Reduced demand and an abundance of sublease space due to economic conditions of the past 12 to 18 months have radically curtailed new office development in the Raleigh/Durham area of North Carolina, according to Neal Friedman, managing director at the Raleigh/Durham office of Advantis Real Estate Services Company.

Compared to first quarter 2001 numbers, this year's new construction is down by more than 60 percent. Nearly 3 million square feet of space was under construction in early 2001; less than 1 million square feet was under construction in the first quarter of 2002.

"As a result of weak demand for space and substantial amounts of sublet space flooding the market, true vacancy rates for various product types exceed 20 percent in certain submarkets," says Friedman. Office vacancy rates average 13.7 percent for the area, and estimates stretch to more than 20 percent when including sublease space.

"Negative absorption occurred in some sectors last year," Friedman notes. "However, recent activity suggests the bottom may be upon us. Space users are more actively investigating the market, and increasing confidence in the direction of the economy is beginning to translate into more commitments for space."

Recent leases in the Raleigh/ Durham area include a 120,000-square-foot deal signed by Red Hat for space at the Centennial Campus at North Carolina State University. United Healthcare has leased 34,600 square feet at Weston One in Cary, BE&K Engineering has leased 33,000 square feet at Perimeter Park in Morrisville, Value Options has leased 31,000 square feet at Central Park West in Durham and Best Practices has signed for 15,940 square feet at Quadrangle III in Chapel Hill.

Rates for Class A office space range from $18.50 to $23 per square foot, full service. "Concessions vary between submarkets and are closely related to the creditworthiness of tenants," says Friedman.

No large corporate users are expanding with frequency seen in the past from IBM, Cisco Systems, Nortel Networks, Ericsson or SAS. "However, there are some sizeable users by local standards currently evaluating the market -- both with a local presence and from outside our market," says Friedman.

Recently, the area has experienced "the re-trenching of the technology sector, the end of the dot-com phenomenon (at least for the time being) and a substantial decrease in venture capital investments in start-up companies," according to Friedman. "These three factors were substantially responsible for the record growth enjoyed in our region in the 1998-2000 period. Since that time, nearly 10,000 professionals in the telecommunications industry alone have been laid off. This compares with historical job growth in the 1998-2000 time frame of approximately 64,000."

Nortel, Ericsson, Lucent Technologies and Cisco were particularly hard hit by the slowing economy. "Cisco's mammoth expansion plans on their local campus have come to a temporary standstill," says Friedman. Lucent, Nortel and other companies were forced to sell their properties. Some companies have had to sublease considerable blocks of space or have failed to renew existing leases, he adds.

The biotechnology sector has remained relatively active through the slowdown. "Healthy demand continues and available space continues to be tight," says Friedman. "New and existing companies continue to raise money from the investment community, and new science continues to explode in this hotbed of great intellectual capital."

Developers new to the market include TLS, a group of investors from Texas and California working on biotech redevelopment; Andy Rothschild, working on a local lab adaptive re-use project; lab developer Phase 3 Properties; and Dead River Properties, a Maine-based company with warehouse product in the Raleigh/Durham area. Carter & Associates will be the fee developer for Progress Energy headquarters, which includes a residential component, in downtown Raleigh. Also in the area, a local owner and fee developer is doing a project across from Duke University Medical Center.

Many smaller and mid-size end users are willing to consider shorter-term sublease space solutions while they wait to see how their businesses and the national economy will unfold in the near term. Flex space alternatives are quite acceptable to an increasing number of office users.

"The market is expected to be more active for the remainder of the year as compared to second half of 2001," states Friedman.

Neil Freidman is managing director of Advantis Real Estate Services Company.


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