Real Deals

Triangle developers line up for chance to build new DHHS campus

dbracken@newsobserver.comJuly 25, 2012 

For Triangle real estate developers used to hunting big game, these past few years have been fallow ones.

With few companies seeking additional space, let alone a new corporate campus with hundreds of thousands of square feet, the chances of landing a career-making deal have been slim. Instead of hunting for lions and elephants, developers have had to settle for chasing rabbits and squirrels while they wait for the economy to improve.

A rare opportunity to bag a large tenant emerged earlier this month when the state announced that it is seeking as much as 1 million square feet of space in the Triangle for a new Department of Health and Human Services campus. A meeting last week to discuss the state’s request for proposals drew a packed crowd of big-name developers. The sign-up sheet for the meeting included 91 names, all of whom are now eligible to submit responses.

Developers have until Aug. 17 to submit proposals, but speculation is already beginning about where the agency might end up.

DHHS is seeking to sign a 20-year lease for either an existing property or a build-to-suit campus that would include 850,000 to 1.05 million square feet. The agency will need between 600,000 and 650,000 square feet to be delivered no later than June 2014, with additional space becoming available in 2017 and 2019.

The request says preference will be given to sites that are in close proximity to the Dorothea Dix campus just west of downtown. The roughly 1,400 DHHS employees now working on the Dix campus would be among the first employees to relocate to the new site.

Realistically, the state is going to have to consider sites a fair distance from Dix, perhaps even in Durham County. A suburban office campus with surface parking would be the most cost-effective approach, but there are few existing properties able to accommodate the agency’s needs.

“There are few existing properties able to accommodate the agency’s needs if they don’t go out to Research Triangle Park and take some of those giant facilities that are sitting empty out there,” said Jim Anthony, CEO of Colliers International in Raleigh. “It’s nonexistent in Raleigh.”

‘Availability of funds’

One option might be Park Center, a nine-building office park at N.C. 54 and Davis Drive that is home to about 750,000 square feet of space. Sony Ericsson also has two empty buildings in RTP with a little more than 450,000 square feet. Neither option delivers the space that DHHS says it will ultimately need, but they would be considerably less expensive than having a new campus built.

Constructing a new campus would probably require five to six office buildings and 65 to 100 acres. Given the tight construction window, the site would need to have the necessary infrastructure already in place.

Duke Realty could propose building DHHS a new campus at Perimeter Park, where it already has built a campus for Lenovo. Highwoods Properties may have enough land at Weston in Cary to accommodate the agency’s needs.

Such a campus could cost in the range of $150 million to $175 million. Although governments have traditionally been viewed as low-risk tenants, that is not necessarily the case anymore given the fiscal uncertainty that all states are now dealing with.

Most government leases include an “availability of funds” clause that provides an annual out should funding not be in place to live up to the lease. In the past developers paid little notice to this clause, but it was a topic of discussion at the meeting last week.

Wider implications

If nothing else, the clause is a reminder to developers that any campus will need to be commercially viable in the event that DHHS’ space needs change over time.

Of course, with more than 6,000 employees in Wake County, the agency would not appear to be at risk of being dismantled. The RFP was the result of an analysis of the agency’s roughly 30 different state-owned and leased facilities in Wake County.

The state has hired Grubb & Ellis Thomas Linderman Graham to represent it in the RFP process. Grubb & Ellis is eligible to earn a commission of 3.5 percent of the value of the lease, a sizable chunk of money for a firm that also represented Wake County schools in the $66 million lease it signed in 2010.

Although only one developer likely will end up being awarded the new DHHS campus, the project itself will cause wider ripple effects within the market. As the older space the agency now leases comes on the market, it will exacerbate the discrepancy between the vacancy rates for older, less desirable space and newer Class A space that is now in short supply.

And DHHS’ departure from Dix will allow for the 306-acre campus to be transformed into what many hope will be a park. That would have enormous implications for the real estate surrounding the campus.

Bracken: 919-829-4548

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