Tech, Co-Working Shine in Raleigh-Durham’s Downtown Submarkets

by John Nelson

The question today for office tenants and investors is not why Raleigh-Durham, but why not. The Raleigh-Durham market is defined by continued job growth and a thriving technology sector. The Triangle is enjoying significant rent growth, strong absorption and major construction that now has a Downtown Raleigh and a Downtown Durham.

Raleigh-Durham’s overall growth continues and was recently ranked No. 1 in the Southeast in projected population growth, posting a 10.3 percent growth rate from 2017 to 2022. This figure is nearly double the 5.5 percent average growth rate for Southeastern cities.

Job growth is the primary driver of the region’s expanding presence with over 30,000 jobs added in 2018 through the first half of the year, already surpassing the 24,000 jobs added in all of 2017.

Brad Corsmeier, CBRE | Raleigh

Over the last year, we have seen Infosys (2,000), Credit Suisse (1,200), LabCorp (400) and Ipreo (250) announce major job additions to the area. Most recently, Amazon announced 1,500 jobs that will be required for its new fulfillment center.

The tech sector is a major contributor to those jobs, and there is a lot of talk about a well-known e-commerce giant and a major technology giant bringing a significant presence to our market.

Whether or not you believe it will happen, the skids are now greased for the next tech giant to plant their flag in the market.

CBRE reported that Raleigh-Durham ranks No. 8 out of 50 U.S. and Canadian markets in its 2018 Scoring Tech Talent report. The Triangle has grown by 20.7 percent over the last five years in total tech occupations, adding more than 10,000 new tech workers to the metro area. The Raleigh-Durham market ranked No. 2 in millennial growth change over the last five years, offering a large labor pool for growing tech companies.

Downtown(s) Dominate
New construction has soared this year with record-setting 2.6 million square feet of space under construction in the metro area. Most of this construction activity is within the CBD markets, as Downtown Durham has nearly 1 million square feet of Class A space under construction. The projects currently underway include 555 Mangum, Durham ID, One City Center and Golden Belt, a tobacco warehouse adaptive reuse project.

WeWork and Spaces will each anchor a building in Downtown Durham, as the coworking giants have signed leases for over 50,000 square feet in One City Center and 555 Mangum, respectively. Golden Belt recently announced over 100,000 square feet of leasing with technology and biotech companies.

Downtown Raleigh is the second most active submarket for new construction and demands the highest asking rental rates in the market, with an average rate of $32.08 per square foot. In most cases that does not include parking.

The Dillon delivered 227,000 square feet in the first quarter at 38 percent preleased, but recently announced new leases bring the building to more than 95 percent leased.
One Glenwood, a 227,000-square-foot project, is underway with half of its office space accounted for, including a lease with WeWork for over 80,000 square feet.

FNB Tower broke ground in May with anchor tenant First National Bank. The 22-story mixed-use project will have 239 residential units above 150,000 square feet of office and ground-floor retail space. Most recently McGuireWoods, an international law firm, announced its future home at FNB Tower, bringing the project to 60 percent preleased.

Absorption Drives Up Rents
Absorption and rent growth have been the other big stories in Raleigh-Durham. In the last five years, average annual absorptions have exceeded 1.6 million square feet, with a total of 8.2 million square feet absorbed in that time.

Direct vacancy decreased to 9.77 percent overall, with Class A space sitting at 8.16 percent. Low vacancy has shifted the dynamic in the market in favor of landlords. Rental rates are rising almost monthly in certain submarkets and concessions have thinned.

Average Class A rates have risen to $26.63 per square foot, however new Class A product is climbing toward the low $30s in the suburbs. The RTP/I-40 submarket, which has historically been occupier favorable with downward pressure on rates, is close to seeing $30 per square foot in new Class A product.

Rising construction costs for new product and tenant improvements have allowed landlords to push both rates and term. Even in older product with second-generation space, a standard fit up can now cost up to $35 to $40 per square foot, allowing landlords to push rates higher into the mid-20s.

The next wave mixed-use product in our downtown markets with structured parking is expected to reach rents close to $40 per square foot.

Now when investors come to our market asking, “Why Raleigh-Durham?” the story is self-explanatory. The steady job growth, new tenants and thriving technology industry continue to contribute to the strength of the area and drive the major economics of real estate in both new and existing product.

— By Brad Corsmeier, Executive Vice President of CBRE |Raleigh. This article originally appeared in the October 2018 issue of Southeast Real Estate Business.

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