2 min read October 2023 — The real estate office market is in the middle of a perfect storm with vacancy rates higher than 14% in the Raleigh-Durham region. “I think this is going to be an elongated period of at least another 18 to 24 months before the tide starts to shift. We have a hybrid work model that has become the norm, historically high-interest rates and a looming White House election to get through,” William Allen, managing partner of Trinity Partners, told Invest:.
What are the key highlights for Trinity Partners during the last year?
In general, times remain challenging for commercial real estate and we expect headwinds through 2024 and into 2025. As a full-service commercial real estate company, Trinity Partners has 10 distinct and diverse service lines, and this diversification strengthens us even when some segments may be down. The two areas that have been impacted the most in the current environment are office leasing and investment sales. These are also the areas that have been hardest hit on a national and global basis.
We are weathering the storm in spite of these challenges, and compared to some of our other industry competitors. One of the brightest spots for us has been property management, which we have grown year over year throughout the pandemic and during 2022-2023. With a current portfolio of just under 9 million square feet under management, we have also been staying quite busy on the Project Management side as well the Construction Services side.
What is the biggest challenge your business is facing?
We’ve had 11 interest hikes over the course of the last 12 Federal Reserve meetings and we’re back at rates that we saw in 2007-2008. With that, there are challenges across the board. We are heavily involved in the office services sector as a company here in Raleigh-Durham, as well as our other offices in Charlotte, Columbia S.C. and Greenville S.C. The challenge this time around versus the last difficulty in the 2007-2008 cycle is that this one has lasted much longer, and is being held down by a multitude of factors, not just a financial one. With the weakness in the office sector, historically high-interest rates and historically low physical office occupancy (i.e. people in spaces), many owners are considering (or have already) handing the keys back to the lenders. The lenders, on the other hand, do not want these properties back due to the significant erosion of value that has occurred, and the expectation that we are in an elongated trough, and therefore they do not want to carry these losses on their books for an extended period of time. This disconnect will take quite a while to cycle itself through the system, which is why most industry professionals agree that we are stuck in this environment for at least another year, or two.
What is your overall analysis of the office sector?
The office sector has just over a 14% vacancy rate this quarter. That’s on a direct basis. The additional challenge is that we have approximately 4 million square feet of available sublease space on the market, which puts us over 20% in terms of the “true” vacancy rate. Furthermore, besides these reported vacancy numbers, there are fewer companies physically occupying space, despite being on the hook for a lease obligation, due to the fact that many, if not most, companies implemented a work-from-home model during COVID. Another nuance is that many companies, during COVID and because of such uncertain times, worked out short-term rental arrangements with their landlord, such as a 12 to 18-month lease extension. Those are set to expire in the latter part of 2023 and into 2024. So, we’re seeing what is almost a perfect storm in the office market, and many of these short-term leases will simply not be renewed, which will drive vacancy rates even higher.
Where are the bright spots in your business?
Property Management has continued to grow and remains our strongest side of the business at the moment. That’s a part of our business that never sleeps. We are experiencing a very robust construction cycle, with new products being delivered to the market across different product types. Most of this has been in the Industrial and Life Sciences space. As that new product is introduced, we’ve been fortunate enough to grow our portfolio, both with new and existing clients. Our Property Management division, and related services, has been the highest head-count growth within our company over the last three years.
How is your business changing as a result of the work-from-home trend?
We are all being forced to do business differently than we’ve ever done before. We are all collectively trying to figure out what this new way of doing business looks like. I would like to see a bigger push for people to either solidify their plans to reoccupy and utilize space versus a wait-and-see attitude or to definitively designate a hybrid strategy that the market, and the economy, can react to. We are starting to see companies adopt those policies, with most being either three or four days in the office, but it is still challenging to draw any true planning based on what we are seeing now. In my opinion, this extreme uncertainty is causing major, if not permanent, damage to our industry, economy, tax base and general well-being.
Why is Raleigh-Durham a good place to do business?
We’re surrounded by phenomenal universities, such as North Carolina State University, Duke University and the University of North Carolina Chapel Hill, as well as one of the best technical college systems in the nation with Wake Tech. We have a broad base of talent that is educated here and trained here. We have a robust industry that wants to keep that talent here and not lose it to other markets and other states or other regions. We are home to the most successful research and development park in the word, Research Triangle Park (“RTP”)which is where much of this educated talent becomes employed. Raleigh is also home to our state government. Our cost of living is favorable our schools are exceptional, and our temperate climate makes the area an attractive place to live. Our region typically rebounds very well from recessions, and we expect to come out of this one quicker than some other areas of the country.
What is your outlook for the next three to four years?
I expect challenging times to remain in place through 2024, and the general mindset and hope is that we will begin to “normalize” into 2025. The upcoming 2024 Presidential election will be a pivotal point and will determine much of what happens. Irrespective of that outcome, we are in need of real leadership, and a resounding voice from Washington D.C. that will provide direction to our state and local government, stability in our financial markets, encouragement in our private sector, and confidence in our workforce so that we can get this real estate industry back on a healthy trajectory.
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