COVID-19 has slowed deals to a crawl, but Triangle developers expect a rebound

While new deals have fallen nearly to zero in the Triangle’s once blazing hot office market, there is still belief that the region remains poised for growth despite the changes the coronavirus pandemic may bring to the way we work.

For the past decade, vacancy rates in office buildings across the Triangle fell and rents rose sharply as the Triangle’s economy hummed along. Startups grew from dozens to hundreds of employees and a wide variety of companies relocated to the Triangle, filling up existing buildings and helping get new ones underway.

But now those buildings are mostly empty, as the coronavirus keeps most office-based employees at home.

Brad Corsmeier, head of CBRE’s investor leasing office in Raleigh, said he thinks it could be nine to 12 months before the region sees major lease commitments happen again — a gap that would’ve been unthinkable just three months ago.

“Companies don’t know what this is going to look like and what employees are going to feel comfortable with,” he said in a phone interview.

“But is office space dead?” he said. “No, I am pretty optimistic about it.”

Staggered shifts and plexiglass

It will surely change, though, at least in the short term.

Corsmeier said companies are currently working through three potential thought processes.

Some companies will choose to work from home permanently. Others will look to reduce their footprint and only use their offices for meetings and collaborative projects. But some might even look to lease more space to give workers room to spread out and transform their open areas into more private offices.

In a call with investors in late April, Ted Klinck, the CEO of the Raleigh-based real estate company Highwoods Properties, said there will likely be a “de-densification” going forward.

“I do think you’re going to have reduced densities,” he said, at least until there’s mass testing or a vaccine. “Some are going to do phased returns, alternating days and weeks, staggered hours. ... I think some companies we’ve already heard are going to be putting some plexiglass in between their bench seating to create more social distancing.”

Corsmeier said building owners likely will look to create touchless doors and elevators and install higher quality HVAC systems to clean the air in the buildings.

Over the next year, said Gregg Sandreuter, a managing partner at the development company HM Partners, companies will find a balance between remote work and office work.

“I think we will get more of both — more people occasionally using Zoom and Microsoft Teams to communicate from non-office locations,” he said in a interview, “and companies changing their floor plans to give employees more elbow room, more options for privacy, more options for head-down work.”

But offices will still be important, he added, as a place to form company culture, ensure confidentiality and security, and as a place to innovate and execute projects. “I don’t foresee a future where we all videoconference in our slippers from the kitchen table,” he said.

And even during the pandemic, Highwoods, which mainly operates in markets like Raleigh, Charlotte and Nashville, said there is still some interest in office space.

“There continues to be some interest for back-filling available space,” Klinck said. “The volume of showings has obviously slowed during the past four weeks to six weeks, but activity has not gone to zero and we are cautiously optimistic that demand will begin to rebound as the economy reopens.”

Coming from a place of strength

Before the coronavirus sent workers home, things were looking rosy across the Triangle when it came to office leases.

Overall office vacancy rates had dropped to 10% for the region, and the average asking price for Class A rental space was up 3.6% from a year prior to nearly $29.25 per square foot, according to CBRE. The Wake County Economic Development group had announced 24 company expansions up until May, including tech firm Bandwidth’s decision to add 1,100 jobs in Raleigh over the next few years.

Corsmeier said he believes the Triangle could recover faster than some other markets because it hadn’t overbuilt in recent years, and because its economy is based on a diverse array of industries. He added that there doesn’t appear to be any major distressed tenants. Highwoods told investors it collected 97% of rents in April.

“I am optimistic about Raleigh-Durham because we weren’t overbuilt,” he said. “There is not a big amount of product. Most of the new construction that is underway has significant pre-leasing. I think new construction is around 40% pre-leased.”

Some previously planned projects that haven’t started construction yet could be delayed. For example, the developers of the mixed-use development planned for the former News & Observer property in downtown Raleigh is still undecided on when it will start construction, a spokesman for the development group said in an email.

“It will be hard to get a construction loan,” said Sandreuter, who is also trying to get a project off the ground in downtown Raleigh, “so fewer new buildings will be built, which will keep new supply down and favor existing buildings.”

Potential for relocations

There’s also some belief that the coronavirus could drive the migration of companies and workers to the Triangle from more dense markets in the Northeast. For the past few decades, the Triangle, like many Sunbelt metro areas, has benefited from companies and people moving from colder climates to the South.

“The Triangle economy is going to emerge stronger and faster from this period than other parts of the country,” Sandreuter said. “Companies and individuals will accelerate their migration here because we have a friendly business environment, low cost of living, a culture of innovation and entrepreneurship, and room to grow.”

“Suddenly, suburban regions like ours have a whole new appeal,” he added.

Klinck said it’s too early to tell whether that migration will happen. But, before the pandemic hit, he said Highwoods was “in discussions with a lot of different customers ... and many of those were in fact from out of town.”

“We believe our markets, Sunbelt markets, less dense markets ... are going to continue to serve us well and attract a lot of companies going forward,” he said. “We feel good about the demand. Once we get past this period of time, we feel good, the demand is going to be kick-started and still be there.”

This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work. Learn more; go to bit.ly/newsinnovate