Annual Conference

Positive Year Ahead for the Triangle Economy and Commercial Real Estate Markets

The strong economy augurs a good year ahead for the area's commercial real estate market, but a failure to move beyond extreme partisanship in politics could detract from the region's competitiveness and appeal.

Those were the tidings delivered on January 22nd to 1,600 of the area's business, Government and community leaders gathered in Raleigh's PNC Arena to consider the health and direction of the local economy in the coming year.

The event was the 33rd Annual Triangle Commercial Real Estate Conference, hosted by NAI Carolantic Realty. Considered the authoritative "state of the market" report on the Triangle's real estate sector, findings presented at the conference also provide an important bellwether of the region's general economic vitality.

The overall market was healthy in 2017 and likely to remain so in the coming year, Jimmy Barnes, SIOR, President of NAI Carolantic, told the conference-goers. Among statistics that Barnes cited in support: the most single-family homes sales in Wake County in the past ten years, a Durham office market with vacancy the lowest of any submarket (5%), positive absorption in downtown Raleigh, a low overall shopping center vacancy (3%), and the multipurpose warehouse category's overall vacancy rate holding steady (9%).

"As goes commercial real estate, so generally will the overall economy," Barnes noted. "When we see companies are making plans to add square footage, or sit tight or pull back, that gives us an accurate reflection of business confidence months ahead of most other indicators."

Barnes said the report was based in part on a survey of over 278 million square feet of office, multipurpose and retail space comprising over 8,600 buildings.

Guest speaker and political consultant John Davis reminded the audience that some of the 2018's most important business will be conducted in voting booths and legislative sessions. Whether the Triangle can convert economic growth into lasting prosperity and security will depend in part on whether political and government leaders can table extreme partisanship to leverage the power of bipartisan cooperation.

In his market recap, Barnes reported the Triangle had experienced another year of positive absorption creating single-digit vacancy in the overall multipurpose and shopping center categories, and vacancy in the office category actually declined slightly to 10%. There were only a couple of submarkets in the shopping center and multipurpose categories that had negative absorption.

"The industrial market has shortages in some submarkets, but there is 2.1 million square feet of construction underway. The office market can accommodate large blocks of space immediately in some submarkets, and with construction underway in every submarket, it can be made available as projects are in the pipeline and ready to go," said Barnes. "However, new construction costs are at an all-time high driving rental rates up."

Barnes noted that the RTP Multipurpose submarket was a notable exception to last year's overall trajectory with vacancy rates reaching 14% - more than double the rate in 2015.

Barnes also cautioned that vacancy in the apartment market would likely rise. "Although there continues to be strong absorption, I don't think the market can sustain supply side pressure in 2018," he said.

Speaking to the conference theme of "Closer Than It Appears: The Triangle's Fast-Arriving Future," NAI Carolantic Realty Chairman Steve Stroud encouraged his peers in the audience to both guide, and learn from, the next generation of leaders.

"There's a rising tide of determined and hardworking Millennials who are out to change the world, and you are already rewriting the playbook for commercial real estate with new ideas and new technologies," Stroud said. "It is my generation's responsibility to open the door to you, and it is our privilege to be your mentors and partners."

A cocktail reception followed. Sponsors for the NAI Carolantic Conference included Bobbitt Design Build; Celito.net; DMJ & Co., PLLC; JDavis; Manning, Fulton & Skinner, P.A.; TriSure; Wells Fargo and WithersRavenel.

Highlights of Mr. Barnes’ commercial real estate presentation:

Barnes reviewed the past year’s commercial real estate landscape and offered NAI Carolantic’s forecast for 2018.

In a market with over 278 million square feet of office, multipurpose and shopping center space, approximately 23 million square feet remained vacant at year-end, per NAI Carolantic’s survey and analysis.

Barnes reported that overall office market vacancy dropped to 10% in 2017, a 1% decline from 2016. The Multipurpose market remained healthy at 9% for the second year in a row. However, Shopping Center vacancy increased a point to 3% with approximately 745,000 square feet under construction.

Overall, approximately 3 million square feet were absorbed in the Triangle commercial market, with roughly 5.4 million square feet of office, multipurpose and shopping center space now under construction for the first quarter of 2018. The apartment market continued its robust growth in 2017, but NAI Carolantic does not anticipate absorption to keep up with supply, and expects a slight vacancy increase to 6% by the end of 2018. The single-family homes market also remained strong with another increase in sales and historically low inventory. This trend is expected to continue throughout 2018.



2018 Forecast and Category Summaries:

2018 Investor Outlook for Land

  • Wake County residential land continues to be “on fire”
  • Western Wake County is the jewel
  • All surrounding submarkets are active
  • Up and coming areas include Rolesville, Chatham County, Franklin County and Angier
  • Suburban Downtown areas continue to be active to include Holly Springs, Apex and Cary
  • Demand for retail land has cooled
  • Well located retail corners still see buyer activity, but fringe locations get minimal interest.
  • Industrial land cost continues to rise

2018 Investor Outlook for Income Property

  • While cap rates for investment properties reached historic lows, pricing is leveling off and the majority of demand remains for higher quality assets. 
  • Money is available, but core properties remain hard to find. 
  • Industrial sector remains in favor, office and retail are softening.
  • The overall sentiment in the market is that we are in the late stages of the current real estate cycle.  
  • Research shows that the spread between asking and closed cap rates has widened across all asset classes.
  • Property owners are attempting to sell assets in the current market to take advantage of the historically low cap rate environment, regardless of asset quality, which is shifting the market from a seller’s market to a neutral market.
  • Cap rates will continue to trend upward following interest rate hikes and we can expect another solid year ahead.

Summary: NAI Carolantic’s research showed area-wide vacancy in the office category declined slightly from 11% in 2016 to 10% in 2017. The multipurpose category—which includes warehouse, industrial and flex space— remained at 9% in 2017. Shopping center vacancy increased slightly from 2% in 2016 to 3% in 2017. The office category expects approximately 2.5 million square feet to be constructed in 2018, and multipurpose looks for 2.2 million square feet of new construction. Shopping centers have 745,000 square feet underway, with most being built in the Cary/Morrisville submarket.

Absorption was generally positive in 2017 with the office category improving to 2% in 2017 up from 0 in 2016. The multipurpose category held at 1% absorption for the second year in a row, while shopping centers dropped a point to end 2017 at 1%.

Multipurpose: Overall, with approximately 2.2 million square feet of new construction underway, absorption is expected to remain positive into 2018. The Research Triangle submarket had the highest vacancy for warehouse/industrial space during 2017 at 14%. This was an increase from 11% in 2016 and 6% in 2015.

Office: As in the past several years, the Research Triangle submarket had the highest office vacancy at 15% though a slight decline from the 17% in 2016. This equates to 3.1 million square feet of available space. Downtown Raleigh vacancy dropped to 6% from a high of 11% in 2016. Absorption in the overall office market improved from 0 to 2% in 2017. Approximately 2.5 million square feet of office space is under construction with most occurring in the Downtown Durham submarket.

Shopping Centers: All Shopping Center submarkets had low vacancy for 2017. The Cary/Morrisville area expects to have the most new construction in 2018 with approximately 330,000 square feet. Overall absorption dropped from 2% in 2016 to 1% in 2017. Construction will be steady as this category will continue to improve. As we reported in early 2017, the market remained healthy, keeping vacancy low.

Single-Family Housing: The NAI Carolantic’s Housing Momentum Index considers the annual new and pre-owned sales volume, subtracting year-end Multiple Listing Service inventory to track sales momentum. Again in 2017, the Momentum Index rose with the increase in activity. Approximately 25,000 units were sold in Wake County and inventory dropped to 2,853 units…the lowest level since 1994. According to Barnes, actual home sales were the highest since 2007.

Multi-Family Market:The apartment market was very active in 2017 and vacancy actually dropped from 6.1% in 2016 to 5.4% in 2017. Over 5,643 units are under construction with an additional 3,663 proposed according to Real Data Apartment Market Research Report. Barnes predicts vacancy will go to 6% in 2018 indicating demand will not be able to keep up with supply.

Hotel Market: According to the Greater Raleigh Convention and Visitors Bureau, there has been an increased interest in building new hotels in the Raleigh area. Hotel occupancy in Wake County for 2017 was 70.4%, one of the highest in over 15 years. The average daily rate rose slightly to $103.38, also the highest level in over 15 years. During 2017, seven hotels were built in Wake County, adding 911 rooms. Thirteen more hotels are due to open in 2018 adding 1,157 rooms.

Durham County had two hotels to open in 2017 adding 273 rooms. According to Shelly Green, President & CEO of the Durham Convention & Visitors Bureau, one more hotel is scheduled to open in 2018 adding another 113 rooms.