Rich Harris, DTZ
Shoshana Collins, DTZ
Despite this auspicious environment for new construction, developers are still exercising substantial caution, underscoring the depth of the last downturn and its long-lasting impact on both the development and lending communities. However, recent successful Class A deliveries by REITs like Raleigh-based Highwoods Properties and Indianapolis-based Duke Realty signal a shift toward a more pronounced supply cycle, with lower pre-lease thresholds, and a Class A market that is clearly transitioning from a recovery cycle to a period of low supply.
As the market picks up steam, here are three trends that we see emerging in the Raleigh-Durham office market, and the implications for the MSA going forward.
The Rise of Live-Work-Play
In the last decade, no trend has had a greater impact than the rise of the live-work-play model, a phrase that encapsulates many meanings, but always embodies the high value placed by many local entrepreneurs on convenience, collaboration and amenity-rich office environments. For developers, this has always been known as a mixed-use project, but the trend has emphasized the importance of getting the right balance of ingredients (retail, apartments, restaurants and office). How do you know when you get it right? Well, the tenants come in droves and an undeniable energy emerges as each component works in concert, becoming more than the sum of its parts.
Today’s most successful projects in Raleigh-Durham are all variations on this theme: American Tobacco (downtown Durham), North Hills (Midtown Raleigh), Brier Creek (Raleigh) and East 54 (Chapel Hill). The implications going forward are clear. Developers will need to address the high demand for walkable amenities and high energy environments or risk leasing space to a much smaller pool of prospective tenants.
Reduce, Reuse, Upcycle
The Triangle was an early adopter of the redevelopment trend that is seen throughout the United States. The region’s economy once centered on agriculture and manufacturing, leaving a legacy of historic, but abandoned, tobacco and steel warehouses that provide the ideal raw materials for today’s vintage aesthetic. Savvy developers have capitalized on the buildings’ historical authenticity, “upcycling” the original brick walls, reclaimed, tobacco-weathered wood, and exposed industrial ductwork and piping with the high-end finish of premier Class A office product.
This repurposing trend has resulted in some of the Triangle’s most highly coveted mixed-use projects: the American Tobacco District in downtown Durham, which has maintained almost 100 percent occupancy since renovations began in 2004, and the recently-completed Citrix building in downtown Raleigh, which is not only expected to set a new record sale price per square foot in the state, but also to catalyze a rapid acceleration in the revitalization of the downtown Warehouse District.
These buildings not only provide the vintage appeal today’s entrepreneurs covet, but also bring structural advantages (high ceilings, bay windows, and historical relics) that have architects clamoring to create these one-of-a-kind work environments. The implication for developers going forward is to seek out these historic buildings that are of finite supply, but mass market appeal.
Science-Tech Collaboration
Unsurprisingly in a region nicknamed the Research Triangle, Raleigh-Durham has also seen new construction activity centered in the area’s three Innovation Districts: a re-imagined type of mixed-use development that integrates the traditional live-work-play trifecta of housing, office and retail with leading-edge research institutions, clustered high-tech and bioscience companies, and start-up incubators — all driving collaboration. The opportunities and public-private partnerships fostered by these environments ensures that space in these districts will always be in high demand.
Centennial Campus at North Carolina State University encompasses over 1.2 million square feet of office, research and development (R&D) laboratories and manufacturing space and boasts a 1.6 percent vacancy rate. In response to space constraints, Craig Davis Properties has jumpstarted Alliance Center I after tabling the project during the recession. The 146,000-square-foot office building is scheduled to deliver in 2015, and will be anchored by ABB, a power and automation technology firm.
There has also been a surge of redevelopment activity and new proposed projects at Durham ID and the surrounding area, with the aim of nurturing a nascent innovation district anchored by Duke University in the renovated Carmichael and Chesterfield buildings into a 1.7 million-square-foot life-science hub in downtown Durham. It is no accident that one of the primary investors in this project, Boston-based Longfellow Real Estate Partners, was involved in the transformation of Cambridge’s Kendall Square near MIT, which has become the national archetype for converting urban blight into dynamic research centers.
Like Cambridge, downtown Durham is rich with historic buildings that have fallen into disuse, ideal candidates for repurposing into a variety of office and lab spaces.
Meanwhile, Research Triangle Park, which for decades maintained an unassailable position as the region’s primary driver of economic activity, has struggled in recent years with flat employment growth and elevated vacancy rates in its aging office product. Taking inspiration from the vitality of the new generation of R&D projects, the RTP Foundation signaled its determination to maintain its relevance in a rapidly changing market. The research park, which for decades has housed the nation’s leading tech companies on campuses behind locked gates, recently unveiled a new master plan that strives to create a more modern, collaborative environment. The plan calls for extensive investment in residential and retail development, an urbanized Park Center and the creation of a light-rail system that would connect the park with the two downtowns.
The implication going forward is that a premium will be placed on collaborative work environments. Developers that can access universities for their research, interns, facilities and skilled workforce will have a competitive advantage. Moreover, these same partnerships often afford private companies access to university facilities likes labs or even gyms or swimming pools.
— By Rich Harris, Managing Principal, DTZ and Shoshana Collins, Research Analyst, DTZ. This article originally appeared in the January 2015 issue of Southeast Real Estate Business.