The Raleigh industrial market dipped slightly in the third quarter of 2013 with negative net absorption, yet overall it improved from a year earlier, in part because of the general health of the North Carolina economy. Four factors are pushing the state’s economic recovery: a manufacturing revival, a construction surge, a boost of college graduates who are attracting knowledge-based industries and an influx of retirees, according to Dr. Michael L. Walden, a North Carolina State University professor and author of a report on the North Carolina economy that was published in the summer of 2013.
The combination of factors led Dr. Walden to forecast that North Carolina’s Research Triangle, which includes Raleigh, would have an unemployment rate below 6 percent by the end of 2014.
Ironically, some of the positive news for the state’s economy is putting pressure on the region’s industrial marketplace and driving these trends in Raleigh:
• Net positive migration and population growth, year-after-year
• The loss of industrial development opportunities to the homebuilding industry
• Local pressure to prioritize live/work/play environments and de-emphasize industrial development
• Constrained land supply
• A lack of institutional grade space
Consistently ranked by Forbes as one of the best places to live in the United States, Raleigh draws thousands of people annually to move here. In 2012 for example, net migration was 22,000, which put the total metro population at nearly 1.2 million people. This is spurring the homebuilding industry to build more houses, oftentimes on land that previously may have been used for industrial development. Well-located land is being purchased by homebuilders, which are competing fiercely with each other for entitled sites.
In fact, seven of the top 50 fastest growing firms in the Raleigh-Durham area are associated with residential real estate and homebuilding, according to the Triangle Business Journal’s Fast 50 list that was published in late November 2013. The companies are: Coldwell Banker Howard Perry and Walston, Corporate Investors Mortgage Group Inc., Forever Home LLC, Homes by Dickerson, Prime Mortgage Lending, Professional Builders Supply and Stock Building Supply.
The owners of Research Triangle Park (RTP), which was founded in 1959 on 7,000 acres of land with the intent of creating a new model in business parks by linking research and development with universities, business and government, recently completed a new master plan for the park — its first in 50 years. The new plan calls for adding housing and retail to the park. RTP has a daytime population of approximately 120,000 workers, and while the idea of creating a mixed-use village has a lot of merit on many levels, the change of use will remove significant portions of land inventory from future industrial developments.
The RTP operators are reportedly going back to companies that they sold land to years ago and asking to buy some of the vacant and surplus land back — ostensibly for residential or retail development. Hines was named the development partner and EE&K the designer for the new mixed-use village at Research Triangle Park. (I checked with RTP and they assured me that, “Research Triangle Park will remain accessible, not only to large corporations, but to the smaller organizations pioneering the discoveries of tomorrow.”)
From an industrial real estate perspective, one of the greatest challenges in drawing new tenants to the region is the lack of institutional-grade property. CoStar Group peg’s the region’s industrial inventory at around 120 million square feet and though true, the fact is the core market is comprised of only 28 million square feet and concentrated along Interstate 40 in the 12 miles or so that separates Raleigh from Durham.
The combination of homebuilding in perimeter areas near Raleigh, RTP’s decision to focus on more mixed-use in the park and lack of available land along I-40 is limiting new industrial construction in the region. So much so that only five buildings totaling 60,396 square feet were added to the inventory during the first three quarters of 2013, according to CoStar. However, there is a new 103,091-square-foot building under construction at 6741 Louis Stephens Drive that is fully pre-leased.
An additional barrier-to-entry for new development is new rules and regulations associated with development, such as requiring more elaborate storm drainage systems and new setback or screening regulations. Because the Triangle is heavily wooded, planning agencies want to preserve the historical environment and are mandating that new commercial projects maintain a certain level of the existing tree foliage. While the intent of the regulations is understandable, it does add another layer of complexity for developers.
As such, industrial vacancy has remained relatively stable, finishing the third quarter of 2013 at 9.9 percent, compared with 9.8 percent at the close of the second quarter in 2013 and 10.4 percent at the end of the fourth quarter of 2012. Net absorption was negative in the third quarter (-97,269 square feet), yet it was positive in the three previous quarters with a combined 830,719 square feet, according to CoStar.
With demand staying slightly ahead of supply, all landlords have raised rent prices. Overall rent rates increased slightly in the third quarter, to $5.38 per square foot on an annual basis. However, in the zone in which the average tenant deal is between 15,000 and 20,000 square feet, it is more common for rents to be north of $8 per square foot triple net, in single-tenant buildings with outside storage.
Through the first half of 2013, 26 industrial buildings totaling nearly 1.5 million square feet were traded with an average price per foot in the first quarter of $70.60 and the average price per foot in the second quarter of $51.24. Sales activity was slightly greater in 2013 compared to a year earlier, when 23 buildings sold, according to CoStar.
Market conditions are not likely to change dramatically in 2014. The industrial market is expected to perform similarly, with vacancy staying in the high-single digits, rents increasing nominally and net absorption to be positive for the year. More companies will look to build-to-suits, as the available industrial supply fails to accommodate their needs
— By Michael Lewis, SIOR, CCIM, Principal, President,The Lewis Group/CORFAC International. This article originally appeared in the January 2014 issue of Southeast Real Estate Business magazine.