Real Deals

Real Deals: Triangle office rents could be poised to rise in 2014

dbracken@newsobserver.comFebruary 12, 2014 

After several years of very little movement, is 2014 the year office rents in the Triangle finally make a significant move upwards?

The average office rent last year was $20.85 per square foot, less than a 2 percent increase over 2012, according to Karnes Research, a Raleigh firm that tracks commercial real estate trends.

Rates have risen less than 3 percent over the past four years, figures that don’t reflect the concessions and up-fit dollars that landlords were forced to provide during the downturn to lure new tenants.

Still, there are signs that landlords are now – or will be soon – in a much better position to push rents higher.

On a conference call with analysts this week, Ed Fritsch, CEO of Raleigh-based Highwoods Properties, said the real estate investment trust is forecasting anywhere from 3 to 5 percent rent growth in its top markets, which includes the Triangle.

The company, which is the largest office landlord in the Triangle, reported that its average rents per square foot rose 3 percent last year across its entire office portfolio.

Mike Harris, Highwoods chief operating officer, said the company expects to be aggressive in its strongest markets.

“I would say in at least half our markets, we’ll be looking to try to push the envelope to the high end of the range ...,” Harris said.

Just how quickly rents rise will largely depend on whether job growth accelerates in the Triangle. Although the region’s economy is doing better than most other markets, the pace of job growth is still well below normal levels at this state of an economic recovery.

The Triangle added 19,300 jobs last year, down slightly from the gain of roughly 20,000 jobs in 2012.

Still, while rental rates have remained fairly stagnant, the region’s office vacancy rate has been falling, particularly in the Class A market for newer space. The Class A vacancy rate was 13.4 percent at the end of last year, down from 14.35 percent at the end of 2012.

“Tenants are getting a little bit more confident, and they’re expanding, and they’re absorbing some of the suites next door to them,” said Brian Reece, a partner with Karnes. “They know that rental rates are going to start increasing, and so they might as well pull the trigger now to expand.”

Although developers, including Highwoods, have begun building several new office buildings in the Triangle, much of the space in those buildings is preleased.

“There’s really not a lot of new space hitting the market, because it’s already been absorbed,” Reece said.

Some tenants that are in need of larger blocks of space are taking matters into their own hands by simply buying a building, he said. Low interest rates have made such an investment more attractive, and tenants know that they can lease any extra space until a time when they need it, Reece said.

Bracken: 919-829-4548; Twitter: @brackendavid

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