The Raleigh-Durham commercial real estate market continues to be one of growth and perseverance despite the global pandemic. Its economy is rich with an array of industries, healthcare and university systems that support population growth and expansion. Commercial real estate is experiencing its own challenges and opportunities through this pandemic, including one of the most talked about asset classes, office. The sector is the subject of the big “pause” discussion as there’s uncertainty going forward.
Despite the lack of commitment to many significant leases, the office market’s fundamentals have remained stable in Raleigh-Durham. Rates are holding steady with an average Class A rental rate of $29.59 per square foot. Vacancy and absorption are maintaining competitive levels, allowing market rates to hold somewhat steady.
Brad Corsmeier, CBRE|Raleigh
Over the last year, activity reflected these trends as many landlords negotiated short-term renewals without rate increases. If the leasing trend continues this year, renewals and space consolidation will possibly lead to a reduction in rental rates.
One of the key driving forces of office product in Raleigh-Durham stems from the life sciences industry. The market is currently ranked No. 5 among life sciences markets in the United States, according to CBRE’s annual report. The life sciences sector has made major headlines across the market in the last year as companies made commitments to expand or make their entrance in the market, such as ApiJect, Eli Lilly, Duke University lab expansions, GRAIL Inc., KBI Biopharma, Q2 Solutions, IQVIA and Beam Therapeutics.
In order to accommodate the demand for space, the market has seen an influx in capital from developers looking to convert second-generation office or flex space into laboratories and research and development space. Some of the current conversion projects recently completed or underway include Park Point, TBC Place, Eastridge at Perimeter Park, SouthPort, Perimeter’s Edge, The Stitch, Keystone Technology Park, Newcastle and BioPoint.
The life sciences sector is expected to continue to grow Raleigh-Durham’s office market as it attracts the attention of local and national developers and companies.
Life sciences dominate sales
Office investment sales activity has lessened due to the pandemic. The majority of trades taking place for general office use are single-tenant users with credit and long-term leases in place. Some of the major trades seen in the last year include the sale of The Dillon for $237 million to an institutional client advised by MetLife Investment Management; the sale of Durham ID for $136 million to Longfellow Real Estate Partners; and the sale of the Perimeter Park Portfolio leased to University of North Carolina and Microsoft to Mapletree Investments for $180 million. The life sciences industry saw a huge influx in sales with transactions up over 500 percent in the last year, including Alexandria Real Estate’s $590 million acquisition of the Parmer portfolio.
In general, the future of office product has some uncertainties as corporate America continues to figure out its long-term plans for office re-occupancy and ongoing flexibility. Many companies were on the verge of bringing employees back into the office at the beginning of the year, but the pandemic’s spikes during the holidays pushed those timelines out until at least mid-year.
However, landlords continue to look for opportunities to make their buildings healthier for today’s office users, including modern air filtration systems, adding or expanding outdoor communal areas and more thorough cleaning protocols.
New supply coming
The growth of the market continues, as developers are pushing ahead with their projects in Raleigh-Durham’s active submarkets of Research Triangle Park (RTP), Downtown Durham and Downtown Raleigh. Currently there is over 3.7 million square feet of office product under construction across the market.
Downtown Raleigh has several major projects such as the upcoming 301 Hillsborough Street set to deliver this year. The Class A mixed-use development will achieve LEED designation, as well as Wired Score and Fitwell certifications. Major tech company Pendo was a win for Raleigh by agreeing to remain downtown, making 301 Hillsborough its new headquarters.
Tower Two at Bloc 83 and Smoky Hollow are also Class A mixed-use buildings expected to deliver this year. In Midtown, Raleigh Ironworks begins construction on a 150,000-square-foot adaptive reuse project that will include creative office and retail.
In RTP, life sciences continue to be a major focus with Park Point being redeveloped into life science and creative office. Forty540’s Phase II is expected to deliver this year as well, offering a brand new mid-rise office building to the submarket.
Downtown Durham is also seeing activity with the recently announced redevelopment of the former Northgate Mall. The mixed-use development will be repositioned into Class A office space, retail, apartments and life sciences.
Overall, Raleigh-Durham is well positioned to be an office market of interest for many corporations across the country as companies look to diversify their footprint post-COVID-19 to less dense and more cost-efficient markets. The market’s educated workforce from top-tier universities, the flow of National Institutes of Health (NIHS) funding into the region, the relative low cost of living compared to Northeast and West Coast locations and population in-migration are just a few reasons to remain optimistic for the future.
As 2021 begins to unfold, office landlords will continue to create competitive and creative opportunities for office users that are currently located here, as well as those looking to move to Raleigh-Durham.
— By Brad Corsmeier, Executive Vice President, Advisory & Transactions Services Group, CBRE|Raleigh. This article originally appeared in the January 2021 issue of Southeast Real Estate Business.