Raleigh-Durham, North Carolina, has enjoyed an exuberant growth streak for the past decade. Corporate relocations and expansions, high quality of living indices and a surging population have contributed to an unprecedented chapter in Raleigh-Durham real estate. Many are wondering if the region can rewrite the torrid pace of growth amid a cooling economy and new anti-growth politico. The catch phrase of the day is "cautious optimism." Admitting that the boom time has waned, the area real estate community has hope in the future and, unfortunately, must endure the pain that many top tier cities in the country share during a national recession.

The hope stems from Raleigh-Durham's position as the fourth fastest-growing top 50 metro area in the nation. Only Austin, Texas, Las Vegas and Phoenix have grown faster since 1990, according to the 2000 U.S. Census. In terms of real growth, Raleigh-Durham added as many people over the past 10 years as Tampa, Florida, and San Diego, which are much larger cities. The reasons for this growth are the jobs available in the area.

The Research Triangle region, as it is popularly known, is a favorite for site selectors because of its strong academic base, principally with Duke University in Durham, North Carolina State in Raleigh and the University of North Carolina at Chapel Hill -- the points of the Triangle. This brainpower generates thousands of potential employees in annual graduates and facilitates technology transfer between employers and university researchers.

Case in point, the region has become a hotbed for biotechnology start-ups. The area's forefathers planned for this combination of resources with the advent of the Research Triangle Park, a 6,800-acre non-profit development, home to 143 organizations concentrating on scientific research and development that employ 40,000 workers. Offshoots of this planning include world-class medical centers and the nation's second highest concentration of clinical research organizations.

The tremendous rise and subsequent fallout of high-tech job growth is directly responsible for Raleigh-Durham's economic problems. According to the Raleigh Chamber of Commerce, technology companies were responsible for 38 percent of employment growth in the area since 1993, primarily in a rapidly expanding telecom industry. Even though the area was not a dot-com haven, promising, high-growth companies with significant employment in the region have since combusted or retrenched, resulting in unusual layoffs and empty or sublet office and manufacturing space. These companies include Nortel Networks, Cisco Systems, Alcatel, Lucent Technologies and Pliant Systems. Cisco abandoned plans to occupy 1.2 million square feet of newly constructed offices; the space is being withheld from the market for Cisco's anticipated rebound. Nortel dumped approximately 1.3 million square feet of sublease space and 700,000 square feet of for-sale space onto the market. Alcatel dismissed 800 workers last year. The unemployment rate, among the nation's lowest, surged from 1.7 to 4.1 percent in 1 year. This reversal has adversely affected the real estate market and dampened the mood of the real estate community in a way not felt since the early 1990s.

There are clear signs of hope, however. Even the much beleaguered high-tech and software industry is showing signs of life. Success stories include Red Hat, which just assumed the 20-year, 120,000-square-foot former lease of Lucent Technologies within Centennial Campus near N.C. State. A reassurance or perhaps an insurance of sorts exists in the fact that Raleigh, the host of state government, captures a high percentage of government workers. There is much to be optimistic about in the budding Raleigh-Durham region, even if the area echoes the short-term pain that many economies in the nation currently feel.

Office

Historically, few significant barriers to entry have hindered development in the local office market. Obstacles to new construction, however, are surfacing as land banked in approved parks slowly diminishes in the face of anti-growth sentiment. Fortunately, developers and lenders are showing signs of discipline as fourth quarter vacancies climbed from 8.1 to 13.3 percent last year. Construction has slowed from annual deliveries averaging 2.5 million square feet over the past 3 years to only 681,431 square feet currently underway. "The development community and the capital markets have reacted to market conditions," notes Marcus Jackson, senior vice president of Highwoods Properties. He adds that construction peaked at 12 percent of inventory in 1998 and is only 2.4 percent of total inventory today.

The 33 million-square-foot office market regularly absorbs 2 million square feet annually, but last year absorption dropped to 811,000 square feet. The decline in the rate of absorption is expected to continue this year, due mainly to a large sublease inventory. Highwoods Properties, the Triangle's largest landlord, estimates that the sublease overhang of 6.3 percent has interfered with direct leasing. "We've noticed sublease space affecting deal negotiations since October, but January saw significant leasing of sublease space," adds Jackson. Highwoods research shows that since 1995, sublease space averaged 1.7 percent of inventory.

Highwoods' latest Class A arrival is GlenLake One, a 160,000-square-foot, five-story building in the popular West Raleigh submarket. GlenLake, an urban in-fill, multi-use setting, is just around the corner from Crabtree Valley Mall and Duke Realty's newest Class A mid-rise, Crabtree Overlook. Duke's 150,000-square-foot granite structure recently landed the law firm of Ogletree Deakins Nash Smoak & Stewart in a 50,000-square-foot lease. Highwoods Properties, Duke Realty and other West Raleigh landlords intend to capture a significant share of tenant traffic heading further west to the region's largest submarket, Research Triangle Park/Interstate 40.

The RTP/I-40 submarket, with 7.7 million square feet, is most closely associated with technology. Vacancy in the submarket climbed from 6.5 to 10.8 percent over the past year, the result of tech fallout and an abundance of sublease space. Highwoods points out that 55 percent of all sublease space in the market is located within the RTP/I-40 submarket, which is not reflected in vacancy. Local developer Keystone Corporation remains optimistic that tenants will surface to fill a new 150,000-square-foot speculative project at Keystone Technology Park on Davis Drive. One mile east, Danbury Hall, a new 120,000-square-foot speculative building by Principal Financial and Tri Properties Inc., is under construction at Imperial Center.

The good news for the market is that deals are being made. Last year RTI International expanded into 140,000 square feet at Starwood's Park Center; Duke Realty signed Genesys Telecommunications in a 30,000-square-foot lease at One Gateway Center; ONI Systems leased 50,000 square feet in Imperial Center; and ITRON leased 50,000 square feet at Somerset in North Raleigh. The burgeoning biotech and life science sector is expected to stimulate employment in and around the Research Triangle Park. This prediction will likely ease future anxieties -- for example, when the Environmental Protection Agency vacates 400,000 square feet of leased laboratory and office space to occupy its new 900,000-square-foot campus next year.

Overall, the expansion of the office market will occur as credit tenants deal directly with landlords for long-term leases rather than short-term subleases. In the interim, however, vacancies are expected to rise and pressures will mount for rental rate reversal.

Multifamily

The multifamily market currently has the highest vacancy rate in over 10 years. According to the Triangle Apartment Association and Karnes Research, the vacancy rate in September was 8.8 percent, up from 5.7 percent in September 2000. This is the result of construction finally surpassing once insatiable demand. The 72,000-unit multifamily market grew 40 percent in only 7 years, indicative of Raleigh-Durham's surging population growth. The majority of construction has occurred in Cary, northwest Wake County and South Durham -- all within easy commutes to the Research Triangle Park. These submarkets comprise 45 percent of the total market.

The opening of the northern portion of Raleigh's Interstate 540 outer loop, connecting I-40 at the Research Triangle Park to U' in northeast Raleigh, has spawned the emergence of new markets where eager developers have obliged. These areas include Wakefield in northeast Raleigh, Brier Creek in northwest Raleigh and areas immediately surrounding the Research Triangle Park. Wakefield and Brier Creek, two new golf course communities, provide multifamily dwellers with a wealth of new area amenities, including schools and retail within walking distance. Developers active in these pockets include Birmingham-based Daniel Corporation, Epoch Properties of Winter Park, Florida, Michigan-based Beztak Companies and Wood Partners. Although these pockets have generated considerable interest, new multifamily construction is occurring in nearly every corner of the Triangle, including Cary's Crossroads area and Chapel Hill's Meadowmont, a 435-acre mixed-use community.

More often than not, new multifamily properties are constructed with single-family amenities, according to Tom Barker, city partner with Trammell Crow Residential. "In many cases, developers are having to pay more for land and impact fees, so they're forced to build upscale units," says Barker. "We've seen a shift toward more amenities and higher densities, even in garden product, because of increased competition for sites." Currently, 4,400 units are under construction and another 5,300 are in the planning stages. Barker notes that many of those in the planning stages may never be built.

Unless absorption grows at a commensurate rate with construction, increasing vacancies and more rental concessions are likely. Historically, Raleigh-Durham absorbed 3,000 units annually with an unusual spike that occurred in 2000 when nearly 5,000 units were absorbed in a 12-month period. Barker expects vacancies to bottom out in 2002 and adds, "I'm very bullish on Raleigh-Durham long-term, but don't expect 2002 to be a great year. A decrease in construction starts should put the Triangle on sound footing going into 2003."

The multifamily investment market was especially active in 2001. Fourteen properties totaling over 3,100 units traded for $181 million throughout the year. Most active were private capital sources, most notably Chicago-based Benjamin E. Sherman & Sons.

Retail

It should be no surprise that demand for retail services in Raleigh-Durham is growing proportionately to population. The surprise is the range of product being delivered to meet this demand. Currently 4.3 million square feet of new retail space is under construction throughout the Triangle -- the bulk being two regional malls.

The Streets at Southpoint in South Durham, a development of Chicago-based Urban Retail Properties Company, will encompass 1.3 million square feet housing over 100 retailers and four department stores, including the region's first Nordstrom. Other retailers in The Streets at Southpoint that are new to the Triangle area include California Pizza Kitchen, Maggiano's Little Italy, Benetton, and Coldwater Creek. Grand opening is scheduled for March. Triangle Towne Center, a project by The Richard E. Jacobs Group in northeast Raleigh, will contain 1.2 million square feet and four department store anchors: Hecht's, Belk, Sears and Dillard's.

Triangle Towne Center is largely possible because of construction of Raleigh's I-540 outer loop, booming growth on the Triangle's fringe and the closing of North Hills, a smaller mall slated for redevelopment. The new loop is paving the way for a host of regional and community centers planned or under construction. Plantation Point, a 375,000-square-foot center by Ken Morin of Florida and Don Phillips of Raleigh, is located in northeast Raleigh at I-540's intersection with US 1. AAC Real Estate Services is developing Brier Creek Commons, an 800,000-square-foot development in northwest Raleigh anchored by BJ's Wholesale Club and Dick's Clothing and Sporting Goods.

Smaller grocery-anchored neighborhood centers continue to follow rooftop growth in every corner of the Triangle, the dominant local grocers being Food Lion, Kroger, Lowes Foods and Harris Teeter. Rick Rowe, a partner with Wakefield Associates, has developed 1.2 million square feet of grocery-anchored space over the past 10 years. He points out that growth may never catch up with demand as encroachment upon watershed boundaries and higher municipal hurdles limit the extent of new construction. "Redevelopment of existing properties with an emphasis on maximizing buildable area while blending various uses will become more common in the coming year," says Rowe. These limitations bode well for in-fill projects such as the redevelopment of North Hills Mall.

The redevelopment of North Hills Mall, led by Raleigh-based Kane Realty in partnership with Raleigh-based equity fund Cherokee Capital, is a prime example of high-density new urbanism that city officials in the area are seeking. The site at Raleigh's Interstate 440 Beltline and Six Forks Road is a prized location that holds high expectations from Kane and existing tenant JC Penney. One successful transition occurred last year in north Raleigh when BVT Development acquired Falls Village Shopping Center and added 25,000 square feet of space for new tenants Panera Bread and Stonewood Tavern & Grill. "This will be increasingly popular as developers turn their attention to redevelopment of existing in-fill real estate," notes Rowe. "In many cases the existing densities and demographics make these sites prime candidates."

The 27 million-square-foot retail market ended 2001 substantially better than other commercial counterparts. The retail vacancy rate remained constant over the past year at 3.6 percent and absorption for the year totaled 1.4 million square feet, according to Karnes Research.

The retail market was a favorite for investors last year. One of the more prominent sales of the year occurred when Branch Capital Partners of Atlanta led a foreign partnership in the acquisition of historic Cameron Village, a 650,000-square-foot urban center, for $66.25 million.

Mixed-Use

Due to current levels of traffic and congestion, the Triangle Transit Authority is developing a new commuter rail system that will link Raleigh, Durham and Cary to various locations in the park. The creation of the light rail system spurred developer Craig Davis Properties to begin searching for master planning firms to design the first transit-oriented development in the Triangle Area. The HOK Planning Group's New Urban Studio and HOK's Washington, D.C., office were selected to create a master plan for a currently undeveloped 25-acre section of Research Triangle Park. The plan calls for convenient places to dine and shop as well as places to live, work and play within one community, all within a five-minute walk of a new rail station in Research Triangle Park. The plan also calls for flexible buildings that are able to respond to future market demand and economic trends. Groundbreaking was last fall, and completion is expected in 2007.

W & W Partners recently began construction on the first building in Carpenter Village, a new urbanism development in Cary. Carpenter Village will consist of 150,000 square feet of retail and office space and 1,000 residential units. Mike Hunter of W & W Partners says the retail portion will be a pedestrian-friendly area with hidden parking. The company is optimistic that one-third of the office and retail portion will be leased or sold by the end of this year. Chase Properties is handling marketing and leasing for Carpenter Village. Hunter describes the neo-traditional type of project the company is creating: "We've taken a page out of Williamsburg and complemented that with the architecture of Charleston. This is the type of design we have, and it is very unique."

Industrial

The core submarkets within Wake, Durham and Orange counties contain 21.5 million square feet of multi-tenant warehouse, manufacturing and distribution space. Declines in technology manufacturing and services affected the sector in 2001, causing the year-end vacancy rate to rise from 9.86 percent at year-end 2000 to 17.2 percent. Nortel, IBM and their contractors, namely USCO, Anixter and CompuCom, contributed largely to the area's woes by emptying thousands of square feet of sublease or for-sale space on the market. All of these companies had a presence within the RTP/I-40 submarket, Raleigh-Durham's largest industrial submarket with 9.7 million square feet. Vacancies within the RTP/I-40 submarket climbed from 12.1 to 21.8 percent in 1 year.

The area's largest vacancies are located in a cluster near the northern section of the Research Triangle Park between I-40 and US 70. The location has historically fared well but may be the victim of too much product and poor timing. Two speculative buildings located 1 mile apart, Center Pointe and Tech Distribution Center, house a total of 568,000 square feet. These empty buildings are within a short distance of Research Tri-Center, a 2.5 million-square-foot complex constructed by Craig Davis Properties, where IBM recently vacated 450,000 square feet. Although these large vacancies persist, leasing by small tenants appears constant and rumblings of major relocations and expansions are expected to put a dent in the vacancy.

The market historically absorbs nearly 1 million square feet annually, but this pattern subsided last year when 125,000 square feet was absorbed. This low rate of absorption should not develop into a trend, however. Currently only one building is under construction totaling 130,000 square feet. The construction pipeline subsided quickly in reaction to the market; however, opportunities exist for new development as evidenced by Duke Realty's construction of Walnut Creek in east Raleigh, a planned 1.2 million-square-foot master-planned commercial park, and Craig Davis Properties' plans for Auburn Park, a 223-acre development in Garner. These projects intend to lure manufacturers and distributors to locations more accessible by labor.

Andrew Kelton, senior vice president of Duke Realty, agrees: "Non- [Research Triangle Park] related users and companies want to be in the region and not in the traffic of the RTP. Decision-makers want to be closer to their homes and their employee base."

Kelton predicts that traditional businesses locating and expanding in Raleigh will choose the eastern side of Raleigh. "Build-to-suits and owner-occupied development is in demand," he says about the entire market. Kelton adds, "The market can only get better, and with unemployment at 4 percent, Raleigh-Durham is attractive to relocating companies wanting quality workers."

Jeff Glenn is a vice president in the investment properties group of CB Richard Ellis in Raleigh, North Carolina.


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