The Raleigh-Durham industrial/flex market, totaling approximately 135 million square feet, continues to be strong with overall positive absorption. Absorption for industrial totaled 1.6 million square feet and flex was over 3 million square feet for 2018. Vacancy is trending lower, helping make the region a landlord and seller’s market.
Ed Brown, SIOR, CCIM, Broker, NAI Carolantic Realty
With increasing construction costs, lower vacancy and solid demand, the rental rates and sales prices are now the highest of any region in North Carolina. Our rental rate for new industrial product is currently in the mid to high $5 per square foot range and trending higher. Some developers and brokers speculate the Triangle may become a $6 per square foot market for institutional-grade warehouse space in 2019.
Ground zero for the region’s warehouse market is in the general vicinity of Raleigh-Durham International Airport (RDU). Most distributors that locate here are delivering to the local market and need the central location and access to Interstate 40. The historical barriers to entry near the airport have been high land costs and lack of land not encumbered with wetland or easements.
Another barrier to entry that has crept into the picture are some local municipalities desiring a “higher end” product than warehouse and are using the site planning approval process to limit new industrial development.
The end result is distribution development is being pushed away from the epicenter location of the RDU/RTP/I-40 submarket. Amazon has 2.6 million square feet under construction in Garner, and a new 120,000-square-foot spec warehouse has recently been delivered in Knightdale.
The most recent new industrial development announcement is Scannell Properties’ 893,000-square-foot Regional Commerce Center at Briggs Avenue and Highway 147 southeast of downtown Durham. Other speculative discussions include two new warehouse projects in Garner, one in East Raleigh, one in Morrisville and two in the RDU/Research Triangle Park(RTP)/I-40 submarket. Due to the lack of available land and rising costs, many distributors are finding the need to locate further out while still trying to stay close in proximity to I-540.
Other new warehouses include Eastgate’s 150,000-square-foot warehouse developed by Scannell; Hinton Oak’s 120,000-square-foot project developed by Wake Stone Corp.; and Liberty Ridge III, a 136,000-square-foot warehouse developed by Liberty Property Trust. Patriot Park, being developed by Strategic Capital Associates, recently added two warehouses totaling 350,000 square feet. Tri-Center, which is located at the northeast corner of Research Triangle Park, had several vacancies in 2018 that were released in short order.
The rise in rental rates for new institutional-grade warehouse is helping contribute to increased activity in older, Class B and C product. Some tenants cannot pay in the mid $5 per square foot range and are being forced to consider less ideal locations or less efficient warehouses. Many surrounding towns, including Creedmoor, Clayton, Hillsborough, Wendell, Zebulon, Fuquay-Varina, Apex, Benson, Sanford and Mebane are benefiting and have seen increased activity due to the “drive a little and save a lot” mentality.
As some tenants decide to buy rather than lease, small warehouses have had a significant jump in value. Freestanding 5,000- to 30,000-square-foot warehouses available for purchase are non-existent now. Prices for buildings close to Raleigh are now in the $90 to $100 per square foot range and have subsequently increased the value of similar buildings in surrounding communities. The rising construction costs have made older, second-generation warehouses priced at $90 to $100 per square foot appear to be a good purchase opportunity. Five years ago, these buildings would have been trading in the $50 to $60 range.
Today, we have a much healthier market in part due to more diversified industries than in years past. E-commerce and building supply distribution companies are currently two of the largest sources of demand. Last mile distributors are demanding more space as well. Owners and developers that have buildings located near RTP have pharmaceutical and technology companies helping drive demand and absorbing significant square footage.
Flex space, now considered “shallow bay” industrial by institutional investors, is becoming a more acceptable investment opportunity. Coincidently, this same product type is in great demand in our market, but there is limited supply. The need for 120- to 160-foot bay depths that allow for 5,000- to 25,000-square-foot subdivisions is a requirement we can’t often fill in the region.
Due to the economies of scale, it is hard for developers to build a 40,000- to 80,000-square-foot flex/shallow bay industrial building compared to a 136,000- to 200,000-square-foot speculative warehouse. A good example of shallow bay industrial product is Southport Business Park, which was developed by GID. The approximately 1 million square foot project is currently 95 percent leased.
Last mile locations are more desirable than ever as consumers expect same-day instead of next-day delivery. As we continue to grow by 65 people per day, distributors will continue to demand space close to the population growth for the foreseeable future.
Several opportunity zones in our region will likely spur some new industrial development over the next couple of years as well.
— By Ed Brown, SIOR, CCIM, Broker, NAI Carolantic Realty. This article was originally published in the January 2019 issue of Southeast Real Estate Business.