Writer: Eleana Teran
3 min read October 2023 — Raleigh-Durham’s commercial real estate landscape is undergoing rapid transformation.
The challenges of a changing urban economy have echoed in the region, especially in the office sector. Weaker overall demand for office spaces has resulted in a 23.1% decrease in office leasing activity since 3Q22. This is influenced by more hybrid or remote work, with the percentage of job postings for remote roles at 11.4%. However, the office market showed promise with a positive net absorption of 284,966 square feet last quarter, attributed in part to the inauguration of Bandwidth’s new headquarters in West Raleigh.
On the other hand, overall vacancy levels are on the rise, reaching 18.6% by the end of 3Q23. However, the average Class A asking rate has seen a slight uptick, ending last quarter at $33.45, a 0.9% increase year-over-year. Despite the challenges, sublease availability has decreased to 4 million square feet, indicating a move towards stabilization in this sector.
Simultaneously, the city has shown adaptability. Efforts like the Equitable Development Around Transit by the City of Raleigh exhibit forward-thinking, aiming to support a successful Bus Rapid Transit (BRT) system with new zoning rules and development planning around each BRT station. These changes, along with the city’s focus on affordable housing and high-quality public spaces, indicate Raleigh-Durham is planning for mobility in urban landscapes.
In conversations with Invest:, industry leaders discussed strategies that companies can implement to optimize their real estate portfolios and shed light on factors prospective tenants should consider in the present market. These dialogues underscore the importance of adaptability, resilience and creativity in charting the city’s path to sustained growth.
Matt Winters, managing director at JLL
There’s growing concern about the viability of office landlords and potential solvency issues. In response, we are collaborating closely with our capital markets team to ensure we grasp the nuances of the debt and equity markets. This collaboration ensures that we confidently navigate the capital dynamics of building owners, ultimately safeguarding the investments our clients make in their employees, businesses and real estate. Given the anticipated slowdown in new development, there’s an impending scarcity of premium real estate solutions. This has prompted many organizations to kick-start their real estate planning earlier than usual, adopting innovative strategies in their decision-making.
There’s significant pressure on employers to redefine their approach to the workplace, people and real estate. Every organization, whether owning or leasing real estate, is grappling with the same questions about the future of work and the needs of their employees. When considering these projects, our focus is on understanding the future of work and what employees require to be most productive. To ensure our clients receive the best advice, we integrate insights from workplace strategy teams, occupancy planning and technology resources. Our approach prioritizes understanding the needs of the employees first and then crafting a real estate strategy around them.
Jim Anthony, CEO of APG Companies
We have continued to invest in our industrial portfolio, but we have also been selling some of our properties. I think it’s been extremely difficult to find investment property deals that make sense. That is going to change soon.
We’re beginning to see that window of opportunity opening to attractive pricing, particularly in the office sector. We will be opportunistic buyers in the office sector through the balance of 2023 and in 2024 when I expect we’ll start to see some bottoming in valuations. What will drive the dropping values will be the inability to refinance office buildings. Loans will expire and banks will not want to extend their loans. They’re not making any more loans in this asset class. Initially, the banks are going to take a very hard look at the properties, and then sell the debt, or foreclose and resell them. I think it’s a mistake to believe that this is only going to happen in the office sector. Even in the best markets in the country, the only thing that you see trading right now is industrial, some retail, and an occasional hotel. Apartments, office buildings and mixed-use projects are not trading as much. There is a very simple reason for that: lack of financing and lack of availability of properties that are marked to market.
Amy Carroll, president and principal of TradeMark Properties
There are numerous creative ways to approach real estate optimization. For instance, I came across a fascinating podcast episode featuring a vacant 10-story office building that was transformed into a vertical farm. Each level of the building now houses a robotic farm cultivating various fruits and vegetables, with robots efficiently handling the fruit-picking process. This innovative conversion allowed the owner to maximize the potential of the property. Although this example may be extreme, it highlights the limitless opportunities available. Also, to address the significant growth in the Triangle, some investors are converting offices into multifamily residences. Additionally, landlords can utilize periods of lower occupancy to make necessary improvements/upgrades to aging building systems. Because of all of the opportunities, it’s crucial to collaborate with the right professionals who can provide guidance and expertise in navigating these possibilities.
Gordon Grubb, president of Grubb Ventures
The most challenging factor right now is that it is hard to get office financing. We have been very fortunate to have refinanced two of our larger buildings earlier this year with decent rates. They were 100% leased with credit tenants and in great locations. We are repositioning some ‘B’ office buildings locations with amenities such as fitness centers,conference rooms and co-working space, Raleigh Greenway bike trail connections and more. Above all else, we are working to improve amenity packages and the outdoor experiences in offices.
It is a good time to be an office tenant looking for space. You have many options. I would advise a prospective tenant to explore them and focus on finding an environment where their employees want to come, particularly if they want them back in the office. These days, that does mean looking at the amenity package. Your days of a simple office building with a conference room are over. It is not just fitness; it is coffee, retail and outdoor space. We have tried to do courtyards and places where people can go outside and work or relax. We do not typically do high-rise offices. All of our buildings are either five stories or less. They became more desirable during COVID because you can take the stairs rather than an elevator. Newer projects also have terraces with office spaces. Companies want to downsize the amount of space but enhance the quality of that space.
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