Office rents at a high

Rising construction costs boost rents, but demand keeps growing in Triangle

RALEIGH -- When The Castleton Group started outgrowing its offices last year, Suzanne Clifton embarked on a mission to find more space for about $20 per square foot.

It didn't seem like a tough task. After all, the Triangle's office market had just recovered from a serious depression.

But the search was fruitless. Clifton, the president of the human resources company, found space in a new building at 3700 Glenwood Ave. She didn't find the price she wanted.

Castleton's rent will be in the neighborhood of $26 per square foot for the next twelve years.

She's glad it's not more.

"People are already talking about $30 a square foot," she said.

Triangle tenants are waking up to record-high office rents as new and expanding companies continue to gobble up space.

Asking rates for the best offices in the region averaged a record $20.69 per square foot, on an annual basis, in the three months that ended June 30, according to Raleigh brokerage Grubb & Ellis/Thomas Linderman Graham. That's up $1.25 from the first three months of the year -- the biggest quarterly jump in a decade.

The sharp increase comes as companies fill up offices, creating demand for new buildings.

Only 12.1 percent of rentable offices in Durham, Orange and Wake counties were empty at the end of the second quarter, according to a survey of 40.1 million square feet conducted by Raleigh real estate investment trust Highwoods Properties. That's a six-year low, down from 12.9 percent a year earlier.

Net absorption, the total space leased minus the total vacated, was 513,789 square feet -- 42 percent more than the quarterly average in the previous two years.

"We continue to create jobs, and the real estate community continues to put new inventory into the market. ... People are filling everything," said Dave Lindner, director of operations at Highwoods, the Triangle's biggest office landlord.

Developers added 315,000 square feet of offices in the second quarter. And there was 2.5 million square feet of offices under construction in the second quarter -- three times the amount being built during the same period a year earlier.

Rising construction costs are a big part of why rents are climbing. In five years, Triangle steel prices have jumped 66 percent, construction labor has risen 16 percent, and gasoline has doubled.

Developers in turn have jacked up sticker prices to pay back lenders and still make a profit.

Take Raleigh's Glenwood Avenue and Creedmoor Road area, which includes the future offices of Clifton's companies.

That office submarket has grown 21 percent to 2.9 million square feet in the past year. The vacancy rate grew to 15.6 percent from 6.8 percent during the year. But though demand has been slower to keep up with supply, rents have climbed 13 percent to $22.41 per square foot -- the highest in the region.

Next to 3700 Glenwood, where Castleton is to pay about $26 per square foot, a planned twin is advertised at $28.95.

At GlenLake office park off Edwards Mill Road, Highwoods is asking $23 a square foot at a 158,114-square foot building it built in 2001. A twin, finished last year, is listed at $24.50 per square foot.

Meanwhile, owners of older buildings are finding that they can bump up rates and still offer prices below newer competitors' rates. Average asking rents in class-B offices leaped 10 percent to $17.52 per square foot in the past year.

It has been a long time coming for Triangle landlords, who were saddled with empty space after the tech bust in the early 2000s. Back then, they had to cut rents and offer concessions such as free interior construction to lure a limited supply of renters. Construction was at a standstill.

Developers are banking on more growth. They think there's less risk of flooding the market now, as the region's economy relies less on one industry, tech, and more on growing sectors such as financial services and health care.

But there's still a lot of space to fill. About 27 percent of the space being built during the second quarter was pre-leased, compared with 43 percent pre-leasing in space being built a year ago.