During the years after the financial crash, it seemed every local developer you talked to had an office building they were on the verge of building.
These projects, like so many things during the depths of the recession, were frozen in time – permanently, tantalizingly always just months away from breaking ground if only economic conditions improved.
While this state of inactivity remained in place far longer than many expected, it appears to finally be ending.
A number of office projects are moving forward, even with little or no pre-leasing, a sign that some areas of the Triangle now have a serious shortage of Class A office space.
“I think there’s no question that we’re starting to see a clear pickup in the amount of what I think is viable development opportunities,” said Rich Harris, managing principal for Cushman & Wakefield’s Triangle office. “I think the market has demonstrated ... through the growth in the Triangle that we really do need more supply.”
In downtown Raleigh, Kane Realty and Heritage Properties are moving ahead with office buildings, and in downtown Durham, Austin Lawrence Partners began work last week on its 27-story City Center tower.
Earlier this month Highwoods Properties said it would build a 167,000-square-foot office building in the Weston area of north Cary. Highwoods has secured no pre-leasing for the project, but its existing portfolio of 1.3 million square feet in Weston is 98 percent leased.
In such a tight market, developers may find they can lease up a new building simply with organic growth of existing tenants in the market. Others may find it challenging.
Charter Square, which opened in downtown Raleigh in June, quickly leased nearly 60 percent of its space but has not announced any major tenants since. Developer Gregg Sandreuter, meanwhile, is seeking more pre-leasing before starting work on the Edison office building planned for the corner of Martin and Wilmington streets.
Between Kane Realty’s The Dillon project and Heritage’s One Glenwood project, downtown Raleigh could see an influx of 430,000 square feet of new office space in late 2017, early 2018. Such projects will increase the need to land a major tenant – such as a MetLife – that is looking to relocate to the Triangle.
But most of the major office leases signed in recent years have not been relocations; they have involved local tenants moving from one building to another.
“We haven’t seen somebody on the level of MetLife, no question about that,” Harris said.
A number of factors go into landing such tenants, one of them being the availability of space. Harris said large companies looking to move want options, and the Triangle now has relatively few because so little development activity has occurred in recent years.
“In Raleigh-Durham it used to be that there were lots of options,” Harris said. “I think we’re getting down to one or two building options instead of large parks that have lots of undeveloped land.”
There’s also been substantial change in the office market landscape in recent years. Duke Realty, once the region’s second largest office landlord behind Highwoods, sold its office portfolio, and a number of new institutional players have entered the market.
“It’s kind of shifted who you would normally expect to be developing,” Harris said.
In places such as downtown Durham, where the vacancy rate for Class A space is now below 2 percent, an entire development cycle was missed, Harris said.
The result is that companies have had to get very innovative in how they approach their real estate needs. Tenants, particularly technology firms, are cramming more employees into the same amount of space while others are using co-working spaces.
Whereas 10 years ago a company with a relatively open floor plan would average about 175 square feet per person, today “I think we’ve probably shaved 50 square feet per person off that number,” Harris said.
“You’re looking for any crack of space that suddenly shows up to put your tenant in,” he said. “It’s a very, very challenging market.”
Waiting to land
The last new office building to open in downtown Durham was Diamond View III on American Tobacco Campus, and it leased up within 62 days of being announced.
Of late, development activity has gotten a major boost from Duke University, which already leases more than 1 million square feet downtown.
Duke has signed on to be the anchor tenant for both City Center, where it plans to lease 55,000 square feet of the tower’s 129,000 square feet of office, and the Chesterfield building, where it will lease 100,000 square feet of office and lab space.
Scott Selig, Duke University’s associate vice president for real estate, said he’s not worried about downtown Raleigh or Durham being able to land major new tenants from outside the region.
“I’ve talked to some of those tenants,” Selig said. “There are major national anchor tenants looking in both cities they just haven’t landed yet.”
Selig said the region’s strong mix of education, medicine, technology, entertainment and design makes it very appealing to potential tenants. “We’re also building the beds – meaning apartments and hotel rooms and condominiums – for people to live downtown,” he said.
Such deals simply take time, Selig said, noting that he first began talking about Duke’s involvement in the City Center project in 2012.