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 pause in market activity that took hold at the end of 2011 has spilled over into the first quarter of 2012. With vacancy falling by a tepid 10 basis points quarter-over-quarter to 17.0 percent, net absorption totaled a meager 13,796 square feet during the entire quarter. ECONOMY The Triangle area continues its relatively quick healing process, with a combined March 2012 unemployment rate of 7.5 percent 7.8 percent in the Raleigh MSA and 7.4 percent in the Durham metro that is down nearly 200 basis points from two years ago. This improvement, especially in comparison to other still-struggling areas, has garnered a number of accolades for the region with Raleigh-Cary being deemed the 5th Most Attractive Business Location by KPMG and the 7th Best City for Jobs on Forbes 2012 list. Over the past 12 months, the overall Triangle region has seen modest declines in just two of its employment sectors, manufacturing and government, though the rest of the sectors have been performing strongly; the office-using segment of the economy has added 4,300 new positions in the past year, driven largely by 3,0 new jobs in professional and business services. However, the most robust gains were registered by trade, transportation, and utilities, which added 6,0 new opportunities at a 5.3 percent per annum clip, while education and health services and leisure and hospitality services grew payrolls by 4.2 and 3.4 percent, respectively. Most surprisingly, the mining, logging, and construction sector, made up largely of construction-oriented positions, grew by 1,100 jobs or a 3.1 percent annual pace. Recent job and expansion announcements support this ongoing trend with information firm LexisNexis committing to add 350 jobs in the next five years, technology management group Apptio deciding to grow past the 45 positions expected last fall, medical technology Aerocrine opening their North American headquarters in Morrisville and adding 45 positions, and BASF moving its plant science division to RTP from Germany to add approximately 120 jobs and invest $33 million into a new 80,000 square foot complex on its current campus. OFFICE MARKET 2,0,000 1,950,000 1,500,000 1,050,000 600,000 150,000-300,000-750,000 1Q 2011 12 MONTH FORECAST Market Supply 36,016,4 36,016,4 Under Construction 0 203,713 Under Construct. Preleased % N/A 15% Direct Vacancy 17.2% 16.2% Total Vacancy 18.2% 17.1% Total Net -,626 13,796 YTD Net -,626 13,796 Direct Asking Rent $20.24 $19.90 Class A Direct Asking Rent $21. $21.59 Class B Direct Asking Rent $18.06 $17.92 STATISTICS AND TRENDS 2007 2008 2009 2010 2011 Net absorption New development Overall vacancy 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% HISTORICAL VACANCY AND NET ABSORPTION Overview The pause in market activity that took hold at the end of 2011 has spilled over into the first quarter of 2012. With vacancy falling by a tepid 10 basis points quarter-over-quarter to 17.0 percent, net absorption totaled a meager 13,796 square feet during the entire quarter. Though the market did not take a step back, this level of net move in activity is imperceptible to both landlords and tenants as the Triangle office market struggles to find avenues of growth. On the bright side, the area has experienced net absorption of 367,589 square feet since the beginning of 2011 and had seen vacancy fall for nearly every quarter in the past two years from a high of 19.6 percent in first quarter 2010. Also, though the largest deals signed during the quarter were on average smaller than in previous periods, most were expansionary in nature and will lead to positive occupancy gains in coming quarters. For example, LexisNexis inked a sublease deal for 28,090 square feet at 2000 Regency Parkway already its local hub $25.00 $23.00 $21.00 $19.00 $17.00 $15.00 $13.00 2007 2008 2009 2010 2011 Class A Class B Overall market HISTORICAL DIRECT RENTAL RATES page 1
in order to accommodate its announced growth, while Allscripts also expanded at its current location at Forum V by an additional 22,731 square foot floor. Other tenants that had to relocate to find a space best suited for growth were Thomas, Judy & Tucker that moved down the street from 4505 Falls to 40 Falls to increase its footprint to 22,444 square feet, and Worldwide Clinical Trials, which shifted from 1500 Perimeter to 10 Perimeter to nearly double its space to 26,643 square feet. These moves, and smaller similar activity, highlight an ongoing trend: the systemic movement of tenants away from Class B space and towards Class A product; this preference can be seen clearly even in first quarter 2012 alone, as Class A move ins totaled 25,477 square feet, while Class B buildings had tenants vacate a net of 11,681 square feet. There was a substantial uptick in sublease activity during the quarter that centered around a number of sizeable sublease spaces hitting the market as business leaders, expecting more demand and employment acceleration in 2011 than actually occurred, decided to take steps to mitigate overhead expenses. Nearly 200,000 square feet of new sublease spaces being marketed during the quarter, the majority of which were for contiguous blocks of 20,000 square feet or more; a few notable spaces include Health Decisions 63,113 square foot building at 2510 Meridian Parkway, Celgene Corporation s 26,978 square feet at Nottingham Hall, and a third of Nelson Mullins footprint 25,000 square feet at the PNC Plaza building. Given the swift pace of leasing activity for large blocks of well-appointed Class A spaces in the past six months, these subleases are not likely to dampen direct leasing activity too much, though they may be contributing to the slow drop off in direct asking rental rates. Supply Capitol Broadcasting broke ground on the five-story, 130,000 square foot Diamond View III building during first quarter, which is expected to be move-in ready by mid-2013. Located adjacent to the Durham Performing Arts Center and diagonally from the Durham Bulls Athletic Park, the building will include first floor retail and restaurant space, as well as four full floors of office space. As of the end of first quarter, the project had not inked any tenant commitments, though there are a number of tenants interested in taking space at the building; the American Tobacco Campus Route 1 Downtown Durham 6 Forks Falls of Neuse RTP/RDU Orange County North Durham Cary Downtown Raleigh South Durham has maintained vacancy rates of less than 2.0 percent for nearly a year before construction started on Diamond View III, which is expected to offer new and existing tenants room to grow. All of the metro s building activity is concentrated in Downtown Durham, with the 73,731 square foot The Measurement Building also underway with roughly.0 percent leased to a variety of ground floor office users and to owner The Measurement Group. Though it is located a bit afield from American Tobacco Campus, The Measurement Building is expected to realize more leasing activity before its target October 2012 completion date. Rental rates From an investment perspective, one of the most attractive characteristics of the Triangle office market in the past five years has been its comparatively stable overall direct rental rates. The area s rates tend to move within a fairly narrow range between $19.50 and about $20.75 per square foot with a lot of vacillating between those points. However, throughout 2011 which racked up significant net absorption gains and into the weak activity posted in first quarter 2012, rental rates trended downward from $20.24 per square foot at the beginning of 2011 to $19.90 per square foot one quarter into 2012, indicating a 1.7 percent decline. On a year-over-year basis, both Class A and Class B properties experienced a drop in asking rental rates, falling 1.2 and 0.8 percent, respectively. However, in the past quarter, Class B properties have staunched their losses by climbing 0.3 percent to average $17.92 per square foot, while Class A rates continued to slip 1.1 percent to $21.59 per square foot as prime high-rent properties leased up. During first quarter, only three submarkets Downtown Raleigh, 6 Forks Falls of Neuse, and advanced rental rates. Downtown Durham, now with two buildings under construction, saw the biggest drop in rental rates quarter-over-quarter, falling 5.7 percent to $20.35 per square foot as two Class B buildings repriced space downward. SUBMARKET ANALYSIS While both net absorption and leasing activity were muted this quarter, the three north Raleigh submarkets Route 1, 6 Forks Falls of Neuse, and all enjoyed positive net absorption ranging from 10,227 square feet in 6 Forks to a robust 38,291 square feet in Route 1 due to a burst in Highwoods leasing. Surprisingly, Downtown Durham, which 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 0% West Raleigh -50,000-25,000 0 25,000 50,000 Net absorption SUBMARKET-BY-SUBMARKET NET ABSORPTION 1Q 2011 SUBMARKET-BY-SUBMARKET VACANCY TRENDS page 2
is waiting for two new office buildings to complete, racked up 17,467 square feet of net absorption despite American Tobacco Campus lack of available space as tenants instead filled Class B properties such as Legacy Tower and the Rogers Alley Building. Accordingly, Downtown Durham s vacancy rate fell basis points since year-end 2011 to 4.9 percent, which is by far the lowest submarket vacancy rate in the metro. Downtown Raleigh, after mottled leasing activity over the past year, settled on 8.2 percent vacancy, while the most healthy suburban submarket is now Cary with 12.2 percent vacancy. The introduction of several sublease spaces on the market during first quarter pushed West Raleigh s vacancy up 1.1 percentage points quarter-over-quarter to 13.1 percent and knocked it out of its long-held position as the strongest suburban office area. Orange County 6 Forks Falls of Neuse Downtown Raleigh Downtown Durham West Raleigh South Durham Cary RTP/RDU Route 1 North Durham $10.00 $13.00 $16.00 $19.00 $22.00 $25.00 $28.00 Direct asking rate SUBMARKET-BY-SUBMARKET DIRECT ASKING RENTAL RATES COMPLETED LEASE TRANSACTIONS TENANT ADDRESS BUILDING SUBMARKET SF LexisNexis (sublease) 2000 Regency Parkway Regency Park Cary 28,090 Worldwide Clinical Trials 10 Perimeter Park Drive 10 Perimeter Park Drive RTP/RDU 26,643 Allscripts 37 Six Forks Road Forum V 6 Forks Falls of Neuse 22,731 Thomas, Judy & Tucker 40 Falls of Neuse Road 40 Falls 6 Forks Falls of Neuse 22,444 Zenph 2000 Perimeter Park Drive 2000 Perimeter Park Drive RTP/RDU 8,7 Veritas 615 Douglas Street Hock Plaza II South Durham 7,800 Vision Services Group 38 Mayfair Street South Square Corporate Center II South Durham 6,493 RackWise 20 WestChase Boulevard WestChase One West Raleigh 5,772 INVESTMENT SALES TRANSACTIONS BUILDING/ADDRESS SF SALE PRICE SALE PRICE/SF BUYER 1616 Millbrook Rd, 6501 Weston Pkwy, 50 & 5565 Centerview Dr, 801 Jones Franklin Rd, 5520 Capital Center Dr Carolina Place 2626 Glenwood Avenue Edinburgh Center 113-125 Edinburgh Drive South 427,000 $43,950,000 $103 Archon Group 99,974 $15,600,000 $156 New Boston Fund 115,314 $7,000,000 $61 Grubb Properties Many of the recent investment sales transactions in the metro have been predicated on the idea that it remains cheaper and less risky to buy than to build in order to capture the positive momentum of the Triangle s growing population and resilient office fundamentals. With recent deals completed by both local players, such as Grubb Properties, as well as well-known institutional investors such as Archon Group, a broad swath of investors are interested in committing to the Triangle area and believe in its upside potential over time. The six-property Archon portfolio purchase is especially noteworthy because of the range of locations and asset qualities encompassed in the transaction, effectively setting a price floor for moderately leased Class A-/B+ buildings in the area s suburban corridors. Additionally, the investments by Archon Group and New Boston Fund both represent re-entry plays back into the Triangle market after several years of activity elsewhere, indicating renewed confidence in the area s long-term growth relative to other metros. page 3
SPACE STATISTICS URBAN Inventory Overall Vacant SF Overall Vacancy % Total Net (% of inventory) Overall Direct Asking Rent (PSF) YTD Completions Under Construction DOWNTOWN DURHAM DOWNTOWN RALEIGH 2,650,611 130,391 4.9% 17,467 42,092 1.6% $20.35 0 203,713 2,261,558 184,506 8.2% -11,3 25,460 1.1% $21.68 0 0 URBAN TOTALS 4,912,169 314,897 6.4% 5,764 67,552 1.4% $21.21 0 203,713 SUBURBAN Inventory Overall Vacant SF Overall Vacancy % Total Net (% of inventory) Overall Direct Asking Rent (PSF) YTD Completions Under Construction 6 FORKS FALLS OF NEUSE 4,242,342 696,231 16.4% 10,227 225,275 5.3% $21.89 0 0 CARY 4,129,756 505,255 12.2% -4,098 97,619 2.4% $20.09 0 0 GLENWOOD/ CREEDMOOR 1,578,222 253,7 16.1% 11,994 10,158 0.6% $20.59 0 0 NORTH DURHAM 520,872 2,043.7% 0 10,360 2.0% $16.24 0 0 ORANGE COUNTY 1,334,698 215,301 16.1% 7,615 20,233 1.5% $25.48 0 0 ROUTE 1 1,646,982 245,503 14.9% 38,291 43,298 2.6% $17.05 0 0 RTP/RDU 9,631,293 2,327,412 24.2% 8,930-94,171-1.0% $18.93 0 0 SOUTH DURHAM 2,668,620 598,787 22.4% -20,600 68,5 2.6% $20.13 0 0 WEST RALEIGH 5,351,450 686,5 12.8% -44,327-26,964-0.5% $20.31 0 0 SUBURBAN TOTALS 31,104,235 5,813,817 18.7% 8,032 3,663 1.1% $19.83 0 0 TOTALS 36,016,4 6,128,714 17.0% 13,796 422,215 1.2% $19.90 0 203,713 LARGEST AVAILABLE CONTIGUOUS SPACES BUILDING ADDRESS SUBMARKET SF Available 8001 Development Drive 8001 Development Drive RTP/RDU 262,000 01 Development Drive 01 Development Drive RTP/RDU 205,310 800 Park Drive 800 Park Drive RTP/RDU 1,999 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 0 Park Drive 0 Park Drive RTP/RDU 120,473 RDU Center III 2121 RDU Center Drive RTP/RDU 114,518 Pinnacle Park II 41 Silicon Drive RTP/RDU 80,264 Pinnacle Park III 47 Silicon Drive RTP/RDU 80,260 page 4
OFFICE FORECAST Historically, the Triangle area has experienced weakness and negative net absorption during the first quarter of years that, on the whole, have turned out to deliver strong leasing gains. Lincoln Harris suspects that will be the case in 2012 as well, with energy gathering as the year goes on and companies wrap their arms around the current demand picture. With the lukewarm leasing activity signed during the first quarter providing a small cushion for net absorption, the Triangle office market is anticipated to achieve positive occupancy gains during the rest of the year. In either June or July, there should be more clarity about the viability of the Duke Energy merger with Progress Energy that will hopefully give Downtown Raleigh landlords and tenants a better sense of the future. Additionally, details of the Research Triangle Park s revamped Master Plan should be disseminated during 2012 and provide guidance for a more modern utilization of the Park s vacant land to welcome more entrepreneurial tenants, allow for more amenities, and increase the allowable density of developments in order to attract a new generation and type of company to the area. SUBMARKET MAP 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 119 ALAMANCE COUNTY 49 86 57 HILLSBOROUGH CHAPEL HILL 15 86 501 157 15 751 501 DURHAM 147 0 MORRISVILLE GRANVILLE COUNTY 98 50 0 RALEIGH 98 1 WAKE FOREST 1 Wake, Durham, & Orange County Route 1 Submarket Orange County Submarket Downtown Durham Submarket Six Forks Falls of Neuse Submarket Cary Submarket South Durham Submarket RTP/RDU Submarket Downtown Raleigh Submarket Sarah Godwin Research Manager 4 714 7637 sarah.godwin@lincolnharris.com David Connor Senior Vice President 919 645 6968 dconnor@lincolnharris.com Dave Oddo Senior Vice President 919 645 6961 dave.oddo@lincolnharris.com Gary Lyons CCIM, SIOR Vice President 919 645 6973 gary.lyons@lincolnharris.com 64 APEX CARY 4 North Durham Submarket West Raleigh Submarket Submarket 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 gary.kramling@lincolnharris.com 2011-2012 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 matt.larson@lincolnharris.com 30 Wade Park Boulevard, Suite 300 Raleigh NC 27607 office 919 8 80