127
While most office markets are bifurcated between Class A and the rest, the Triangle market has a particularly pronounced disparity that is driving market trends.
In the first quarter of 2013, Class A vacancy was 12.7 percent — nearly half that of both Class B (24.7 percent) and Class C (23.0 percent).
The playing field, in terms of both tenant desires and rental rate differential economics, is skewed heavily in favor of Class A space, which currently only has six options for tenants seeking blocks 50,000 square feet or greater. Not even projects currently under construction, including the NC State Employees Credit Union’s downtown Raleigh headquarters and Diamond View III in downtown Durham, offer available space in that range.
Class A vacancy is at its lowest rate in nearly five years and is only slightly above the 11 percent range that spurred the office building boom between 2005 and 2007. The lack of available large blocks has already resulted in lost opportunities and market timing mismatches for potential preleasing or build-to-suit tenants, such as Wyrick Robbins Yates & Ponton.
The law firm recently renewed and expanded its lease in place at The Summit in the West Raleigh submarket, due to space constraints for well-located, well-appointed targets.
These ideal spaces have dwindled significantly throughout the market in the past several years. The situation has been exacerbated in the past year with Class A vacancy below 10 percent in almost half of the area’s office submarkets (Cary, Downtown Raleigh, Central/Downtown Durham, Six Forks Road and U.S. 70/Glenwood).
However, to drill down even further, the tightest market in the Triangle — and one of the tightest central business districts in the nation — is Downtown Raleigh. The area experienced a recent revival with software company Red Hat taking full occupancy of the 338,000-square-foot Red Hat Tower, formerly Two Progress Plaza. The deal fundamentally altered the tenant makeup of the submarket: not only have tech-oriented companies such as Citrix and Ipreo committed to large investments in the area, but technology-related interest has also boosted tourist activity.
Systemic changes in banking/finance and law firm real estate needs have resulted in large give-backs that have opened the door for mature tech companies, freed from power-heavy suburban locations by cloud technology, to move into more traditional CBD office space.
Additionally, since Downtown Raleigh has the Triangle’s lowest vacancy rate at 5.8 percent and the most substantial submarket rent growth from 2007 to today, this is the first submarket where the economics make sense for substantial risk-taking.
The long-delayed Charter Square project, a 225,000-square-foot speculative office building, is the riskiest project since the last recession hit as it is only approximately 15 percent preleased. The project is slated to break ground in the third quarter. Additionally, extensive upgrades are underway at the 110,000-square-foot former Wachovia building. The building, slated to be fully renovated by early 2014, is planned to be Downtown Raleigh’s first incubator location.
Talk has also spread about a potential 2013 groundbreaking for The Edison, a proposed multi-tower office and retail project that’s slated to take up an entire city block near Moore Square in downtown Raleigh.
Since there are a limited number of financially capable firms with lease expirations in the next two to four years that would be interested in taking down a big chunk of top-tier space at a top-tier price (likely above $30 per square foot), the race is on between these competing properties to lock down enough tenant interest to see if The Edison and other anticipated suburban projects such as North Hills Two, 3800 Glenwood, and GlenLake V are viable alongside Charter Square.
While the elevated availability for Class B office space certainly dampens the overall market — nowhere is that more obvious than the Triangle’s stagnant office average asking rate — the health of the Class A sector is the largest impetus for growth in both the leasing and sales markets.
Unsurprisingly, the quarterly office transaction volume has steadily increased in the past three quarters as national institutional investors and REITs have entered the market in full force. These investors have acquired a number of properties, primarily Class A assets, at cap rates reminiscent of another era (in the 7.25 to 7.75 percent range).
The 302,443-square-foot CapTrust Tower, the Triangle’s premier office building, also traded at a market high-water mark of $325 per square foot in January 2013.
— Sarah Godwin, senior analyst for the Carolinas at Cassidy Turley