4 min read January 2024 — In an interview with Invest:, Matt Winters, managing director of JLL, discussed the landscape for the commercial real estate industry in North Carolina, emphasizing his work as a tenant representation broker in the office and industrial sectors. Winters delved into the challenges posed by the evolving market dynamics, the implications of shifting interest rates and the strategic positioning of JLL in navigating these changes.
What has been keeping your organization busy over the past year?
In my role, I primarily focus on tenant representation, especially in the office and industrial sectors. Lately, we’ve noticed many professional service companies becoming active in the market, including local and midsized regional businesses expanding and investing in their local real estate. We are advising many law firms, as well as architectural, engineering and construction companies as they make strategic investments into the people, their business, and their facilities. Many of these organizations are creating dynamic workplace experiences as they seek to retain and recruit talent and expand their market share in the Triangle region, the Carolinas, and nationally.
The commercial real estate industry has experienced numerous high-impact changes due to factors that began during the pandemic. A few examples include shifts to remote and hybrid work, fluctuating interest rates, evolving consumer preferences and rising construction costs. Despite these challenges, we’ve seen positive developments in the Raleigh Durham region and throughout North Carolina. While the capital markets’ influence on investment sales is evident, our team has remained active, particularly in leasing transactions in specific submarkets and industry groups. Industrial and life science sectors continue to see strong demand and the premium office market is performing better than expected. Mixed-use projects like North Hills, Fenton, Raleigh Iron Works and several sites near Downtown Raleigh are experiencing successful leasing and growing tenant demand. Given the market’s volatility, the need for professional advice and transaction guidance is increasing, not decreasing, positioning for JLL and other advisory firms to assist clients with intricate needs and transactions.
What have been some notable successes for your organization and their impact on the market?
Our teams are involved in high-profile projects like 400H, HUB RTP and Beacon Partners’ developments at Knightdale Gateway and Apex Gateway. HUB and 400H introduce premium office spaces, while Beacon’s ventures are set to provide Wake and Chatham counties with essential class-A industrial spaces suitable for distribution, manufacturing and potentially, life sciences companies. Additionally, we’ve been fortunate to play a role in the VinFast and Toyota projects in North Carolina, which promise significant employment and economic lift in the coming years.
What are some of the factors driving the increasing office space supply in the area and how is your office responding to this trend?
There’s certainly a record amount of office space on the market for sublease, with additional “shadow space” – spaces under lease but unused – expected to increase vacancy rates in the coming quarters. Well-located and high-quality subleases, especially in amenity-rich projects, are moving quickly. Subleasing can be beneficial for companies since it often comes at below-market rental rates and may include furnishings. Quality sublease spaces are moving swiftly, as we’ve observed in areas like North Hills Midtown in Raleigh and Downtown Durham. Approximately half of the sublease inventory is in the RTP submarket, many of which include large block spaces within legacy-type campus environments.
What is the state of demand from new industries seeking industrial space?
Demand for industrial and life science spaces remains strong. While new development has slowed due to the current capital markets environment and challenges with interest rates and other factors, and the build-to-suit market has also cooled, projects initiated on a speculative basis are still attracting tenants. This holds true for both industrial and life science real estate.
How would you describe the challenges posed by fluctuating interest rates and rising construction costs?
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.
What advice can you offer corporations and office space users to optimize their real estate portfolios in the current market?
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.
What is your perspective on the future of commercial real estate in North Carolina and how do you plan to influence this trajectory?
We’re optimistic as we wrap up this year and look forward to a promising 2024. We’ve noticed positive indicators in the office market, especially with companies increasingly bringing employees back and considering relocation to North Carolina. This relocation interest is a segment that’s been dormant for the past few years, so it’s encouraging to see it resurging.
The Sun Belt markets, particularly in the Southeast, have been active and North Carolina, especially Raleigh, is well-positioned to benefit from this momentum. Our sales activity has been influenced by interest rates over the past 18 months but we anticipate a return to normalcy and an uptick in transaction volume in 2024. Leasing, especially in the premium segment, remains robust. Companies in expansion mode are investing considerably in real estate, aiming to retain and recruit talent.
There’s a growing preference for high-quality experiences, influencing successful developments. However, class-B and -C projects in suburban areas lacking amenities may continue to face increased vacancies. Given the current capital markets scenario, we project limited new construction starts across all product types. With Raleigh and other Sun Belt markets experiencing strong population growth, we expect office usage to rise as businesses reintegrate their workforce. Interest rates, governed by the Federal Reserve’s actions, will undoubtedly play a pivotal role, given their broad impact on the economy and real estate sectors.
What are the significant trends in your industry and how is your organization adapting to them?
Many organizations are reevaluating the future of their workforce and workplace. We’ve adjusted our advisory approach to accommodate this shift, emphasizing in-depth initial analyses of client needs and long-term strategic planning. The focus has intensified on employee welfare and recruitment as companies re-evaluate their facilities. To offer the best counsel in these fast-changing times, we often engage experts in workplace strategy and occupancy planning. The persistently tight labor market, marked by record-low unemployment, underscores the importance of talent and labor in virtually every real estate project we undertake, spanning various project types and end-users.
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