L I N C O L N H A R R I S R E : S O U R C E R A L E I G H - D U R H A M The second quarter s negative net absorption of 91,338 square feet served as a reminder of the market s fragility and interdependence with the machinations of several large companies. ECONOMY Poised last quarter on the edge of a strong recovery, the short-term economic outlook for the Raleigh-Durham area seems more muted this quarter. Assuredly, the metro has all the right fundamentals in place top-tier population and household formation growth, a relatively low unemployment rate, renowned educational institutions, and stabilizing home prices; however, macro forces such as Raleigh-based RBC Bank s sale to Pittsburgh-based PNC and the impending approval of Progress Energy s merger with Charlotte-headquartered Duke Energy have damaged the psyche of local businesses and will lead to modest local job losses in the next several years. Pharmaceutical companies, facing patent expirations and falling sales, are responding with local pull outs from real estate, like GlaxoSmithKline s decision to vacate and sell nearly 1 million square feet of space, while Merck slashed both space and jobs after acquiring Raleigh-based Inspire Pharmaceuticals in May. In the past 12 months ending June 2011, the combined Raleigh and Durham metros created 7,100 new positions, a 0.9 percent increase in total nonfarm jobs. The largest winner, and the best bellwether for office demand, was the professional and business services segment of the market, which created 6,600 jobs in the past year; conversely, government positions at the local, state, and federal levels shrank in the combined metro by 3,800 over the same time period. The combined metro area, with 8.3 percent unemployment in June 2011, experienced a sharp basis point uptick in unemployment since April 2011 as a flood of graduating students entered the job market and in-migration upped the labor force by 6,748 people between April and June. Despite these drags on the economy, the Raleigh area continues to be highly ranked for its economic strength and was named the Best Place for Business in 2011 by Forbes magazine. Recent expansions by local players such as HCL and ACS, which plan to add 500 new positions combined, and capital investments in research and manufacturing facilities by corporations such as Medicago and Syngenta only strengthen the economic climate of the region. OFFICE MARKET Overview After the heady beginnings of a strong rebound in the metro s office market throughout 2010 and in the first quarter of 2011 resulting in nearly 596,000 square feet of net occupancy the second quarter s negative net absorption of 91,338 square feet served as a reminder of the market s fragility and interdependence with the machinations of several large companies. A wave of space consolidations, mergers and acquisitions, and uneasiness about the national economic picture slowed local office demand considerably for the time being. Vacancy ticked up slightly by 20 basis points during the quarter to 17.7 percent after recording quarter-over-quarter declines for five straight quarters. Though there was strong leasing activity, that strength was overshadowed during the second quarter by the movements of large tenants consolidating out of leased space and into owner-occupied buildings; RTI completed a 141,000 square foot pull out from 800 Park Drive in RTP after the second 2,500,000 Net absorption New develo vacancy 2007 1,481,431 ######## 14.5% 2,000,000 2008 1,525,123 ######## 15.4% 1,500,000 2009, (576,607) 696,128 18.5% 2010 530,296 256,755 17.7% YTD 1,000,000 2011 (25,790) 0 17.7% 500,000 0-500,000-1,000,000 1.0% 2Q 2010 12 MONTH FORECAST Market Supply 37,051,815 37,051,815 Under Construction,030 0 Under Construction Preleased % 80.8% N/A Direct Vacancy 18.0% 16.8% Total Vacancy 18.8% 17.7% Total Net 231,124-91,338 YTD Net 107,656-25,790 Direct Asking Rent $20.31 $20.05 Class A Direct Asking Rent $21.95 $21.71 Class B Direct Asking Rent $18.04 $18.02 2007 2008 2009 2010 YTD 2011 Net absorption New development vacancy 16.8% 351815 Occupied 30476999 82.26% Direct vacant 6215107 16.77% Sublease vacant 3599 0.97% 17.74% 82.3% Occupied Direct vacant Sublease vacant STATISTICS AND TRENDS 20.0% 18.0% 16.0% 14.0% 12.0% HISTORICAL VACANCY AND NET ABSORPTION SPACE BREAKDOWN page 1
Average direct asking rental rates fell to $20.05 per square foot - a 0.7 percent decline from first quarter - as landlords relented from rate increases at the first sign of slowing demand and proved that an even healthier office climate is needed for increased rental rates to stick. quarter completion of the 120,000 square foot O9 building on RTI s campus, while GlaxoSmithKline moved out of a combined 88,000 square feet in s Fowler and Crowe buildings. The market also had its first taste of a successful law firm significantly trimming its space needs, as Kilpatrick, Townsend & Stockton shrank its office footprint by nearly 41.0 percent in its move from,000 square feet at 3737 Glenwood to 31,877 square feet at CapTrust Tower. Urban properties, located in the core areas of and, continued first quarter s trend of negative net absorption, totaling to 37,913 square feet and 71,612 square feet in second quarter 2011 and year-to-date, respectively. The suburban submarkets also suffered an occupancy setback of 53,425 square feet during the quarter. As is typical, Class A properties in the metro garnered the majority of this quarter s occupancy gains, eking out net absorption of 20,836 square feet while Class B properties due especially to a continued exodus from RTP s aging Class B buildings lost ground by 112,174 square feet. Accordingly, Class A vacancy held steady at 16.5 percent during the second quarter, down 1 basis points year-over-year, as Class B vacancy rose by eighttenths of a percent during the quarter but remained flat over the past year at 20.0 percent. Supply No new office buildings have been completed since mid-2010 as developers took a step back to wait for demand to clear some of the area s 6.2 million square feet of vacant space. However, two owneroccupied projects moved closer to reality during the quarter with Biogen Idec breaking ground on a 180,000 square foot office facility on their RTP campus in May, which will likely result in a move-out at their leased space at Cambridge Hall in Imperial Center. Additionally, Measurement Inc. plans to begin construction of The Measurement Building, a five-story, 74,000 square foot building with office and retail space at the corner of Hunt and Morris in, during July; Measurement Inc. intends to occupy approximately 32,000 square feet, which is half of the building s office space. Both projects are expected to deliver by the third quarter of 2012. could see construction start soon on some or all of the 283,000 square feet currently planned by Capitol Broadcasting, which owns the area s American Tobacco Campus, though this activity could be stalled by slow preleasing demand especially in the wake of GSK vacating 88,000 square feet in the submarket during May. Rental rates The market s lackluster net absorption, combined with impending new construction for the first time in over a year, pushed down the metro s average direct asking rental rate to $20.05 per square foot a 0.7 percent decline from first quarter and a 1.3 percent decrease year-over-year; second quarter s slump erased the 0.5 percent rate gain accrued during the first quarter of the year when landlords, for the first time since 2008, felt able to increase year-over-year rates. At the first sign of slowing demand, however, landlords relented and proved that an even healthier office climate is needed for increased rental rates to stick. Class B properties in the metro continued to inch upwards at a slow 0.1 percent quarterly pace to $18.02 per square foot as these landlords seek to capitalize on their relatively low asking rate. However, Class A landlords have been pricing their space down to compete more readily with large Class B availabilities, contributing to the 0.6 percent rental rate decline in second quarter to $21.71 per square foot. Additionally, the large Class A building brought online in 2009 have recently experienced strong movein activity, as is the case with CapTrust Tower and East, or have failed to attract tenants and repeatedly dropped rental rates like RDU Center III. These reductions and repricings of top-tier office spaces aided in dropping rental rates in every submarket except for during the second quarter. SUBMARKET ANALYSIS On a submarket basis, net absorption growth was mixed with roughly half of the area s submarkets experiencing both positive and negative quarterly activity. Interestingly, the best occupancy performance this quarter occurred in usually moderate segments of the market, such as, Cary, and, which all enjoyed more than 20,000 square feet of net move-ins. Large moves by the Wake County Public Schools, which occupied 34,1 square feet at 5625 Dillard Road, and a 11,4 square foot move-in at Regency Forest I by Mediant Communications significantly contributed to Cary s gains., which typically sees muted demand due to the submarket s constrained available spaces, had several financial and legal tenants above the area s usual 5,000 square foot threshold join the district s roster. HISTORICAL DIRECT RENTAL RATES $24.00 Class A Class B market 2007 $21. $17.13 $20.08 2008 $22.16 $17.39 $20.48 $22.00 2009 $21.69 $17.35 $20.06 2010 $21.71 $17.87 $20.08 $20.00 $21.49 $17.84 $19.84 $18.00 $16.00 $14.00 2007 2008 2009 2010 Class A Class B market 30.0% 25.0% 20.0% 2Q 2010 15.0% Downtown Raleig 6.7% 8.6% Downtown Durha 8.5% 9.2% 10.0% 6 Forks Falls of Ne 21.6% 23.1% 5.0% Cary 18.1% 13.5% Glenwood/Creedm 20.9% 12.1% 0.0% Orange County 21.3% 17.2% RTP/RDU 21.7% 19.5% 15.2% 17.9% South Durham 26.9% 27.4% 13.5% 14.2% 6 Forks Falls of Neuse Cary SUBMARKET-BY-SUBMARKET VACANCY TRENDS Glenwood/Creedmo Creedmoor Orange County RTP/RDU South Durham 2Q 2010 page 2
Traditionally robust submarkets such as 6 Forks Falls of Neuse, Downtown Durham, and all experienced negative net absorption in excess of 30,000 square feet, with the weakest market losing 115,112 square feet as Kilpatrick Stockton pulled out of,000 square feet at 3737 Glenwood and Inspire Pharmaceuticals began closing its headquarters at Brier Creek Corporate Center. The 6 Forks Falls of Neuse submarket saw vacancy rise 90 basis points over the past quarter as net absorption fell to negative 39,430 square feet as tenants move from Colonnade II to Colonnade I to build out Salix s full-building requirement. also suffered a slight setback because of GSK s 88,000 square foot move out in Fowler and Crowe, though HTC is already in advanced discussions to lease at least 20,000 square feet of that space in the Fowler building. Even after the 59,176 square feet of negative net absorption recorded in the Downtown Durham submarket during second quarter pushing vacancy from 7.0 to 9.2 percent the submarket is arguably the strongest in the metro; though s vacancy rate of 8.6 percent is lower, there is significant uncertainty surrounding the scope of future office space needs by both Progress Energy and RBC Bank. However, Red Hat s renewed commitment to Wake County could rapidly improve the forecast for if they were to occupy existing space. SUBMARKET TRENDS SUBMARKET-BY-SUBMARKET NET ABSORPTION Cary YTD 2011 Net absorption South 6 Forks DurhamFalls of Ne -103208 West RTP/RDU Raleigh -88446 Orange Downtown County Durha -66611 North Raleig -42914-24392 North Durham 0 Orange County 30531 RTP/RDU 34871 South Durham 48343 6 Forks Falls Cary of Neuse 84862 Glenwood/Creedm 101174-120,000-80,000 -,000 0,000 80,000 120,000 YTD 2011 Net absorption SUBMARKET-BY-SUBMARKET ASKING RENTAL RATES North Durham 6 Forks Falls of Neuse RTP/RDU Direct asking rate Orange Cary County 25.45 20.99 Downtown Raleig 21.15 Glenwood/Creedm 21.33 Downtown Durha 20.62 South Durham 20.42 6 Forks Falls of Ne 19.98 Cary 19.84 RTP/RDU 19.09 17.73 North $12.00 Durham$14.00 16.05 $16.00 $18.00 $20.00 $22.00 $24.00 $26.00 South Durham Orange County Direct asking rate COMPLETED LEASE TRANSACTIONS TENANT ADDRESS SUBMARKET SF MARKET EFFECT HCL Technologies Regency Lakeview Cary 64,603 Expansion Sensus Keystone Technology Park XII RTP/RDU 60,033 Expansion MediClick Colonnade II 6 Forks Falls of Neuse 18,211 Relocation, expansion RadarFind Perimeter Park West RTP/RDU 17,067 Relocation, expansion Bronto Software Washington Building 14,000 Expansion Jubilant Clinsys Colonnade II 6 Forks Falls of Neuse 13,441 Renewal Patterson Dilthey The Summit 11,151 Relocation, expansion Shodor Golden Belt Center 8,644 Relocation, contraction PathCentral 201 W Main Street 7,225 New IEM 20 Ellis Road RTP/RDU 5,500 Expansion page 3
SPACE STATISTICS URBAN Inventory Vacancy Vacancy % Total Net (% of inventory) Direct Asking Rent 3Q 2010- Completions Under Construction DOWNTOWN DURHAM DOWNTOWN RALEIGH 2,657,091 243,868 9.2% -59,176-16,787-0.6% $20.69 0 0 2,189,226 188,3 8.6% 21,263-42,153-1.9% $21.49 0 0 URBAN TOTALS 4,846,317 432,571 8.9% -37,913-58,9-1.2% $21.04 0 0 SUBURBAN Inventory Vacancy Vacancy % Total Net (% of inventory) Direct Asking Rent 3Q 2010- Completions Under Construction 6 FORKS FALLS OF NEUSE 4,280,450 990,066 23.1% -39,430-66,668-1.6% $20.08 0 0 CARY 4,084,1 551,647 13.5% 42,886 188,358 4.6% $20.11 0 0 GLENWOOD/ CREEDMOOR 1,579,429 191,804 12.1% 77,806 137,820 8.7% $21. 0 0 NORTH DURHAM 565,055 295,3 52.3% 0 6,311 1.1% $16.18 0 0 ORANGE COUNTY 1,334,698 229,214 17.2% 6,320,843 4.1% $25.49 0 0 ROUTE 1 1,646,982 294,122 17.9% -5,321-43,743-2.7% $17.71 0 0 RTP/RDU 10,1,983 2,056,507 19.5% -31,795 231,507 2.2% $19.29 0 0 SOUTH DURHAM 2,828,345 775,963 27.4% 11,221-15,695-0.6% $20.57 0 0 WEST RALEIGH 5,344,386 757,519 14.2% -115,112-36,943-0.7% $21.56 0 0 SUBURBAN TOTALS 32,205,498 6,142,245 19.1% -53,425 455,790 1.4% $20.01 0 0 METRO TOTALS 37,051,815 6,574,816 17.7% -91,338 396,0 1.1% $20.08 0 0 LARGEST AVAILABLE CONTIGUOUS SPACES BUILDING ADDRESS SUBMARKET SF Available Network Center 04-10 NC Highway RTP/RDU 456,745 8001 Development Drive 8001 Development Drive RTP/RDU 262,000 01 Development Drive 01 Development Drive RTP/RDU 205,310 Signature Commons 4100 N Roxboro Road North Durham 136,000 600 Park Drive 600 Park Drive RTP/RDU 129,046 500 Park Drive 500 Park Drive South Durham 125,742 Lucent Lane 200 200 Lucent Lane Cary 124,4 0 Park Drive 0 Park Drive RTP/RDU 120,473 RDU Center III 2121 RDU Center Drive RTP/RDU 114,518 Regency Lakeview 11000 Regency Parkway Cary 113,138 page 4
OFFICE FORECAST Though Raleigh-Durham s economy remains robust, the area s office market during second quarter was battered by fallout from the effects of recovery most notably merger and acquisition activity as uncertainty in the equity markets and the prevalence of large corporations sitting on substantial amounts of cash drive companies to seek higher returns by purchasing competitors. These consolidations, and the natural efficiencies that firms refocus on after an economic downturn, led the market s net absorption downwards during second quarter despite otherwise strong lease and occupancy activity. With an economy as diverse as Raleigh-Durham s, these consolidations are not likely to stall the office market s upward march as numerous local companies expand their operations and as businesspeople and investors continue to praise the area s demographic strength and undeniably valuable technological, pharmaceutical, and educational clusters. The largest downside in the metro continues to be the impact of government belt-tightening that reduces public services and employment; the operating budget cuts handed down to UNC-Chapel Hill and NCSU for their 2011-2012 fiscal year coming to 17.9 and 15.1 percent, respectively are expected to have significant ripple effects on local economies, university services, public-private partnerships, and research-oriented spinoffs from universities that will be an unmeasureable drag on the area for years to come. However, Lincoln Harris predicts that the region s office market will trend towards positive occupancy gains in the second half of 2011 as local firms expand their space needs and new firms eyeing the market make a commitment to tap into Raleigh-Durham s growth. SUBMARKET MAP ALAMANCE COUNTY 119 49 86 57 HILLSBOROUGH CHAPEL HILL 15 86 501 157 15 751 501 DURHAM 64 APEX 147 0 MORRISVILLE CARY GRANVILLE COUNTY 98 50 RALEIGH 0 1 4 98 WAKE FOREST 1 Wake, Durham, & Orange County Submarket Orange County Submarket Submarket Six Forks Falls of Neuse Submarket Cary Submarket South Durham Submarket RTP/RDU Submarket Submarket North Durham Submarket Submarket Submarket ABOUT LINCOLN HARRIS Lincoln Harris, an affiliate of Lincoln Property Company, is a full-service corporate real estate company focused on development, commercial brokerage, corporate real estate services, retail services, land services, project services, property management and asset management. Based in Charlotte, NC, Lincoln Harris has twenty-three service offices across the country. More information about Lincoln Harris can be found at. CONTACT INFORMATION Sarah Godwin Research Manager 4 714 7637 sgodwin@lincolnharris.com David Connor Senior Vice President 919 645 6968 dconnor@lincolnharris.com Dave Oddo Senior Vice President 919 645 6961 doddo@lincolnharris.com Gary Lyons CCIM, SIOR Vice President 919 645 6973 gary.lyons@lincolnharris.com James Mattox Vice President 919 645 6966 jmattox@lincolnharris.com Ty Thomas Vice President 919 645 6965 ty.thomas@lincolnharris.com Trey Dempsey Vice President 4 714 7653 tdempsey@lincolnharris.com Barry Wagner Associate 919 645 6972 barry.wagner@lincolnharris.com Gary Kramling Associate 919 645 6967 gkramling@lincolnharris.com 2011 Lincoln Harris. All rights reserved. All information provided in Lincoln Harris research reports are from sources deemed reliable, but no warranty or representation is made as to its accuracy thereof and same is submitted subject to errors, omissions, or other conditions. Matt Larson Associate 919 645 6964 mlarson@lincolnharris.com 41 Parklake Avenue, Suite 100 Raleigh NC 27612 office 919 645 6960