Rents, Occupancy Rise for Triangle’s Industrial Market as Supply Lags Demand
The Raleigh-Durham business climate has been on the climb for several years now and it doesn’t seem to be slowing anytime soon. The market continues to outpace most of the mid-tier markets across the country by all metrics of economic stability, quality of life, business environment, education, arts and quality of workforce.
As a result, construction of office and retail projects has been strong, yet industrial construction and thus available space is lacking. Average asking rental rates have continued to rise in response to increasing demand and low supply. The remaining 550,000 square feet of industrial space that is expected to deliver has significant prelease commitments, creating competition for tenants looking for space.
Raleigh-Durham’s warehouse market sits at a current vacancy of 3.8 percent with average asking rental rates at $5.01 per square foot triple net. The biggest challenge is for new and expanding tenants needing 35,000 to 200,000 square feet of space. Demand has been outpacing supply for several years in the market and industrial developers who recognized this trend were unable to fill the need because of the lack of available financing during the downturn. It has just been in the past 24 months that significant construction has begun in the industrial sector. Still, the supply cannot withstand the demand.
Indianapolis-based Scannell Properties recently purchased the first tract of what will be a 79-acre industrial park, Eastgate 540. The first building of the nearly 1 million-square foot industrial park is expected to start construction soon. Eastgate 540 is located in the eastern Wake County city of Knightdale, one of the largest industrial markets in the Triangle due to its close proximity to major transportation corridors.
The RTP/I-40 corridor, which includes the Raleigh-Durham International Airport, is also a strong industrial submarket and is in the most need for new development and space. Its proximity to the airport is very appealing, but it has become exceedingly difficult to assemble industrial sites large enough for significant projects. Land zoned for industrial use is all but non-existent and if it can be acquired, the prices are too high to justify development.
Low vacancy rates and high demand have been very appealing to outside investors as the prices being paid for quality warehouse projects in the Triangle are an all-time high. More investors and looking at these properties than ever before.
Returns of 8 to 10 percent were the normal expectations of industrial investors up until 10 to 12 years ago. Today those returns have dropped to between 5 percent to 7 percent for quality buildings with stable rent rolls.
Rents in the market remained flat for many years, until about five years ago when the market began to see steady increases year over year. A tenant that paid $4.00 per square foot five years ago may have to renew a lease today at $6.00 per square foot. This is a 33 percent increase, or an average of 6.6 percent increase each year, double the standard 3 percent annual escalations.
For investors with patience, financial backing and willingness to pay premiums, their rents could see a 30 percent increase over the next five years and returns in proportion.
— By Lee Holder, Senior Vice President, Industrial Services, Colliers International. This article originally appeared in the January 2017 issue of Southeast Real Estate Business.