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RALEIGH, N.C. -- The Raleigh/Durham/Chapel Hill Triangle has captured national attention as a powerhouse of innovation and economic growth for many years, winning a steady stream of accolades for growth, technology, entrepreneurial drive and quality of life. So it comes as no surprise that while some parts of the country are still limping along in what has been the longest and most tepid recovery in recent memory, the Triangle is booming.
Indeed, it's hard to find a metric that shows the region as anything less than thriving. The unemployment rate declined sharply over the past year, down over 2 percentage points from the first quarter of 2013 to 5.1 percent in April 2014, and the region has been adding jobs - more than 26,000 nonfarm jobs in the past four quarters and 7,700 in March 2014 alone. As a result, the region's industrial market is rapidly accelerating.
Raleigh-Durham has consistently placed in the top 10 fastest growing MSAs since 1980, and the Triangle's industrial market is primarily geared toward providing goods and services for the burgeoning local population, ensuring that demand for institutional-grade industrial product remains strong. This dynamic has also created a tendency toward a high degree of diversification, and both factors contributed to partially insulating the local warehouse market from the severe corrections suffered by national and regional distribution hubs during the recent economic downturn.
Demand Surge
Still, the years from 2008-2012 saw elevated Class A vacancy rates of up to 15.5 percent, as higher unemployment and depleted consumer confidence and spending took their toll. But those days are long gone. The region has seen nine consecutive quarters of positive net absorption, and leasing velocity is increasing. Absorption totals for the first quarter of 2014 surpassed the totals for the previous four quarters combined. Among Class A buildings with a minimum of 24-foot clear heights, there are already more prospects than quality options, and the region's rapid population growth and strong economic fundamentals will only increase demand for institutional-grade warehouse space.
The RTP/Interstate-40 submarket is the Triangle's most desirable center-of-market location, and contains almost 40 percent of the total warehouse space in the Triangle, as well as the vast majority of the area's modern bulk space. The area's prime location adjacent to RDU International Airport and along the major transportation artery of the I-40 corridor ensures that space here will always be at a premium. 2013's annual absorption rate of 2.7 percent has the submarket bursting at the seams with a painfully constricted vacancy rate of 5 percent, and as current demand and long-term drivers remain strong, 2014 should see the end of what has seemed like a virtual moratorium on new warehouse construction during the past several years.
New Construction
While it's clear that demand supports significant new construction, questions remain about where to put it. The natural choice would be RTP/I-40, but that submarket is almost completely built out, with only a few sites left for new development. Additionally, prospective developers must contend with significantly higher land prices in the submarket, as well as steep developer fees and costs in Durham. Despite this, market conditions suggest that the time is ripe for someone to pull the trigger on at least one of these sites, and market insiders anticipate an imminent announcement that construction will soon commence on approximately 450,000 square feet of space to be delivered in 2015, with a portion of the space to be spec.
This project may ease supply constriction somewhat, but it is unlikely to be sufficient to satisfy demand. For additional options, developers have shown interest in Eastern Wake, the Triangle's secondary focal point of industrial activity, which has more current availability than RTP/I-40 as well as room to grow. Duke Realty recently announced several build-to-suit opportunities for up to 400,000 square feet at Greenfield North, and development is underway on the first of several proposed flex and warehouse buildings ranging from 10,000 to 80,000 square feet at Triangle East Business Park in Zebulon. But land prices in the most desirable, central areas of Eastern Wake are not much lower than in RTP/I-40, and logistics make space there more attractive to the Triangle's handful of regional distributors, rather than the majority of users. As a third choice, developers may turn their gaze to the outlying counties, where land is cheap, but lack of proximity to infrastructure limits appeal.
Still, with growth during the last several quarters exceeding all expectations and showing no signs of altering its upward trajectory, space to meet voracious demand will have to come from somewhere -- and soon. In the meantime, rents are expected to continue to rise aggressively. Users are out of options: they must relocate to the outlying counties, or pay the new rates that were traditionally thought to be higher than what the Triangle market would bear in what is now truly a landlord's market.
This article originally appeared in the June 2014 issue of Southeast Real Estate Business.
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