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SOUTHEAST SNAPSHOT, MAY 2006
Raleigh, North Carolina Office Market
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Curtis Dean, Executive Director, GVA Advantis
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Raleigh/Durham’s office market showed signs of marked improvement during the course of 2005, ending the year with a vacancy rate of 14 percent, down 2.1 percentage points during the previous year and the strongest showing since the fourth quarter of 2001. Net absorption totaled nearly 1.7 million square feet with the vast majority of leasing activity occurring in Class A space as tenants continued to capitalize on the relatively low asking rates still available after several successive years of depressed rents. Strengthening economic fundamentals have begun to fuel a slow but sure turnaround in asking rents and the first quarter of 2006 showed a $0.06 per square foot increase in direct weighted asking rents during the last 3-month period. What does that mean? Quite simply it means that the Triangle office market is emerging from a state of extended economic hibernation and expect continued improvement in leasing market conditions throughout the rest of the year.
Job growth in the Raleigh/Durham area by the end of 2005 was strong with employment growth of 3.7 percent during the last year and an employment rate 1.2 percentage points below the national average of 4.9 percent (as recorded in December 2005). Additionally, a recent report on www.msn.com named Raleigh as one of the Top 10 housing markets in the country where real estate market appreciation was expected to grow. According to the report, the John Burns Housing Cycle Barometer has placed Raleigh at the bottom of the list of marjor markets that are vulnerable to a bursting housing bubble, and the NAR appreciation by 7.4 percent between 2004 and 2005. House values in this market are expected to grow at roughly 5 percent per year during the next couple of years.
Forecasters predicted that the Triangle office market would begin to see incremental gains in asking rents by mid-year with significant improvement expected in Class A space. They were correct — respectable gains were already recorded by the end of the first quarter.
While there has been little development since the tech bubble burst in 2001, the impact of the new developments that have been completed has been significant. Multi-use developments at American Tobacco, North Hills, Meadowmont and Brier Creek have all commanded top of the market rents while delivering high-end office space. Perhaps most notable is the fact that these developments came online while the rest of the market struggled with vacancy. The multiple-use concept (often called “mixed-use”), while relatively new to this market, has proven very attractive and it is a trend should continue. There are a few key development players that are new to this market, including Americas Realty Partners. SunTrust is also expanding their local holdings as are a number of other institutional real estate owners (i.e. Northwestern Mutual Life at Palladium and Starmount at Renaissance in Durham).
While 2005 was no doubt a year of recovery, it is expected that 2006 will be a year of opportunity in the Triangle. Rental rates should continue to rise in concert with increasing demand for office space and net absorption should remain fairly strong. Speculative construction will increase this year but should remain at sustainable levels given that the market still has several large vacancies to fill. The Interstate 40/RTP area should show marked improvement in both vacancy and asking rates during the course of this year and this submarket will be the one to watch. The Chapel Hill, Glenwood, North Raleigh, Downtown Raleigh and Downtown Durham areas have all been experiencing both increased demand and absorption and the I-40/RTP corridor has remained in a state of stagnation. That will likely soon change as several recent announcements and potential developments should begin to fuel that area’s turnaround.
— Curtis Dean is executive director, and Rich Harris is senior director of GVA Advantis in Chapel Hill, North Carolina.
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