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NAI Carolantic Realty Reports Continued Upward Growth

RALEIGH, NC - January 15, 2013 - At last year's conference, NAI Carolantic predicted that 2012 would be another year of positive absorption and rental rates would hit bottom. They were correct once again and reported declining vacancy in all product types with the exception of two geographic submarkets. "Overall the commercial real estate market is performing well with continued room for upward growth," said Jimmy Barnes, SIOR, President of NAI Carolantic. That was the message to more than 1,700 business and community leaders who gathered at Raleigh's PNC Arena Tuesday for the 28th Annual Triangle Commercial Real Estate Conference hosted by NAI Carolantic Realty. The Conference is considered the authoritative "state of the market" report on the Triangle's real estate sector and health of the region's overall economy.

In keeping with NAI Carolantic's theme, Transformed by Technology, Steve Stroud, SIOR, Chairman of NAI Carolantic, welcomed attendees and asked everyone to scan a QR code on their program to answer five, business-related questions. The results were shown 30 minutes later by Barnes.

Stroud said when NAI Carolantic held its first Conference 28 years ago, reliable property and market information was difficult to acquire. "We made a decision to share our information with the public and local officials to enable them to make informed decisions. Today, despite living in a technology-driven era, we stay focused on the fact that real estate is still a local, relationship business."

Following Stroud's comments, he introduced Governor Pat McCrory who spoke a few minutes about his administration's focus.

Barnes took center stage after the Governor providing the results of the survey taken earlier by attendees:

  1. Are you optimistic about the future growth of the Research Triangle Region? 97% said yes.
  2. Do you plan on hiring more employees in 2013? 59.26% said yes.
  3. Are you considering expanding or relocating your business in 2013? 43.12% said yes
  4. What keeps you up at night? The greatest concern was finding skilled workers, followed by increased taxes and health care expenses. The national deficit and ensuring profitability were last.
  5. What issue should be addressed first by Governor McCrory? 75.23% said Economic Development, followed by Education at 19.27%, and corporate taxes at 5.5%

Barnes then proceeded to review the past year's commercial real estate landscape and offered NAI Carolantic's forecast for 2013. "National investors are still interested in the Triangle Region for holdings as global metropolitan cities are still hard to penetrate. We expect a continued increase in investments in second tier cities led by apartment buyers, although the retail market has seen a year-end flurry. Well located residential land prices will move upward and existing lot prices level off as national builders get better returns from raw land. Overall, the commercial real estate market is performing well," said Barnes.

NAI Carolantic's survey and analysis showed that, in a market of almost 246 million square feet of office, multipurpose and shopping center space, nearly 29 million square feet remained vacant at year-end. "Vacancy decreased in the office and multipurpose sectors, and dropped one point in the shopping center market. Absorption improved in 2012 and we expect minimal construction starts in the first quarter of 2013. The apartment market continues to be on fire with vacancy dropping to 5.5%. This is the lowest level since 1998," said Barnes.

Following Barnes's presentation, he introduced invited guest speaker Dr. Peter Linneman, NAI Global economist, CEO of the American Land Funds as well as the founding principal of Linneman Associates. He is Professor Emeritus of Real Estate at the Wharton School of Business, the University of Pennsylvania where he served for 32 years. He holds both Masters and Doctorate degrees in Economics from the University of Chicago. The third edition of his book, Real Estate Finance and Investments: Risks and Opportunities, has been adopted at over 80 leading universities. His quarterly report called The Linneman Letter forecasts employment growth and examines how macroeconomic factors influence real estate markets.

Linneman provided insight into the national economy's recovery process, as well as offered his outlook for 2013. Outlining his view of the economy, Dr. Linneman simply stated, "The US recovery continues to underperform, being mediocre for a great country."

Returning to the stage, Barnes gave some closing remarks and invited everyone to attend the cocktail reception. Sponsors for the NAI Carolantic Conference included Bobbitt Design Build;; Dixon Hughes Goodman LLP; JDavis Architects, PLLC; Manning, Fulton & Skinner, P.A.; TriSure; Tryon Title; Wells Fargo and Withers & Ravenel, Inc.

2014 Forecast and Category Summaries:
Highlights of Mr. Barnes's commercial real estate presentation:

2013 Investor Outkloo for Land:

  • National home builders are creating demand for residential land
  • Western Wake County and the Southport area in Durham are the most active
  • Raw residential land gets renewed interest as existing lot prices have increased, and lending requirements continue to be tight
  • Population growth alone creates demand
  • Infill and entitled land in good locations are still a commodity especially with apartment developers
  • Limited demand for retail sites, though well located out parcel sites will see an increase in demand
  • There is limited demand for office and industrial sites

Investor 2013 Outlook for Income Property:

  • Trophy properties are still in demand, but availability is limited
  • Therefore continued interest in second-tier markets, and Raleigh/Durham leads the way
  • Limited product and money availability drives cap rates down to historical lows
  • Continued low interest rates are the glue holding the investment environment together (expect interest rates to remain low through 2014)
  • Institutional investors will continue to unload Class B and C properties (be careful here)
  • Investment activity will be up another 40%

NAI Carolantic's research showed a decline in area-wide vacancy rates in the office category from 16% in 2011 to 14% in 2012. Shopping center vacancy dropped from 6% to 5%, and the multipurpose category dropped from 16% to 13% in 2012. The multipurpose category includes warehouse, industrial and flex space. The office category expects the least amount of new construction followed by the multipurpose category. The multipurpose boom year was 16 years ago when over 3.6 million square feet were added to the market. Shopping centers had the most new construction underway with most being built in the Cary/Morrisville submarket.

Absorption improved in all categories during 2012. The office market went from 1% to 2% year-end. The multipurpose category went from 2% in 2011 to 3% overall, and the shopping center category improved 1% over 2011 to end the year at 3%.

Once again, the Durham/Chapel Hill submarket had the highest vacancy for warehouse/industrial space during 2012 at 17%. This was still an improvement over 2011 when the vacancy was 20%. South Raleigh and Downtown Raleigh followed at 16% and 15% respectively. Despite the high vacancies, no submarket had negative absorption. Once again, the RTP submarket had the most sublease space with 470,000 square feet. With less than 200,000 square feet of new construction underway, we expect 2013 to be another year of positive absorption, and Landlords will consider increasing lease rates.

As in the past several years, the Research Triangle submarket had the highest office vacancy at 19% which equates to 3.2 million square feet. However, this was a definite improvement over 23% in 2011. Cary followed with 14% vacancy, down from 15% in 2011. The Suburban Raleigh submarket had the strongest absorption at 4% or just over one million square feet. With minimal new construction, any substantial demand for new, speculative property is two years out. Rental rates should hit bottom and Landlords will begin testing the market with higher rates in 2013.

Shopping Centers:
Once again, the East Raleigh submarket had the highest shopping center vacancy during 2012, with 9%. There was no absorption in this submarket. The Cary/Morrisville area expects to have the most new construction in 2013 with just over 200,000sf, primarily in the Park West Village power center. Absorption was strongest in the Cary submarket at 7%. Though we expect the retail sales momentum will be tough to sustain in 2013, grocery-anchored developers are now active in the Triangle, and considering sites they viewed a few years ago.

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. The housing market had an increase in activity in 2012 with home sales of just over 13,500 units, the largest one-year jump since 2005. According to Barnes, construction activity will increase in 2013 and average home prices will trend upward.

Multi-Family Market:
The apartment market was very active in 2012 with vacancy dropping to 5.5%, a level not seen since 1998. The highest reported vacancy was ten years ago when the rate reached 11.5%. Just over 1,180 apartments were added in 2012 with another 6,106 units under construction for 2013. An additional 11,000 are proposed according to Karnes Research Company. Barnes predicts with continued population growth, the vacancy rates will remain in the 6% range. Special thanks were given to the Triangle Apartment Association and Karnes Research Company for providing information on the apartment market.

Hotel Market:
According to Dennis Edwards, President and CEO of 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 2012 was 63%, level with 2011. The average daily rate held at $82.70. During 2012, three hotels were built in Wake County, adding 379 rooms. Two more hotels are due to open in 2013 to include the Hampton Inn & Suites on Glenwood Ave. and the Hyatt House in North Hills.

Durham County did not have any new hotels added in 2012, but expects three to open in 2013 adding 424 rooms. According to Shelly Green, President & CEO of the Durham Convention & Visitors Bureau, the new hotels include a Hilton Garden Inn University/Medical Center with 128 rooms; Residence Inn on Main St./Watts with 145 rooms, and a Hyatt Place on Hope Valley Road near Southpoint plans to add 151 rooms.

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NAI Carolantic is the Raleigh/Research Triangle area's leading commercial real estate firm with seventeen brokers, a full-service property management division, as well as an experienced marketing and research division. Established in 1972, NAI Carolantic is a member firm of NAI Global, the world's premier network of commercial real estate firms and one of the largest real estate service providers worldwide. NAI has over 5,000 real estate professionals in over 400 offices around the world with regional management, global infrastructure, best practices and technology to provide clients with consistent, quality results. NAI Carolantic and NAI Global are trusted partners, committed to your long-term success.