A rebounding economy and robust population growth are driving strong fundamentals across all segments of Raleigh-Durham’s commercial real estate industry. The region added 30,105 jobs during the 12 months ending September 2015, a growth rate of 3.1 percent. Users of all product types are facing rising occupancy costs and fierce competition for quality space.
The Raleigh-Durham industrial market experienced positive net absorption of 721,185 square feet through the first three quarters of 2015, marking the sector’s fifth consecutive year of expansion. Increased tenant demand, combined with a lack of new construction, has driven vacancy back to pre-recession levels. Overall vacancy for warehouse and flex space ended the third quarter at 7.5 percent, down by 130 basis points year-over-year. Warehouse vacancy fell by 160 basis points to 6 percent during the same period and is down from a cyclical high of 10.2 percent. Flex vacancy ended the third quarter at 11 percent, down by 60 basis points year-over-year and from a cyclical high of 16.5 percent. Leasing activity has been broad based, driven primarily by organic growth in the region’s existing tenant base. Among the industries fueling the largest transactions are third-party logistics, e-commerce, manufacturing and housing and construction. Finally back in the driver’s seat, industrial landlords are pushing asking rents higher. Warehouse asking rates rose 9.4 percent year-over-year, and flex rates increased 6.5 percent, the strongest rent growth witnessed in more than a decade.
Elizabeth Gates, Avison Young
Raleigh-Durham’s largest industrial submarket at 22 million square feet, the I-40/Research Triangle Park (RTP) corridor, witnessed substantial activity in recent months. Warehouse vacancy ended the third quarter at 6.9 percent, down from a cyclical high of 11.5 percent, and flex vacancy is at 11.7 percent, down from a high of 15.2 percent. Among the largest transactions in the submarket, Implus Footcare pre-leased 136,500 square feet at Liberty Ridge, PBM Graphics leased 132,000 square feet of expansion space at 4105 S. Miami Blvd., and Courier Express leased 73,600 square feet at Keystone Industrial Park.
The U.S. 1/Capital Boulevard submarket, the region’s second-largest at 9.2 million square feet, is among the most improved areas after being particularly hard hit by the collapse of the housing market. Warehouse vacancy ended the quarter at just 4.3 percent, down from a cyclical high of 16.8 percent, and flex vacancy has fallen to 17.3 percent from a high of 26.1 percent. This submarket has also witnessed some of the region’s strongest rent appreciation with warehouse asking rates rising by 21 percent year-over-year. Activity in this corridor has been particularly strong among small and mid-sized users.
In Southeast Wake County, warehouse vacancy fell to 7.4 percent in the third quarter, down from a high of 17.8 percent, and flex vacancy fell to 16.1 percent, down from a high of 25.4 percent. Transactions of note included Mattress Firm pre-leasing 80,000 square feet at Greenfield North and SRS Roofing leasing 67,286 square feet at Beltline Center. In Northeast Wake County, IMI Group leased 161,572 square feet at 2728 Capital Blvd., and Sumitomo leased 86,886 square feet at 201 S. Rogers Lane. In the Six Forks/Falls of Neuse Road submarket, DHL eCommerce leased 92,850 square feet at 3401 Gresham Lake Road for its first distribution center in North Carolina.
As rental rates have risen in the Raleigh-Durham industrial market, so has sales activity. Sales volume totaled $336 million through the first three quarters of 2015, representing 10 percent of total market volume. The largest sales were for highly specialized laboratory and manufacturing facilities. Longfellow Real Estate Partners purchased 806,157 square feet of laboratory/flex space at Keystone Technology Park in RTP for $118 million. Also in RTP, Biogen paid $75 million for Eisai North Carolina’s 275,000-square-foot manufacturing facility. In Southwest Wake County, Seqirus Inc. purchased a 298,469-square-foot former Novartis Vaccines facility for $45 million.
With rental rates rising enough to justify the cost of new construction, development activity in the region has risen to its highest level since 2001. Five industrial buildings totaling 137,880 square feet were delivered through the first three quarters of 2015, the largest of which was a 50,080-square-foot build-to-suit for Graybar Electric Supply in Northeast Wake County. About 733,159 square feet was underway in the third quarter with the bulk of new construction occurring in RTP and Eastern Wake County. Keith Corp. is developing 97,900 square feet at Centerpoint III in RTP, 100 percent of which is pre-leased to Argos Therapeutics.
With another 1.3 million square feet of proposed space in the pipeline, more projects are likely to break ground by early 2016. Strong demand should keep vacancy on a downward track over the next 12 months, but the rate of decline will likely slow as new space is delivered. Developers will be selective with regard to timing, however, given the relatively small size of Raleigh-Durham’s industrial base and its tenants.
— By Elizabeth Gates, Principal and Senior Vice President of Research, Avison Young. This article originally appeared in the January 2016 issue of Southeast Real Estate Business.