If anybody still had doubts about the Triangle’s growing stature among global real estate investors, they were probably vanquished in 2015.
The region has become a magnet for investors of all stripes in recent years, attracting significant amounts of capital from sources that likely wouldn’t have been able to find the Triangle on a map 15 years ago.
Perhaps the best example of this came in May, when Kane Realty and Concord Hospitality Enterprises sold two hotels at North Hills for nearly $103 million to the sovereign wealth fund of the government of Abu Dhabi.
The price the Abu Dhabi Investment Authority paid for the Renaissance Raleigh North Hills – $79.91 million, or nearly $350,000 a room – is comparable to what some hotel investors pay in New York or Chicago.
Such deals are likely to become more common in the future, as the Triangle has a number of characteristics that real estate investors increasingly gravitate toward – a growing population, a highly educated workforce and a diverse economy with lots of companies in industries that are growing.
So what will 2016 bring? Here are four questions worth asking as we head into the new year.
Will the inventory of single-family homes finally rise?
One of the puzzling aspects of the housing recovery has been the dearth of homes for sale. The Triangle is not the only market experiencing a lack of supply, but this trend has gone on far longer than most thought possible.
Inventory levels are now down 40 percent from the same period four years ago and have fallen for 15 consecutive months on a year-over-year basis.
The lack of supply can in part be explained by the pace of new home construction, which remains well below what it was before the recession. The emergence of the single-family rental market, with large institutional investors amassing portfolios of thousands of homes, also has played a role.
But don’t expect things to change dramatically in 2016. New construction, while picking up, is unlikely to accelerate enough to significantly raise inventory levels, particularly since the Triangle continues to add new residents.
In the resale market, the lack of inventory has become its own deterrent to people looking to move to a bigger house or downsize, notes Stacey Anfindsen, a Cary appraiser who analyzes Triangle Multiple Listing Services data.
“They don’t have any place to move to,” he said.
In theory, rising home prices should eventually solve this problem.
At some point, prices should rise enough to entice more people to list their properties. Buyers priced out of the more desirable areas will decamp to areas where there is more inventory, such as Wendell Falls in eastern Wake County or Wake Forest.
“As prices rise, it will push people back to those outer geographic areas,” Andfindsen said.
Will the local apartment market cool down?
The biggest benefactor from the housing bust has been the Triangle apartment market, which has been among the best performing in the country in terms of rent growth.
The region continues to attract enormous interest from investors, a number of whom are so confident they are paying top-dollar for new communities the minute the certificate of occupancy is granted.
Through Dec. 15, there have been 76 Triangle apartment complexes sold this year, with those transactions totaling $1.88 billion, according to CBRE. Last year, apartment sales totaled $1.98 billion.
Although the pace of new construction in the Triangle has slowed somewhat, developers continue to move ahead with projects, particularly in and around downtown Raleigh and Durham. Many of the best apartment sites have been taken, so scarcity of land should slow construction somewhat.
The larger question hanging over the sector is whether we are at the peak of a cycle or whether there has been a fundamental change in the demand for such units. Some say the pool of potential renters has been greatly expanded in recent years, citing the growing numbers of millennials now of prime renting age and the increased difficulty that many would-be homeowners have qualifying for a mortgage.
Still, the market’s current trajectory seems unsustainable, given that rent growth is far outpacing wage growth.
Triangle rents for new leases are now rising at an annual rate of 5.3 percent, among the fastest rates of any market in the U.S., and they are rising at both new and older properties, according to MPF Research, which analyzes apartment data in 100 U.S. metropolitan markets.
If rent growth slows, and some newer properties struggle to lease up, expect other developers to take notice and adjust their plans accordingly.
Will demand for new office space pick up?
The vast majority of commercial real estate construction in the Triangle since the recession has been apartments. Only a handful of new office properties have come out of the ground.
Part of that is due to the lending environment. Financing for office projects remains very difficult to obtain, with most developers needing to pre-lease a sizable portion of any new building.
With little or no speculative office construction on the horizon, the Triangle will need to attract new companies to justify a significant amount of new space. But many of the largest lease deals this year have involved companies moving from one local property to another.
Allscripts, for example, announced earlier this year that it would lease 250,000 square feet in a new office building now under construction at North Hills. The company currently leases space in North Raleigh.
“There’s just been a lot of moving, and we need to attract some more companies to Raleigh,” said Andy Andrews, CEO of Raleigh-based Dominion Realty Partners.
Dominion developed the Charter Square office building in downtown Raleigh, which is 58 percent leased after opening earlier this year.
For all the accolades showered on the Triangle, Andrews said the region still is not experiencing the type of robust job growth found in other metro areas.
“We’re doing better than a lot of cities but we’re nowhere near the growth of Seattle or Austin, Texas, or other places like that,” he said. “ ... We’re doing OK but we’re not doing great.”
Will recent land prices in Triangle downtowns look cheap a year from now?
The intense interest from investors and developers in downtown Durham and downtown Raleigh is quickly driving up land prices.
The suddenness of the spike in prices in Raleigh has caught many people off guard.
“Everybody is aghast at land pricing in downtown Raleigh,” said Marcus Jackson, managing director of urban investments for TradeMark Properties.
Only time will tell if the prices are justified, but Jackson said downtown Raleigh may look reasonable when compared to what developers would pay in places like Washington or even Charlotte.
Downtown is entering the next phase of its redevelopment, one that will be characterized by more density and taller buildings. The recent land sales are an indication of how much money is chasing these deals, and the big-city ambitions of the developers behind them.
“I think the $120 a square foot for the city-site might be cheap,” Jackson said, referring to the price that The Lundy Group has agreed to pay for a 1.2-acre site at 301 Hillsborough St. in Raleigh.