RALEIGH, NC – January 17, 2019 – Most signs point to a good year ahead for the area’s overall economy and commercial real estate markets, and the U.S. will win in a volatile 2019 economy because we are a country of innovators and reliable consumers.
Those were two of the messages delivered last night 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 34th 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 findings presented at the conference provide an important bellwether of the region’s general economic vitality. The Conference theme was “Enriching the World Through Innovation.”
“The overall market was healthy last year and will likely remain so in 2019 despite some concerns over rising interest rates which have not affected us yet,” said Jimmy Barnes, SIOR, President of NAI Carolantic. Among statistics that Barnes cited for 2018: office rents continued an upward climb to record highs due to increased demand and construction costs. The retail market experienced negative absorption in three submarkets with only 172,000 square feet of positive absorption causing a slight uptick in the overall vacancy rate. The multipurpose (industrial/warehouse/flex) sector reported a historically low vacancy at approximately 7%. The Triangle apartment market still saw strong absorption and vacancy rates increased only slightly in 2018.
“In December there were concerns with the stock market, but real estate values continue to be strong and there is good activity within all product categories. The industrial sector is still leading the way, fueled in part by demand for products for the residential construction industry and same-day “last mile” delivery requirements of E-commerce,” said Barnes.
NAI Carolantic’s research was based in part on a survey of over 287 million square feet of office, multipurpose and retail space comprising 8,800 buildings.
The Conference hosted guest speaker Sarah Quinlan, Founder and Strategic Consultant with QAM and formerly Group Head of Market Insights and Senior Vice President at MasterCard. In her keynote address entitled “Innovation and the Economy of 2019,” Quinlan gave her views on where the economy is going in the year ahead, and the factors that will fuel volatility, including a slow-down in global growth and continuing issues with trade tariffs.
“What isn’t so volatile,” she observed, “are the retail sales that currently fuel 70% of the U.S. GDP growth. In the strong holiday period just ended, sales were up 5.1%.” Driving the strength of retail sales is what Quinlan called “The Experiential Economy.” That includes fine dining, travel and entertainment.
“What matters in our current economy is the consumer,” Quinlan said. “And, we are a nation of innovators. We will win because the United States is the ‘Intellectual Property Country.’”
In his market recap, Barnes noted the industrial sector continues to be the “bell of the ball” with increased rental rates and a strong tenant base. “There is little concern heading into 2019 with the amount of new construction in this sector as the industrial market has a long runway well into 2020 and 2021,” said Barnes.
The office market is seeing historically low vacancy in some submarkets and Central Business Districts are seeing rental rates deep into the $30.00 psf range. Comparatively though, our market is still as much as $10 psf below some other national markets. However, rising office construction costs will continue to drive rental rates up. This is creating a resurgence of suburban office building activity as these properties provide a value-add prospect for investors and gives owners the ability to provide quality office space at cheaper rental rates. There will be some tenants that choose this option.
There continues to be a transformation in the retail sector. Many brick and mortar big box retailers are reducing their footprint and E-commerce continues to impact the industry. We will continue to see obsolete retail centers utilized in other ways. Residential land is still in great demand with our continued population growth and opportunity zones which provide tremendous tax benefits will become popular in geographic areas that qualify.
There was another $400 billion of investment sales transactions in the country in 2018. Still plenty of money chasing real estate…and investors are having difficulties getting into gateway markets therefore, money trickles down to mid-markets like the Triangle area. Cap rates are still low around the 6% range, but that is still 2 to 4 points greater than what can be achieved in larger metropolitan areas.
Barnes concluded with, “The heartbeat of our community is our positive job growth. With tremendous hard work by our elected officials and economic development teams, this trend will continue. We are in a great place and the future continues to be bright.”
Speaking to the conference theme of “Enriching the World Through Innovation,” NAI Carolantic Realty Chairman Steve Stroud recounted some of the Triangle regions major contributions in medicine, analytics and energy-saving lighting technology. “Innovation is powered by creativity, bold leadership and by investment, and that certainly includes investment in real estate development,” Stroud told the audience. “The Triangle is a leader in innovation, and I believe our community will continue to enrich the world in which we live. We embrace change and make it our own.”
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 2019:
In a market with over 287 million square feet of office, multipurpose and shopping center space, approximately 20 million square feet remained vacant at year-end, per NAI Carolantic’s survey and analysis.
Barnes reported that overall office market vacancy dropped to 9% in 2018, a 1% decline from 2017. The Multipurpose market remained healthy at 7% for the second year in a row. However, Shopping Center vacancy increased a point to 4% with approximately 1,071,000 square feet under construction.
Overall, approximately 7 million square feet were absorbed in the Triangle commercial market, with roughly 5.1 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 2018, but NAI Carolantic does not anticipate absorption to keep up with supply, and expects a slight vacancy increase to 6% by the end of 2019.
The single-family homes market also remained strong with another slight increase in sales and historically low inventory. Barnes pointed out, however, this is the first time in eight years that inventory increased in Wake County. We anticipate minimal change in residential markets in 2019.
2019 Forecast and Category Summaries:
2019 Investor Outlook for Land
- Central Business District land values are hitting a record high well over $100 prsf
- Current low office vacancy is driving interest in well-located, zoned office sites
- Retail land sales are slowing
- Ground zero industrial land sites are in high demand but are limited and expensive
- Industrial sites in outlining areas are getting attention
- Hotel developers are active and looking for well-located sites
- New residential developers continue to enter the market driving land prices up
- Zoned and entitled land is valued at a premium
- Many great opportunities in surrounding counties
2019 Investor Outlook for Income Property
- Investors face some challenges in 2019 with rising interest rates, higher construction costs, retailers downsizing and office co-working concerns
- The industrial market is the most attractive segment with rising rental rates, favorable landlord lease terms and low cap rates
- Regional retail malls and power centers are the least popular product type
- Smaller, local investors face challenges relative to achieving their desired returns
- Money is still available
- Despite new challenges, expect another strong year of transactions and sales volume
NAI Carolantic’s research showed area-wide vacancy in the office category declined slightly from 10% in 2017 to 9% in 2018. The multipurpose category—which includes warehouse, industrial and flex space— also dropped from 9% in 2017 to 7% in 2018. Shopping center vacancy increased slightly from 3% in 2017 to 4% in 2018. The office category expects approximately 2.4 million square feet to be constructed in 2019, and multipurpose looks for 1.6 million square feet of new construction. Shopping centers have just over one million square feet underway, with most being built in the West Raleigh, North Raleigh submarkets.
Absorption was generally positive in 2018 with the office category improving to 3% in 2018 up from 2% in 2017. The multipurpose category improved to 3% absorption in 2018 over 1% in 2017. However, shopping centers dropped from 1% to 0% in 2018, the lowest in the past ten years.