh submarket has several projects on the drawing board after two failed condominium projects, The Hue and 712 Tucker, were acquired and converted to rental units in 2010. The success of both of these projects as rentals has led other developers to contemplate similar apartment developments in this area. Additionally, the areas along Interstate 540, including Chapel Hill, Duke, NC State, Brier Creek, have also been the primary targets of developers for future projects.

As of last December, there were 12 apartment communities under construction consisting of approximately 2,500 new units that will be delivered mostly in 2012, the most since 2009. One example is the $47 million, 303-unit Circle Ninth Street in Durham which broke ground in December of last year. The first units are slated for completion in the fall of 2012. The developers of these projects are clearly in a prime position to take advantage of the current demand for new Class A apartment units. The Raleigh/Durham market also has as many as 25 proposed developments that have not yet broken ground.

As long as the Raleigh/Durham market continues to show positive job growth (its unemployment rate is currently the lowest of any North Carolina CMSA), as long as the population growth trends continue in the region, and as long as there is a continued shift from homeownership to rentals, this is a marketplace that should be able to absorb the new units that are scheduled to be delivered through the end of 2012. As to whether or not the extended pipeline is realistic, that will likely hinge on the level of success experienced with the projects set to deliver in 2012. Going forward, we will also need to keep our eyes on interest rates and consider how a sudden rate spike in 12-18 months might impact financing for new development projects as well as acquisitions or refinances.

— Daniel Eller is a managing partner of The Carolinas Multi Housing Group, a real estate investment firm specializing in the acquisition of multifamily assets throughout North Carolina and South Carolina.

Raleigh Retail Market

The Raleigh/Durham retail market consists of approximately 41 million square feet and serves a population of about 1,750,000 people. Raleigh, Durham and Chapel Hill comprise the “Research Triangle” metropolitan region, which is continuously ranked among the best areas in the nation to live and work. The retail market has an overall low vacancy rate and remains relatively healthy despite the lingering recession.

A period of remarkable growth has slowed and only a handful of new developments opened in 2011. These include Park West Village, a 373,748 square feet power center located in Morrisville at Highway 54 and Cary Parkway, and the 57,511-square-foot Market at Colonnade, a shopping center anchored by Whole Foods and located on Six Forks Road in north Raleigh. Another notable project is the renovation of the 200,000-square-foot Waverly Place in Cary.

Few new development opportunities are expected in the near future and positive absorption of vacancy for anchor and shop space has been encouraging, as centers have continued to strengthen albeit at lower rental rates. Job growth drivers are simply not there to support the rapid retail growth the area experienced prior to the recession.

Trends in the marketplace include expansion of discount chains such as Walmart, T.J. Maxx, Ross Dress For Less and Dollar Tree. New tenants to the market include Five Below, Gander Mountain, North Face, Fleming’s Steakhouse, The Container Store and Nordstrom Rack.

Success stories include North Hills, a 835,575-square-foot mixed-use development located at the Interstate 440 Beltline and Six Forks Road in Raleigh which J.M. Kane continues to expand with retail and residential components. It’s brought the addition of many popular new tenants such as Brighton, World of Beer, Pure Barre, Lulu Lemon Athletica, Relax the Back, The Spectacle and Mia Franchesca’s.

Cameron Village, a 629,216-square-foot retail center located near downtown Raleigh is expanding with “The Residents at Cameron Village”. This multi-story mixed-use development includes 282 apartments and ground level retail and is now under construction by Crescent Resources. A highly anticipated two-story Chick-fil-A will open this year.

Expansion of existing centers such as Wake Forest Crossing II, will continue to add retail space to the marketplace in 2012. Areas of heavy residential and retail growth have generally followed the expansion of Interstate 540. The northern quadrant of this roadway is complete from U.S. 64 to Highway 55 on the West side of Raleigh. I-540 construction continues as a toll road around the western quadrant and new retail will follow including Parkside Town Commons, planned by Kite Realty.

The recession will not have a long-term effect on how the retail market is developed. Basic supply and demand principles and retail following new rooftops will apply. Areas of high residential growth, such as Wake Forest, Cary, Morrisville and Holly Springs, will continue to grow due to their proximity to employment centers at Research Triangle Park via I-540. The Triangle will remain high on the list of areas that developers favor due to the diversity of its employment base.

— Banks A. Hunter, CCIM, is the president of Raleigh-based Hunter & Associates.

Raleigh Industrial Market

The Raleigh/Durham industrial market finished 2011 with substantially increased activity within the warehouse sector. Capital markets activity continues to be particularly strong for Class A institutional grade product, and leasing velocity seems to be finding its legs. The increased volume of deal flow is likely to set the stage for continued improvement through 2012.

Investment sales activity has been particularly robust during the past 18 months with more than 3.1 million square feet of institutional grade industrial space trading hands for more than $209 million in value. Cap rates for institutional grade product in the Raleigh-Durham market have fallen significantly since the credit crisis in 2008, but have begun to level off in the low 7 percent range.

Duke Realty has been the most active buyer of industrial product in the region. Since September of last year, it has acquired nearly 1 million square feet in three transactions totaling $61.4 million, and is now the largest owner of institutional industrial space in the market. Most notable was its acquisition of the Greenfield North portfolio in Garner, North Carolina, for $31 million. Through this acquisition, Duke has virtually cornered the fast growing East Wake market for Class A warehouse space.

Leasing velocity has accelerated as new leases finally joined renewal activity to result in more than 466,000 square feet of net absorption in the third quarter. The RTP/I40 submarket, the Triangle’s largest industrial submarket, recorded 261,000 square feet of net absorption and marked the first time in more than a year that the submarket posted positive net growth. Helping to fuel the growth over the quarter was Cardinal Health’s 255,000-square-foot renewal, which included a 101,000-square-foot expansion at 5104 Chin Page Rd. in Durham.

Despite the increased presence of new deals, lease renewals continue to dominate most of the leasing activity. New deals are largely the result of organic growth from companies that already have a presence in the area. This is likely to change however with a couple of significant requirements that appear poised to sign in the first quarter of this year.

Vacancy rates continue to demonstrate disparate performance between Class A assets with clear heights above 24’ and ESFR sprinkler systems versus older facilities without these features. While the overall market vacancy continues to hover around 20 percent, vacancy rates within Class A product continues to be relatively tight at 7 percent market-wide.

Rental rates have been in a relative holding pattern since 2008. This could change dramatically however especially in the RTP/I40 corridor where land is scarce and new construction would likely command rents 25 to 30 percent higher than current rents.

Speculative development is non-existent throughout the market. However, two significant build-to-suits were delivered over the summer of last year. Caterpillar opened a Panattoni-built 277,000-square-foot manufacturing facility in Sanford, North Carolina, and announced 400 new jobs to be relocated to the plant from Mexico. The Keith Corporation delivered a 720,000-square-foot distribution center to Becton Dickinson in Four Oaks, which is the largest industrial build-to-suit in the market’s history.

The pipeline for new lease deals sets the stage for continued momentum in 2012. Leasing activity should continue to improve while the industrial segment of the capital markets may take a breather following the activity of the past 18 months.

— Christopher Norvell is the senior managing director and a principal in Cassidy Turley’s Raleigh office.

Raleigh Office Market

Raleigh salutes 2011 as a year of improvement and we welcome 2012 with great optimism. In September of last year, Raleigh received Bloomberg Businessweek’s “No. 1 American City” accolade, which is a measure of the “all-around excellence” of a region. The NCSU Index of North Carolina Leading Economic Indicators, a forecast of the economy’s direction 4 to 6 months ahead, rose in October of 2011, the first gain in the Index since June of  last year. All of the North Carolina-based components of the Index improved, with the leader being a 31 percent jump in building permits, says Michael Walden, distinguished professor of economics at North Carolina State University in Raleigh. As the economy continues to improve and jobs increase, absorption will take additional existing vacant space.

The cities of Raleigh, Cary, Chapel Hill and Durham make up 98 percent of the 76 million square feet of office inventory in the Triangle area. With 461,119 square feet of absorption year-to-date in the third quarter of 2011, the market remains positive. Owner-occupant companies had a major effect on positive absorption. In the third quarter, nine of the 12 submarkets showed positive absorption and a  decreased vacancy rate over the previous quarter. Wachovia contributed to the negative absorption in the Raleigh submarket by vacating 68,418 square feet in downtown Raleigh. Overall market Class A absorption was positive for the sixth straight quarter with little change in average asking rents. (Sources: CoStar Property, The KARNES Report, the Triangle Business Journal and others. Data includes owner-occupant buildings and buildings over 10,000 square feet.)

Companies contributing to positive absorption include: Duke University, Salix Pharmaceuticals, Channel Advisor, Kilpatrick Townsend law Firm, Drucker & Falk law firm, Rex Healthcare, Mustard Tree Investments, Piedmont Investment Advisors, PriceWaterhouseCoopers, RadarFind, WebAssign, Tempest Environmental, Morphormics, QMS Capital, Executive Suites, and Piedmont Community Bank Holdings. Multiple smaller tenants contribute to positive absorption, including: Raymond James, Brown Investments and Atlas Diligence leasing 10,000 square feet or less. These small tenants are the backbone of The Triangle’s economy, with two-thirds of all new jobs in North Carolina being created by these small businesses.

The planned Duke-Progress Energy union continued to impact the office market in 2011. Progress Energy leased 125,000 square feet at 200 Lucent Way in Cary, making way for Red Hat’s future commitment to sublease the 365,000-square-foot Progress Energy headquarters. While the merger was expected to occur in 2011, regulatory approvals will continue into 2012.

The RTP/RDU submarket is the largest submarket in the Triangle. Located within this submarket is the world-renowned Research Triangle Park, one of the most successful developments of its kind worldwide. The 7,000-acre park is home to more than 170 of the most influential and advanced companies on the globe. Fidelity Investments purchased four office buildings, approximately 676,000 square feet, in Research Triangle Park for $34.3 million. Fidelity is renovating the property and consolidating its Triangle operations into one campus. IBM, which employees 10,000 people in The Research Triangle Park, is growing through acquisition of multiple companies. Research Triangle Park companies continue to receive multiple federal grants, private funding and state incentives and awards. Park companies receiving grants include: RTI International, Entegrion, Sequenom Inc., Medicago U.S.A., Avaya, and The Hamner Institutes. Global companies find The Research Triangle Park a great location for major facilities.

2012 looks to be a promising year for The Research Triangle Park with multiple development opportunities coming from the new master plan and the selection of a new CEO for the Research Triangle Foundation.

In 2011, SAS opened its new 287,190-square-foot Building C and in 2012, SAS plans to begin construction of one or two new office buildings ranging anywhere from 160,000 to 195,000 square feet at its Cary world headquarters campus.

Cree Inc., with its headquarters in Durham, began its Cree Silicon North expansion in 2011. The development includes 400,850 square feet of office, manufacturing and warehouse space.

Major office sales activity includes the sale of the 259,531-square-foot Quintiles Plaza in Durham for $75.5 million, and Fidelity Investments’ purchase of four office buildings totaling 676,000 square feet for $34.3 million in Research Triangle Park.

— Karen Christy is the director of marketing and research at Colliers International’s Raleigh office, and Corey Liles is the director of planning at Durham-based The Research Triangle Foundation.

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