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Absorption, Job Growth in Raleigh Have Led to Office Space ‘Crunch’

Raleigh’s office market is the strongest it’s been in years, with employment and corporate investments continuing to climb throughout the Triangle region. A current lull in the delivery of new construction and the market’s increased popularity have created a space crunch for Class A office space, especially for tenants seeking large blocks. While a good amount of new construction started or continued in 2015, there’s still a gap in “move-in ready” space.

Vacancy fell from 11.7 percent in the second quarter to 11.2 percent in the third quarter, causing rent growth for Class A space. Direct asking rent increased from $23.81 per square foot in the second quarter to $24.14 per square foot in the third quarter and is expected to continue to increase until delivery of new construction picks up, which will likely be mid-2016/early 2017. The market has definitely shifted in favor of the landlord, and concessions that were made during the recession have fallen off as owners no longer have to offer them to secure tenants.

Kaler Walker Lincoln Harris

Kaler Walker, Lincoln Harris

Desire for Class A space in the Triangle has pushed pre-leasing rental rates to a historic high north of $33 per square foot — and they are likely go higher before tapering off. A few projects were recently delivered, including the 103,000-square-foot Wade III in West Raleigh, which is 50 percent leased and asking $27.50 per square foot, and the 193,000-square-foot Perimeter IV, which is 71 percent pre-leased and asking $24.95 per square foot. The remainder of the available space is expected to lease quickly. Wade III will likely be 75 percent leased and Perimeter IV should be upwards of 90 percent leased within the next six months.

There is nearly 1.3 million square feet of product under construction (with more announcements coming), half of which (667,869 square feet) is located in the North Hills submarket. The market offers the sort of live/work/play environment today’s tenants are looking for, including walkability and amenities. Companies that want to attract and retain top talent are aggressively seeking this kind of space and are willing to pay a premium for it.

Source: Lincoln Harris Research, CoStar, Real Capital Analytics

Source: Lincoln Harris Research, CoStar, Real Capital Analytics

To further prove the point, projects under construction in the North Hills area include the 285,000-square-foot Bank of America Tower, which is 50 percent pre-leased at $34.95 per square foot, and the 330,000-square-foot Midtown Plaza, which is 75 percent pre-leased at $33.95 per square foot. The Six Forks submarket’s current vacancy rate is 8.9 percent and, since it is a desirable area of the market, we believe this space will fill up quickly. Another big project under construction is the 156,000-square-foot Carolina Square in Chapel Hill, which is 42 percent pre-leased at $35 per square foot. It is scheduled for delivery in the first quarter of 2017.

One of the largest sales impacting the Raleigh market this year was Duke Realty’s $1.1 billion sale of 62 suburban office properties in North Carolina, Tennessee, Missouri and Florida, which closed in April. A joint venture among three private capital partners led by Trinity Capital Advisors acquired the properties. More than 2.6 million square feet of this portfolio is located in the Triangle region. Longfellow Real Estate Partners, which has been aggressively seeking properties in Raleigh during the past two years, completed the acquisition of 11 office buildings in Durham for $117.7 million in September.

Until some of the product under construction is delivered, we believe the Class A market will remain tight, with the vacancy rate decreasing, rental rates rising and concessions decreasing. This also means companies are getting squeezed out and looking toward alternate options, like Class B or flex space.

— Kaler Walker, Vice President, Lincoln Harris. This article originally appeared in the January 2016 issue of Southeast Real Estate Business.

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