The Raleigh-Durham industrial and flex market, totaling approximately 129 million square feet, continues to be strong with overall positive absorption. Vacancy is trending lower, making the region a landlord and seller’s market. With increasing construction costs, lower vacancy and solid demand, the rental rates and sales prices are now the highest of any city in North Carolina.
Available industrial land is diminishing for development in high-demand areas, and that typically signifies a significant barrier to entry for developers helping keep supply in check. The rental rate for new industrial product is currently in the mid-$5.00 per square foot range and trending higher. Some developers and brokers speculate the Triangle may become a $6.00-plus per square foot market for institutional-grade warehouse space. However, when comparing rental rates to markets like Austin and Boston, Raleigh-Durham is still a very competitive option.
Ground zero for the region’s warehouse market is in the general vicinity of Raleigh-Durham International Airport. Most of these distributors are delivering to the local market and need the central location and access to Interstate 40. The highest rates and prices can be found in this submarket and then start to decrease further out. Due to the lack of available land and rising costs, however, many distributors are finding the need to locate further out while still trying to stay in close proximity to Interstate 540.
New industrial projects for 2018 include: Eastgate’s 150,000-square-foot warehouse being developed by Scannell; Hinton Oak’s 120,000-square-foot project being developed by Wake Stone Corp.; and Liberty Ridge III, a 136,000-square-foot project from developer Liberty Property Trust. Patriot Park, under development by Strategic Capital Associates, will add two warehouses totaling 350,000 square feet. Once these projects are completed, we anticipate vacancy will rise, in part due to several second-generation spaces coming back to the market at Tri-Center, an industrial park located at the northeast corner of Research Triangle Park (RTP).
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 that cannot afford current rents are being forced to consider less ideal locations or inefficient warehouses. Surrounding towns are benefiting and have seen increased activity due to the “drive a little, save a lot” mentality.
As some tenants decide to buy rather than lease, small warehouses have had a significant jump in value. Free-standing 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 per square foot range.
Despite the current positive market, landlords and sellers have to remember it was not that long ago that the Triangle had one of the highest vacancy rates in the country at 30 percent. In the early 2000s after the tech bust, a flood of space came back to the market from firms like IBM and Nortel.
Today, we have a much healthier market in part due to more diversified industries. E-commerce and building supply distribution companies are currently two of the largest sources of demand. Owners and developers that have buildings located near RTP have the pharma and technology companies like PowerSecure, Spirit and Intuitive to drive demand and absorb 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 a development in line with shallow bay product is Southport Business Park developed by GID. The approximately 1 million-square-foot project is currently 93 percent leased.
The Triangle region continues to grow at a phenomenal rate with companies citing our talented workforce, diverse economy, vibrant startup community, top-tier universities and our community college system as reasons for doing business here. These attributes will continue to impact company expansions and relocations as well as job growth, so we expect to see a growing demand for industrial space in the Raleigh-Durham market.
— By Ed Brown SIOR, CCIM, Broker at NAI Carolantic Realty. This article originally appeared in the January 2018 issue of Southeast Real Estate Business.