MARKET UPDATE: LEASING OFFICE SPACE IN THE RALEIGH-DURHAM, NC AREA

By Blair Graham

Guest blogger Blair Graham is a commercial real estate advisor with the Raleigh, NC office of Grubb & Ellis|Thomas Linderman Graham.

As a commercial real estate broker, whether I’m at a cocktail party or in a meeting with a client, one of the questions I always get asked is “what is happening in the market?” There is little doubt that my clients are looking for me to respond not only with insight gleaned from recent experience, but also with objective market data.

An advantage of working with a large commercial real estate services company is the depth of up-to-date market research.  Locally, Grubb & Ellis|Thomas Linderman Graham tracks all the commercial office, industrial, and retail space for lease in the Raleigh, Durham, Chapel Hill, RTP, Morrisville, and Cary markets and publishes this information in quarterly market reports.

To put this in perspective, the combined size of each of those sectors of our market total over 132,000,000 square feet (SF) of commercial space in the Triangle, which breaks down as follows:

  • Office Space: 44,014,976 SF
  • Industrial (Flex/Warehouse) Space:  44,015,736 SF
  • Retail Space: 41,370,788 SF

One of the most important metrics we follow to understand the health of the market is vacancy.  To answer the question as to what is happening specifically in the office market, I turn first to vacancy rates for office space.

Understanding Vacancy

According to some brokers, historically the market has demonstrated that equilibrium for vacancy in the Raleigh-Durham office market is approximately 10 percent.  Among other things, this takes into account functionally obsolete space as well as unique properties in the market that only cater to a small subset of potential tenants.

With that being said, at the end of the 3rd Quarter 2011, overall office vacancy for the collective Raleigh, Durham, Chapel Hill, RTP, Morrisville, and Cary markets was hovering around 20.3 percent.  While that number is historically high, one must take a deeper look inside the data to truly understand what is happening.

Flight to Quality

With vacancy rates increasing over the last two years and asking rental rates falling, tenants have systematically leveraged these market opportunities to move up from Class B and Class C office space to Class A space.  Consequently, Class A office vacancy rates have fallen to 17.2 percent while Class B office vacancy rates have ballooned to 26.5 percent.

Absence of New Construction

Over the last couple of years new construction of commercial properties available for lease has almost completely dried up.  This will prove to be a significant factor as the economy improves and companies begin growing again.  If you subscribe to basic economic theory, the increase for demand of office space, coupled with the stagnation of new supply, should lead to higher rent rates in the future.

What Does All of This Actually Mean for Me as a Tenant?

Opportunity!  While the office market has been soft for a sustained period of time, now is the time to lock in a long-term lease before a contraction in supply (especially in Class A space) leads to increased rental rates.  We are already seeing one of the Triangle’s largest landlords, Highwoods Properties, raising rental rates in select Triangle properties, and many other local landlords are cutting back on tenant concession packages (free rent, moving allowances, and large tenant improvement allowances).

Silver Lining for Entrepreneurs

Given the fact that landlords are anticipating that rental rates are going to be increasing in the coming years landlords are more open to short-term leases (one to three years) today than they have been in recent years.  However, this is much more palatable for a landlord if a tenant is willing to take a space “as-is” or with minimal out-of-pocket costs for the landlord (such as limiting tenant improvements to the space, i.e. not moving walls in the space and/or building additional private offices). This exact situation has played out regularly for many of the startups and high growth technology companies I represent.  This definitely presents a great opportunity for entrepreneurs looking to take down their first space.

About Blair Graham

Blair Graham is a commercial real estate advisor with the Raleigh, NC office of Grubb & Ellis|Thomas Linderman GrahamIn his advisory role, Blair focuses exclusively on tenant representation and corporate services. Blair utilizes his unique background as a commercial real estate attorney, coupled with experience in finance, to zealously advocate for his clients and effectively serve their interests. Blair helps tenants and buyers understand their options in the market and can leverage his diverse skill set to negotiate deals that can generate savings to the bottom line. We have seen the quality of his work first-hand with our clients at the Forrest Firm, and count him as a trusted partner.