SOUTHEAST SNAPSHOT, MAY 2011

Raleigh-Durham Office Market

The Raleigh-Durham office market continues to show signs of improvement, as the market recorded 154,000 square feet of positive net absorption to close out the first quarter. During the past four quarters, demand has outpaced supply by over a half-million square feet and the vacancy rate has declined from a peak of 19.7 percent down to 18.9 percent.

While market activity remains light compared to historical averages, the steady growth is welcomed by most market participants following a series of turbulent quarters during the recent recession of 2008-2009. Hillman
Duncan, senior vice president of leasing at Cassidy Turley, says, “The market closed out 2010 on a strong note and that positive momentum carried over into the start of 2011. We’re not there yet, but things are looking up.” With virtually no new speculative construction in the pipeline, the positive momentum in net absorption and vacancy is expected to continue throughout 2011.

The most noteworthy lease transaction that transpired over the first quarter involved Salix
Pharmaceutical’s decision to leave their space in Perimeter Park in RTP/I-40 and relocate back to the Colonnade Office Park in the North Raleigh submarket, where they used to lease space in the early 2000s. The area around Colonnade off Six Forks Road has been very active recently, especially with the opening of The Market at Colonnade, anchored by Whole Foods. This transaction is a significant win for the submarket and leaves the area with very few large blocks of available space left.

Along with the North Raleigh submarket, strong demand was also evident in the West Raleigh-US 70/Glenwood submarket, which recorded 79,000 square feet of positive net absorption while the vacancy rate fell to 13 percent. “West Raleigh led the market with over 321,000 square feet of positive net absorption in 2010 and was very active once again over the first quarter of 2011,” says Scot
Humphrey, an analyst on the investment sales team with Cassidy Turley who also oversees research. “The amenity base and exceptional access to Interstate 40, Interstate 440 and Interstate 540 that West Raleigh offers is very appealing to both tenants and landlords.”

Two significant investment sales transactions took place over the first quarter in Raleigh-Durham’s largest submarket, RTP/I-40. Quintiles Plaza, a 259,500-square-foot, Class A office tower, sold for $75.8 million, or $292 per square foot. The sale was the second highest office sale on a per square foot basis in the market’s history. Meanwhile, The Brookdale Group purchased Nottingham Hall, a 105,000-square-foot Class A office building, located in Imperial Center, for $13.6 million. Cassidy Turley represented the sellers in both transactions.

David Finger, managing principal of Cassidy Turley, says, “Capital markets activity in Raleigh-Durham is much improved from a year ago. The trends we’re seeing through the first quarter are very encouraging. First, investors continue to view this market as having solid fundamentals — most remain focused on establishing or growing their presence here. Second, we’ve demonstrated that quality office assets with a good story most certainly can find the finish line in a sales transaction. As for properties more in the range of value-add or opportunistic, the finish line may be a bit more challenging to reach but it’s being achieved with more frequency. Bottom line, recovery in capital markets is clearly gaining traction for Raleigh-Durham.”

Other news within the RTP/I-40 submarket included Biogen Idec announcing plans over the quarter to build a new 180,000-square-foot building in Research Triangle Park, with occupancy expected towards the middle of next year.

In addition to the area’s market fundamentals, the Raleigh-Durham metropolitan area received positive news on its current and long-term economic situation over the first quarter as well. The Business Journals ranked Raleigh as the eighth strongest job market in its most recent monthly ranking of employment vitality among the nation’s 100 largest metros. Also revealed during the first quarter, the Raleigh-Cary MSA is the seventh fastest growing metropolitan area in the country according to the new 2010 U.S. Census data, growing by 42 percent over the 10-year period ending in 2010. With a stabilizing job market and a growing population, the prospects of continued growth in the Triangle office sector look more and more favorable.

“Conditions are certainly improving, but I’d be hesitant to start the party quite yet,” says John Kelly, managing director with Cassidy Turley. “We’re moving off the bottom, but the recovery is fragile and will be sensitive to any bumps in the road.”

Forecast

• The area is expected to continue to record positive net absorption, albeit in modest amounts, over the remainder of 2011.

• Finding well-capitalized owners will continue to be an upfront priority for tenants looking for space. Owners with constrained capital and those unwilling to commit capital at a level that will secure competitive deals are finding new lease transactions to be few and far between.

• Together with increased net absorption and decreased vacancy, concession packages will become less generous as the year progresses, but they will very much remain a vital element to making office transactions.

• North and West Raleigh continue to lead the way in terms of recovery.

• RTP/I-40 and Cary, Raleigh-
Durham’s two largest submarkets, are likely to experience a rebound in the latter half of 2011 as growth industries improve.

• Investment sales activity in the area continues to pick up the pace, with the sales of Quintiles Plaza and Nottingham Hall leading the way. Some other offerings in the marketplace have found the finish line to be a bit more elusive, however, overall conditions appear to be improving.

— Scot Humphrey is a research analyst for Cassidy Turley in Raleigh, N.C.

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