Research & Forecast Report RALEIGH-DURHAM | OFFICE Q1 2016 Vacancy Rates Plummet in the Triangle’s CBD Sectors Emily Bostic Research Associate | Raleigh-Durham Key Takeaways > Vacancy rates, particularly in the Class A and CBD sectors, continue to fall in the Triangle market. The vacancy rate in Downtown Durham at the close of Q1 2016 was 2.2% while vacancy also dropped in Downtown Raleigh to 6.5%. This presents a combined vacancy percentage of 4.3% for CBD submarkets at the close of the quarter. It is evident, particularly in the Raleigh-Durham region, that tenants are making a push towards downtown markets that offer collaborative space with an entrepreneurial environment. > The Raleigh-Durham office market continues to experience an upward trend in overall asking rents. Class A rents were reported at $24.96 per square foot, increasing over six consecutive quarters. Downtown Durham reported the most significant Class A average rent increase from the previous quarter, bumping up $4.00 per square foot. Market Overview The Raleigh-Durham market continues to thrive and obtain major investor interest. Downtown Raleigh alone has benefited from over $2.75 billion in investments within the past decade. The Triangle region attracts new companies and employees from all industry sectors, yet the ability to obtain one of the most talented workforces in the nation on a consecutive basis remains one of the Triangle market’s strongest assets. As of February 2016, the Triangle unemployment rate was reported at 4.9% and Raleigh was recently named among the top ten large cities in the country for economic growth. Population density is expected to continue its rapid increase. The Triangle region is growing at exponential rates with population estimates in Wake County reaching 1,024,198 as of July 2015. Summary Statistics Q1 2016 Regional Office Market Triangle Region Triangle Class A Triangle Class B Existing Inventory (Square Feet) 81,401,884 34,831,773 38,487,801 Vacancy Rate 8.0% 7.8% 9.2% Change From Q4 2015 (basis points) 0.2 0.4 0.0 Absorption (Square Feet) 493,450 434,480 51,875 Under Construction (Square Feet) 1,443,595 1,386,235 57,360 Deliveries (Square Feet) 366,655 313,655 53,000 Asking Rents Per Square Foot Per Year Average Quoted $21.23 $24.96 $17.96 Market Indicators Relative to prior period Raleigh-Durham Q1 2015 Raleigh-Durham Q1 2016 VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE
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Research & Forecast Report
RALEIGH-DURHAM | OFFICE Q1 2016
Vacancy Rates Plummet in the Triangle’s CBD Sectors Emily Bostic Research Associate | Raleigh-Durham
Key Takeaways > Vacancy rates, particularly in the Class A and CBD sectors, continue to fall in the Triangle market. The vacancy rate in Downtown Durham at the close of Q1 2016 was 2.2% while vacancy also dropped in Downtown Raleigh to 6.5%. This presents a combined vacancy percentage of 4.3% for CBD submarkets at the close of the quarter. It is evident, particularly in the Raleigh-Durham region, that tenants are making a push towards downtown markets that offer collaborative space with an entrepreneurial environment.
> The Raleigh-Durham office market continues to experience an upward trend in overall asking rents. Class A rents were reported at $24.96 per square foot, increasing over six consecutive quarters. Downtown Durham reported the most significant Class A average rent increase from the previous quarter, bumping up $4.00 per square foot.
Market OverviewThe Raleigh-Durham market continues to thrive and obtain major investor interest. Downtown Raleigh alone has benefited from over $2.75 billion in investments within the past decade. The Triangle region attracts new companies and employees from all industry sectors, yet the ability to obtain one of the most talented workforces in the nation on a consecutive basis remains one of the Triangle market’s strongest assets.
As of February 2016, the Triangle unemployment rate was reported at 4.9% and Raleigh was recently named among the top ten large cities in the country for economic growth. Population density is expected to continue its rapid increase. The Triangle region is growing at exponential rates with population estimates in Wake County reaching 1,024,198 as of July 2015.
Under Construction (Square Feet) 1,443,595 1,386,235 57,360
Deliveries(Square Feet)
366,655 313,655 53,000
Asking Rents Per Square Foot Per Year
Average Quoted $21.23 $24.96 $17.96
Market IndicatorsRelative to prior period
Raleigh-Durham Q1 2015
Raleigh-Durham Q1 2016
VACANCY
NET ABSORPTION
CONSTRUCTION
RENTAL RATE
2 Raleigh-Durham Research Report | Q1 2016 | Office Market | Colliers International
Absorption & Leasing Activity > During the first quarter of 2016, the Triangle experienced 493,450 square feet of positive net absorption. Fidelity Investments, a market leader in financial services and technology, occupied 116,300 total SF at Imperial Center in the RTP | I-40 submarket. Also in the RTP | I-40 submarket, Proto Labs, occupied 77,574 SF at Pleasant Grove Business Park.
> The Class A office sector has surpassed its Class B counterpart in the first quarter of 2016. The Class A market reported the highest absorption of all market classes with 434,480 SF of occupancy gains. This presents a significant shift from the previous quarter (Q4 2015) when the Class B office sector had reported the highest net absorption numbers. The strongest absorption totals were reported in the RTP | I-40 submarket with 324,219 SF.
> It is clear that an increasing number of tenants are striving for locations within the Triangle’s central business districts. Occupancies in both Downtown Durham and Downtown Raleigh were positive at the close of the first quarter. Downtown Raleigh experienced higher absorption in Q1 2016 than at year-end 2015, reporting 69,191 SF of positive net absorption. In Downtown Durham, Duke University occupied 55,000 SF at City Center, the largest tenant gain in that submarket.
> The Six Forks Falls of Neuse submarket is making significant gains in absorption due to the development of trophy Class A office properties in North Hills. As Midtown Plaza and Tower III come to fruition, expect to see huge gains in Class A absorption in this suburban submarket.
Vacancy & Availability > The Triangle market’s vacancy rate was reported at 8.0% for the first quarter, resulting in a 0.2 basis point drop from the fourth quarter of 2015.
> 9.2% of vacant square feet was reported in Class B space in the Triangle market’s vacancy totals, while Class A vacancies were not far behind. Class A vacancy was reported at 2,720,061 SF or 7.8% for the first quarter of 2016.
> The Triangle’s Downtown districts have consistently reported vacancies below the overall market average. Downtown Raleigh and Downtown Durham’s combined average vacancy rate was 4.3% during the first quarter, 3.7% lower than the overall Triangle vacancy rate.
Rental Rates > The overall average asking rental rate for the Triangle market was reported at $21.23 per square foot during the first quarter, up $0.47 from the fourth quarter of 2015.
> The largest increase in asking rents was observed in the Class A sector where the overall average rent jumped to $24.96 per square foot. This represents a $0.79 increase from the recorded rents at the close of 2015.
> Overall Triangle rent growth has been positive across all office classes and shows no signs of slowing down.
Class CVac. Rate = 3.3%
Historical Vacancy and Absorption
Source: Colliers Research, CoStar Group
Historical Rental Rates Per SF
Source: Colliers Research, CoStar Group
Class A Rates Market Average
Class AVac. Rate = 8.5%
Class BVac. Rate = 9.3%
Vacant Space by Type
Class A Class B Class C
Class B: 9.2%
Class A:7.8%
Class C: 3.8%
$18.00
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$24.00
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2013
2014
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Market Average Rates
Class A Rates
Source: Colliers Research, CoStar Group
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3 Raleigh-Durham Research Report | Q1 2016 | Office Market | Colliers International
*NOTE: North Durham and NE Wake County submarkets do not have any Class A inventory.
CLASS A SUBMARKET COMPARISONS | RALEIGH-DURHAMEXISTING
INVENTORY (SF)
DIRECT VACANCY
(SF)
SUBLET VACANCY
(SF)
TOTAL VACANCY
(SF)
VACANCY PERCENTAGE
(%)
NET ABSORPTION
(SF)
NEW DELIVERIES
(SF)
UNDER CONSTR
(SF)
AVERAGE RENTAL RATE
CLASS CLASS A 34,831,773 2,457,123 262,938 2,720,061 7.8% 434,480 313,655 1,386,235 $24.96
CLASS B 38,487,801 3,438,464 108,809 3,547,273 9.2% 51,875 53,000 57,360 $17.96
CLASS C 8,082,310 254,874 4,097 258,971 3.2% 7,095 0 0 $16.09
$0.00
$5.00
$10.00
$15.00
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$25.00
$30.00
Average Asking Rental Rates by Submarket
Q1 2
016
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YTD Investment Sales Volume
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)
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400
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2011 2012 2013 2014 2015 YTD
Sales Volume (in Millions)
DOWNTOWN DURHAM AMERICAN TOBACCO CAMPUS
4 Raleigh-Durham Research Report | Q1 2016 | Office Market | Colliers International
NOTABLE LEASING ACTIVITY TENANT PROPERTY SUBMARKET SIZE (SF) TYPE
Duke University City Center Downtown Durham 55,000 New Proto Labs Pleasant Grove Bus. Park RTP | I-40 77,574 New Microsoft Perimeter Park RTP | I-40 39,257 NewWake County Board of Education Crossroads Park Cary 21,600 New
NOTABLE SALES ACTIVITY PROPERTY SUBMARKET SALES DATE SALES PRICE SIZE (SF) PRICE / SF CAP RATE BUYER
Perimeter Park Four RTP | I-40 1.6.16 $39,500,000 192,225 $205.49 6.7% Starwood Capital Operations LLC
3901 S. Miami Boulevard, Bldg. 510 RTP | I-40 1.21.16 $35,800,000 200,846 $178.25 6.1% Griffin Capital Essential REIT
Venable Center Downtown Durham 1.15.16 $18,000,000 85,886 $209.58 NA Federal Capital
Meridian Business Campus RTP | I-40 2.12.16 $15,225,000 106,101 $143.49 NA JPB Raleigh Holdings LLC
5 Raleigh-Durham Research Report | Q1 2016 | Office Market | Colliers International
Construction & Investment Activity > At the close of the first quarter, office deliveries totaled over 360,000 SF with an additional 1.4 million square feet currently under construction in 11 buildings. Class A deliveries totaled 313,655 SF and over 1.3 million square feet of space under construction. Downtown Raleigh and Downtown Durham have a combined 701,000 total square feet under construction at the close of the first quarter.
> After an exceptionally strong 2015, investment sales activity in the Triangle has slowed slightly during the first quarter of 2016. With total sales of 969,880 square feet of office space, sales volume reached $240 million during the first quarter. The average sales price per square foot was $206 and market cap rates continue to decline, averaging at 6.7%.
> One of the most notable office sales transactions of the fourth quarter was Perimeter Park IV in the RTP | I-40 submarket. The 192,225 SF building sold for $39,500,000 at $205.49 per square foot in January. Major tenants in the building include ChannelAdvisor (over 136,500 SF) and Microsoft.
> The Raleigh-Durham office market is positioning itself for ongoing growth and record demand in the upcoming year. The first quarter of 2016 resulted in strong positive net absorption numbers and low vacancy rates that will push the market’s momentum throughout the year. While construction will slow some towards year-end, investor interest remains robust and developer confidence remains extremely high.
SELECT CONSTRUCTION ACTIVITY PROPERTY SUBMARKET SIZE (SF) PRE-LEASED % QUOTED RATE BUILDING CLASS STATUS
Midtown Plaza Six Forks Road 329,214 83% $33.95 A Under Construction
The Chesterfield Downtown Durham 284,000 69% Negotiable A Under Construction
The Dillon Downtown Raleigh 267,000 100% N/A A Under Construction
Carolina Square Orange County 201,451 73% $33.95 A Under Construction
Center for Innovation & Technology West Raleigh 104,988 48% $29.50 A Under Construction
The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.
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