RALEIGH — On Wednesday morning hundreds of real estate professionals gathered at the City Center Marriott to hear about all the momentum that downtown Raleigh has built up over the past 18 months.
The annual event, hosted by the Downtown Raleigh Alliance, came less than a week after the downtown office market got one of its best bits of news in years. Dominion Realty Partners will end the moratorium on construction of speculative office buildings that has been in place since the credit crunch. The Raleigh company is moving ahead this fall with an 11-story office building on the Charter Square site across from the Marriott.
But the response to the $54 million project has not been entirely glowing.
Theres a lot of disappointment that ... the new Dominion building is going to be so small and so short, said Jim Anthony, CEO of Colliers International in Raleigh. ... Nobody wants that site underutilized because its such a prime site. It really needs to be a 20- to 30-story tower site, in my opinion.
Of course, theres a very good reason that Dominions tower is 11 stories. Even at that size the project carries plenty of risk, and Dominion and its equity partner are putting up nearly 40 percent of the cost. And considering what the markets just been through, pining for taller buildings may seem a bit presumptuous.
Still, Anthony and others are raising an issue that the downtown area could be grappling with for several years. While there is a strong desire for key downtown projects to move ahead, could downtowns long-term interests be harmed if some of these projects are scaled back too much?
The city has a particular interest in seeing Charter Square live up to its promise, given that it spent $14.8 million creating the City Plaza on Fayetteville Street and an additional $25.5 million acquiring the 550-space underground parking deck.
Its going to be a hundred years before they tear down this building and put up another one, so we got to get it right the first time, Anthony said.
Three stories shy of original
The original plans for Charter Square called for a total of about 600,000 square feet of office, residential and retail space spread across two towers.
Dominions 225,000-square-foot building is three stories shorter than the original plans envisioned for the Charter Square south tower. Those plans, however, called for a 14-story building that would be mostly residential with some retail.
The north tower, which was to be 20 stories, would have included about 285,000 square feet of office as well as some retail and residential.
Andy Andrews, Dominions CEO, said last week that the building being proposed reflects what the market will bear.
The markets drives you to what you can build, he said.
Building residential on the site no longer makes much sense, particularly since downtown has a dearth of quality office space and there are now 1,200 apartment units under construction in the surrounding area.
A chance to whet appetites
Constructing a much larger office building would require Dominion to either pre-lease 65 percent of the building or pony up a lot more equity.
I think it would have been hard to do a 400,000-square-foot building without a 250,000-square-foot tenant, said Roland Gammon, owner of White Oak Properties. That tenant is either going to skin you alive on the economic terms and make your deal [impossible to finance] or not come at all. I think this is probably the prudent way to do it.
Gammon should know. White Oak is part of the group that acquired the Charter Square site from the city in 2008. His group had been unable to pre-lease enough space in either of the towers to secure financing before Dominion came along.
Theres no telling how long the project would have remained stalled had its size not been reduced. And the building could still act as a wet finger in the wind for the downtown office market.
If Dominion is able to quickly lease up the building, it would set the stage for a much taller building on the north site. It also would be a sign to other developers and lenders that there is an appetite for such projects.
Can that building be higher? Yes, it can be higher. But certainly I think its important that we got a project on that site, said Mitchell Silver, Raleighs planning director. We have other sites in the city that Im sure over time will go vertical. But its important that we keep momentum going and we see construction underway.