Over the past three years the Triangle office market has experienced what can only be described as a gradual recovery.
After suffering steep rental declines in the years following the global financial crisis, the market has posted modest annual rent gains of between 1 and 2 percent since 2011, according to Xceligent Karnes, a research firm that tracks commercial real estate trends.
That pattern largely held true last year, when rents increased 1.5 percent and the vacancy rate fell from 15 percent to 13.3 percent. The question now is whether rent growth will finally accelerate this year as the economic recovery in the Triangle continues to gain steam.
“Any rent increase moving forward is always a positive sign,” said Brian Reece, Xceligent Karnes regional director of client services for the Mid-Atlantic region, noting the depths that the market fell to in the latter part of last decade.
The largest rent increases recorded last year were in downtown Durham, which now has the lowest vacancy rate of any market in the Triangle at 8.2 percent. Overall rents in downtown Durham rose 2.5 percent last year compared to 2013, while rents for Class A properties increased 3.9 percent.
Reece said the increases are the result of there being so little new supply coming on the market, and the properties that have recently opened – such as the Diamond View III building in American Tobacco Campus – have commanded some of the higher rents in the region.
Developers have also spent considerable money repositioning older properties in downtown, which have been able to command Class A rents.
After several years of virtually no new office construction, the Triangle now has a decent pipeline of new inventory on the way. There was nearly 2.1 million square feet of office under construction in the fourth quarter, with an additional 6 million square feet proposed.
Some of that new space is already taken, as most developers need to prelease a significant chunk of space before moving ahead with construction.
Reece said the lack of new supply – combined with more companies having the confidence to expand – is creating scenarios where landlords are creatively moving tenants around their existing buildings to meet their needs.
“There’s become this shuffle of moving tenants out to expand another existing tenant’s space,” he said.
As new Triangle office buildings open over the next 12 months, there will be movement of tenants from existing properties into the brand new buildings. One gauge of the health of the market will be how quickly those new vacant spaces are filled – and what rents they can command.
“We’re going to see some adjustments over in those existing buildings, especially if they don’t lease it up,” Reece said. “ ...tUnless landlords come in and redo the space ... they definitely won’t be as competitive to the brand new buildings,” particularly in downtown Raleigh and Durham.
There are a number of good signs that potentially point to better-than-expected rental growth this year.
The Triangle’s largest office submarket, the Research Triangle Park/Interstate 40 area, has leased several of the large blocks of existing space that had kept vacancy rates high. The vacancy rate in RTP/I-40 plummeted from 17.2 percent in 2013 to 10.9 percent last year, and rents increased 2 percent.
And last week Highwoods Properties, the Triangle’s largest office landlord, reported that asking rents at its local properties were up 5 percent over the previous year.