Population Gains, Transforming CBDs Drive Triangle’s Multifamily Market Forward
Today, the Triangle market is booming. The once sleepy Raleigh and Durham central business districts have been transformed with development pipelines exceeding $2.5 billion. Since 2009, Kane Realty’s North Hills, which has become our standard bearer for suburban mixed-use planning, has delivered an additional 1,100 multifamily units, 120,000 square feet of retail, 501 hotel keys and 1.1 million square feet of office space that is achieving top rental rates for the market. And there are more uses coming.
There are 10 exciting mixed-use projects under construction as the Triangle continues to take amenities to the next level and increase its competitiveness.
Multiple demand drivers
The Triangle still feels like it’s in earlier innings with durable growth potential as evidenced by:
• Explosive In-migration: 52 percent population growth since 2001, or 3.7 times the national average.
• Balanced, Recession Resistant Factors: The market is a top 10 life sciences clusters and includes the largest research park in the United States with Research Triangle Park (RTP). Raleigh-Durham also has well-regarded university and hospital systems and state capital.
• Highly Educated Workforce: There are more than 80,000 students enrolled at University of North Carolina at Chapel Hill, Duke University and North Carolina State University, and more are staying local post-graduation.
• Explosive Tech Growth: Marquee firms like SAS, Infosys, Epic Games, Citrix, Pendo and Red Hat are in growth mode, and CBRE recently ranked Triangle as the No. 10 technology market.
• Millennial Magnet: Millennials, the top multifamily renter cohort, is generated in Raleigh-Durham nearly six times the average U.S. population growth since 2013, according to ULI.
• Room to Run: The average regional rents start at a compelling 20 percent of median household income.
Ending Sept. 30, 2019, the Triangle multifamily market was 96 percent occupied with average effective rents growing at a robust 5.3 percent year-over-year (versus 3.2 percent nationally) to $1,173 (or $1.22 per square foot), per Axiometrics.
In the past five years, our regional supply has grown approximately 30 percent to 136,000 units. While future supply is an estimated 6.2 percent of inventory (at a break down of 82 percent suburban, 18 percent CBD), average annual net absorption of 5,300 units has exceeded deliveries by 200 units the past four years, according to a Real Data report. We expect this dynamic to continue.
A transforming marketplace
Developer interest is intense across many of our submarkets, including our downtowns where scarcity of parcels is driving some of our first podium multifamily deals with replacement rents peaking north of $2.40 per square foot.
With average effective multifamily rents at $1.22 per square foot but average rent-to-income nearly 30 percent less than the national average, demand for higher end core projects has started pushing suburban and urban rents above their respective $1.45 per square foot (approximately $1,500) and $2.15 per square foot (approximately $1,800) barriers.
It’s not just multifamily achieving rent growth. Top office rents just passed $40 per square foot with 2.9 million square feet under construction and Class A vacancy at 7.4 percent.
On the retail front, Wegmans just opened its first of six planned regional stores, Publix will open downtown Raleigh’s first full-service grocer in 2020 and high street retail is transforming our CBDs as regional vacancy was reported at 6.9 percent.
With 10 mixed-use developments under construction regionally, our diverse, creative and highly educated workforce is driving an exciting regional development trend that will continue to enhance our amenity base.
Our Raleigh CBD skyline, in addition to active Durham and Chapel Hill CBD pockets, will be transformed by the likes of Dominion Realty Partners and New York Life’s FNB Tower, which is a 22-story mixed-use tower that opened last month. The Fallon Co.’s 20-story Raleigh Crossing mixed-use project is also under construction.
In our evolving suburbs, Kane Realty continues to expand North Hills with latest plans featuring 20- and 33-story towers. Columbia Development, USAA Real Estate and Hines’ Fenton development is a 69-acre mixed-use project set to open in Cary in 2021. Turnbridge Equities and Denali’s Cary Town Center redevelopment is in the planning stages, and Hub RTP will eventually feature structured parking multifamily deals, therein further stratifying top-end suburban and urban rents.
Room to run
Any secret on investing in the Triangle has long since left the station and, to a large degree, any relative risk premium. In the past five years, more than 60 percent of our inventory has traded at least once, and many of our submarkets are pricing in some level of scarcity premium, especially for value-add deals.
In the past 12 months, the Triangle has closed on $3.5 billion on an average deal size of $34.6 million, according to Real Capital Analytics. The Raleigh-Durham market is trending 39 percent higher than the $2.5 billion average annual transaction volume the market has seen the past five years.
As of the fourth quarter of 2019, tax-adjusted entry cap rate spreads across risk classes have compressed and are approximately at mid-4 percent.
Recently, the first sale to eclipse the $400,000 per unit barrier was Grubb Ventures and Stiles’ trophy project now named Camden Carolinian that commands an average effective rents of $2,200, which is in the top 5 priciest communities in the Triangle.
While we must remain ahead of our infrastructure needs and quality of life, we continue to see room to run across the Triangle multifamily market. Buoyed by recession-resistant growth drivers and continued densification, Raleigh-Durham offers better mousetraps that will continue to support a growing population and renter-heavy millennial base.
— By Howard Jenkins, Senior Vice President of CBRE|Raleigh. This article originally appeared in the January 2020 issue of Southeast Real Estate Business.