The Raleigh-Durham region is experiencing increasing optimism despite the lingering impacts of COVID-19. While some reentry plans have been delayed and companies are still grappling with the way in which they will utilize office space moving forward, tenant demand is expected to rebound sharply in the first half of 2022.
“We’ve seen an encouraging uptick in tenant activity since the second quarter of 2021, and we expect that trend to accelerate,” says Kathy Gigac, principal of Avison Young and a member of the firm’s Occupier Solutions Team. “Tenants seem ready to get back to some sense of normalcy.”
Emily Bostic, Avison Young
Local economic fundamentals are sound, as reopening efforts and positive job growth have allowed Raleigh-Durham’s unemployment rate to recover from a pandemic high of 12 percent to 3.2 percent as of Sept. 2021.
The region continues to witness major economic development wins with companies such as Google and Apple announcing plans to create thousands of new jobs.
In its largest presence on the East Coast, Apple will invest $1 billion over a 10-year period to create a 3,000-job campus to eventually span 1 million square feet.
In the most recent announcement from an office-using tenant, Fidelity Investments will add 1,500 jobs in the Triangle, on top of 750 already announced in 2021, marking the financial service giant’s third recent expansion in the market.
Year-to-date office leasing activity reached 2.5 million square feet through third-quarter 2021, an increase of 12 percent year-over-year. The flight to quality trend persists with Class A office product accounting for 78 percent of post-COVID-19 leasing demand.
After a record-setting amount of sublease offerings hit the market in 2020, sublease vacancies declined moderately in the latter half of 2021 as some companies pulled space from the market and prime locations attracted considerable interest from tenants seizing an opportunity to upgrade their space.
Rent growth has undoubtedly slowed in comparison to pre-pandemic years, but it remains positive. The average asking rate rose 2.9 percent year-over-year to a new record high of $29.26 per square foot in the third quarter. A substantial increase in construction costs and strong investor demand have thus far sustained the increase in office rents market-wide.
With 2.2 million square feet of office construction currently underway, both national and local developers continue to press forward with new speculative projects, signaling confidence in the long-term outlook for the Triangle.
Kane Realty’s $1 billion North Hills Innovation District will be heavily focused on life sciences users. The 33-acre district at full buildout will offer an additional 700,000 square feet of Class A office space and 1,000 residential units to the already burgeoning North Hills corridor.
The Triangle region has long been recognized as a national hub for life sciences occupiers, a trend that has certainly escalated since the onset of the pandemic. A flood of life sciences companies seeking trophy research and development (R&D) and lab space has spurred a notable trend in office-to-R&D conversions that shows no signs of slowing.
2020 was a record-setting year for Triangle office sales, driven by a combination of trophy and life sciences opportunities. While limited acquisition opportunities held sales volume down in the first half of 2021, a recent spike in office investment sales indicates that investor demand remains solid.
In July 2021, Highwoods Properties set a record for price per square foot for a non-medical office building, paying $142.5 million (or $474 per square foot) for Captrust Tower at North Hills. Other recent transactions to surpass $400 per square foot included the Citrix Building in Downtown Raleigh ($456 per square foot) and Durham.ID in Downtown Durham ($418 per square foot).
As both employers and employees contend with optimizing their return-to-work strategies, occupiers must decisively think about how their space and surrounding amenities will attract and retain employees in traditional office environments.
The typical office space was already in evolution pre-COVID-19, and some measure of flexibility is likely to be expected by office employees going forward.
The Triangle’s growing economy, access to talent and high-quality education and training resources, particularly in the tech and life sciences industries, will continue to provide key fundamentals for office recovery. Given recent leasing momentum and elevated investment capital, the near-term outlook is decidedly positive.
In their recently published Emerging Trends in Real Estate 2022 report, the Urban Land Institute and PricewaterhouseCoopers named Raleigh-Durham the No. 2 market in the United States to watch for overall real estate prospects this year. The metro was also the No. 1 market in the 2021 Emerging Trends report.
— By Emily Bostic, Insight Analyst, Avison Young. This article originally appeared in the January 2022 issue of Southeast Real Estate Business.