Real Estate News

Triangle office market tightens, but lending for new projects still scarce

As the Triangle economy has recovered from the depths of the recession in recent years, there is one area of the real estate market that still looks very similar to the way it did in 2009: New office construction.

Since late 2008, when a credit crisis took hold and banks severely tightened their lending standards, financing for new office buildings has been extremely difficult if not impossible to obtain. While the area’s office market has improved considerably, banks continue to demand that a substantial amount of any new office building be pre-leased before they will finance it.

So it remains noteworthy any time a developer moves ahead with a project without pre-leasing.

Last week, Strategic Capital Partners and Federal Capital Partners said they would do exactly that. The partners expect to begin construction later this month on a new 198,481-square-foot, 5-story office building at the intersection of Interstate 40 and Interstate 540 near Research Triangle Park.

The $40 million project, called Forty540, is the latest sign that opportunities exist for new projects that can get out of the ground. But the need for pre-leasing has been particularly problematic in the Triangle, where tenants remain reluctant to commit before they see construction begin.

“This market has not been a great pre-lease market, and so folks don’t seem to believe you’re real until you’re going,” said Bryan Kane, FCP’s vice president of acquisitions. “I think that’s going to give us an advantage over some other sites that are proposed currently. ... To be the lone site moving dirt out in the park I think will be a big advantage.”

In addition to using traditional financing, FCP has the advantage of being able to use capital from its investor funds to back projects. The company has been extremely active in the Triangle in recent years, both providing early financing for projects and acquiring properties outright.

In the case of Forty540, Kane said the location is ideal.

“And, more importantly in our view, there are no big blocks of Class A space available,” he said. “So that makes for a nice opportunity to be really the only landlord with a large block of space in that submarket.”

There was 1.3 million square feet of office under construction in the third quarter, according to Xceligent/Karnes, but that is about half the amount that was under construction in early 2008.

The Research Triangle Park/I-40 office market is by far the region’s largest, with about 9.2 million square feet. The market’s vacancy rate was 15.8 percent in the third quarter, but the rate for Class A space was much lower at 10.2 percent. Kane said he knew of just one block of Class A space larger than 50,000 square feet that is now vacant.

This is the first Triangle project for Strategic Capital Partners, which is based in Indianapolis and employs a number of former executives of Duke Realty. The building is expected to open in the first quarter of 2017.

Rich Horn, Strategic Capital Partners president, said his firm was told about the Forty540 land last year by Andrew Kelton, who was previously a Duke Realty senior vice president in charge of the company’s Triangle operations.

Although Duke Realty recently sold its office portfolio here, the company had a long and successful run as a developer of new office space. The Forty540 site is across Slater Road from the entrance to Perimeter Park, the widely successful office park that Duke Realty began developing last decade after landing Lenovo as a tenant. Before it sold Perimeter Park, Duke built several new buildings in the park in recent years that leased up quickly.

SCP acquired the 15-acre site in March for $2.52 million, and FCP bought it from the firm for $2.76 million last month, according to property records. SCP also controls adjacent land where it can build a similar sized office building in the future.

Horn said SCP has done some industrial buildings without any pre-leasing in recent years, but this will be the firm’s first speculative office building.

“I think if developers try to do spec office in other areas they would find it very difficult,” he said.

Horn said his firm is actively looking for other investment opportunities in the Triangle, which he considers among the best “tier-two cities,” meaning markets outside of major cities such as New York, Boston, Chicago and San Francisco.

“I think that Raleigh-Durham area is very, very high on the list, along with Nashville and Austin,” he said. “I think it’s very strong. I think it’s more diversified than it was 15-20 years ago.”