The Raleigh/Durham industrial market finished 2011 with substantially increased activity within the warehouse sector. Capital markets activity continues to be particularly strong for Class A institutional grade product, and leasing velocity seems to be finding its legs. The increased volume of deal flow is likely to set the stage for continued improvement through 2012.
Investment sales activity has been particularly robust during the past 18 months with more than 3.1 million square feet of institutional grade industrial space trading hands for more than $209 million in value. Cap rates for institutional grade product in the Raleigh-Durham market have fallen significantly since the credit crisis in 2008, but have begun to level off in the low 7 percent range.
Duke Realty has been the most active buyer of industrial product in the region. Since September of last year, it has acquired nearly 1 million square feet in three transactions totaling $61.4 million, and is now the largest owner of institutional industrial space in the market. Most notable was its acquisition of the Greenfield North portfolio in Garner, North Carolina, for $31 million. Through this acquisition, Duke has virtually cornered the fast growing East Wake market for Class A warehouse space.
Leasing velocity has accelerated as new leases finally joined renewal activity to result in more than 466,000 square feet of net absorption in the third quarter. The RTP/I40 submarket, the Triangle’s largest industrial submarket, recorded 261,000 square feet of net absorption and marked the first time in more than a year that the submarket posted positive net growth. Helping to fuel the growth over the quarter was Cardinal Health’s 255,000-square-foot renewal, which included a 101,000-square-foot expansion at 5104 Chin Page Rd. in Durham.
Despite the increased presence of new deals, lease renewals continue to dominate most of the leasing activity. New deals are largely the result of organic growth from companies that already have a presence in the area. This is likely to change however with a couple of significant requirements that appear poised to sign in the first quarter of this year.
Vacancy rates continue to demonstrate disparate performance between Class A assets with clear heights above 24’ and ESFR sprinkler systems versus older facilities without these features. While the overall market vacancy continues to hover around 20 percent, vacancy rates within Class A product continues to be relatively tight at 7 percent market-wide.
Rental rates have been in a relative holding pattern since 2008. This could change dramatically however especially in the RTP/I40 corridor where land is scarce and new construction would likely command rents 25 to 30 percent higher than current rents.
Speculative development is non-existent throughout the market. However, two significant build-to-suits were delivered over the summer of last year. Caterpillar opened a Panattoni-built 277,000-square-foot manufacturing facility in Sanford, North Carolina, and announced 400 new jobs to be relocated to the plant from Mexico. The Keith Corporation delivered a 720,000-square-foot distribution center to Becton Dickinson in Four Oaks, which is the largest industrial build-to-suit in the market’s history.
The pipeline for new lease deals sets the stage for continued momentum in 2012. Leasing activity should continue to improve while the industrial segment of the capital markets may take a breather following the activity of the past 18 months.
— Christopher Norvell is the senior managing director and a principal in Cassidy Turley’s Raleigh office.