Real Estate News

September 3, 2014

Real Deals: American Tobacco has enviable vacancy problem

The success of the American Tobacco both as an entertainment district and an office park means that American Tobacco now has almost no vacant space.

As the American Tobacco campus in downtown Durham celebrates its 10th anniversary, its owner, Capitol Broadcasting, finds itself with a problem that any real estate developer would love to have.

The success of the campus both as an entertainment district and an office park means that American Tobacco now has almost no vacant space. All of the campus’s 45,000 square feet of retail space is taken, and about 1 percent of the roughly 1.15 million square feet of office space is vacant if you include pending deals.

“We have a little bit of office, but a bunch of people chasing it,” said Michael Goodmon, Capitol Broadcasting’s vice president for real estate. “I say that with some humility, but that’s kind of where we’re at.”

He added that American Tobacco’s situation is not unique, noting that there is now a dearth of Class A office space available throughout the Triangle, particularly in sought-after urban areas.

Still, the challenge for landlords such as Capitol is to continue anticipating and meeting their tenants’ needs given the space limitations they have. In the years immediately after the economic downturn, that wasn’t much of an issue, since most tenants were worried about their near-term survival.

Different mentality

But that has started to change.

“It’s a new trend when you see tenants making long-term real estate lease decisions, meaning I’m going to lease more – much more, maybe – than I actually need under the auspices of I know I want this long-term, I know I need it long-term, and I want to lock into the position of where I want to be with my real estate,” Goodmon said. “That’s a really different mentality. You’re seeing a lot more of that than you used to, especially in these urban environments.”

Such a mentality helps explain why, after several years of no new office construction, the Triangle is now seeing a handful of projects get built. Duke Realty, Highwood Properties, Craig Davis Properties and Dominion Realty Partners are all now constructing new buildings, and Kane Realty plans to break ground next week on a second office tower at North Hills.

Duke University remains American Tobacco’s largest tenant by a wide margin, followed by FHI 360 and Bronto Software. FHI occupies 95,000 square feet in American Tobacco’s newest office building, the 130,000-square-foot Diamond View III.

Goodmon said Capitol is in no rush to decide what the next office project might be at American Tobacco, and is content to see how the market develops.

“We take care of our guys. We’re going to move heaven and earth to make sure that we do what we can do to make sure you can continue to grow,” he said. “I think everyone is very understanding of what the market scenario is, and if you don’t got it, you don’t got it.”

More parking

Capitol also remains very committed to providing space for startups in its American Underground locations. By the end of this year, American Underground will have 90,000 square feet in three Triangle locations, including 30,000 square feet on the American Tobacco campus.

Goodmon said plans are in the works to eventually add more parking to American Tobacco, a need that is being driven by the fact that many of the campus’s tenants are squeezing more employees into the same amount of space than they have in the past. It also reflects just how much of a visitor destination the campus has become. American Tobacco now draws between 1.2 million and 1.5 million visitors a year.

Goodmon said other near-term projects include adding more than 200 residential units within the campus, and making American Tobacco more of a destination for conferences. A new conference center is being added to the Diamond View III building, and the Aloft Hotel now under construction on the campus will also feature some meeting space.

By the second quarter next year, American Tobacco expects to have 13 restaurants in place, and Goodmon said the company’s focus now is on filling the holes that remain and not necessarily on expansion.

“We can have all the great ideas we want, but at this point we’re kind of putting the last pieces of the puzzle in, and we just want to make sure we put the right ones in,” he said.

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