Editor’s Note: This WRAL TechWire’s Commercial Real Estate special report “Follow the Numbers” is supported by commercial real estate firm CBRE Raleigh.


RALEIGH – Judging by the whir of construction cranes above Raleigh’s skyline, it’s hard to believe the region’s commercial real estate market is anything other than robust. But lingering beneath the surface are numbers that suggest a weakening – in the short-term, at least – is looming in one key property segment.

Data gathered by CBRE|Raleigh for the first quarter of 2023 finds slowing demand for office space, with a rise in vacancy rates, a spike in sublease availability and only modest increases in asking rents for Class A properties. In the Triangle market – which includes Durham, Orange and Wake counties – total vacancy increased to 17.5 percent, 300 basis points (or three percentage points) above prior-year levels. The figure includes both direct vacancy and vacant sublease space.

The numbers illustrate a shift in the balance of power between landlords and tenants, according to Elizabeth Gates, senior research analyst at CBRE|Raleigh.

“When you’re looking at total vacancy, once you start getting above 14 percent, that market is getting out of balance for building owners and is creating opportunities for tenants,” Gates explains. She cites “a perfect storm” for office space, which is facing both cyclical economic uncertainties as well as a “generational” change related to the slow return of employees to the office after three years at home during the pandemic. “The persistence of hybrid and remote work is starting to show up in the data,” Gates says.

CBRE graphic

A concerning trend

CBRE|Raleigh is a joint venture between local principals and Dallas-based CBRE Group, Inc. (NYSE: CBRE), the world’s largest commercial real estate services and investment firm measured by revenue. CBRE|Raleigh is the leading commercial real estate services provider in the Raleigh-Durham market, providing portfolio management, sales and leasing service, consulting expertise and other services.

CBRE|Raleigh’s Q1 data also point to a concerning trend in absorption rates for office space. Their analysis found more than 212,000 square-feet of direct negative absorption in the first quarter of the year – meaning more available office space came onto the market than was consumed. The market for sublet space was even more asymmetrical, with just over 566,000 squarefeet of negative absorption. While vacancy rates offer an understandable snapshot of utilization, absorption is a more dynamic indicator that illustrates the net rate by which available space is being “taken down” from the market during a given timeframe. Absorption serves as a critical input into pro forma projections of cash flow, and it is examined closely by developers, lenders and other decision-makers in corporate real estate.

“Negative absorption does happen, but it is unusual to see this level of negative absorption in such a short period of time,” Gates says. The situation is somewhat comparable to the combination of secular shifts that occurred in the early 2000s when multiple shocks, including the dot-com bust and the 9/11 terror attacks, forced significant changes in the business world in general and the technology industry in particular. “It’s not completely apples-to-apples, but it is more similar than the Great Recession was later that decade,” she explains. “The office market weathered that storm reasonably well, followed by a prolonged period of expansion and landlord-favorable conditions.”

The softening was also reflected in the rental rates landlords sought in the first quarter of the year. Asking rates for Class A office space – the most modern properties equipped with sought-after amenities like 24/7 security, reserved parking and the latest digital technologies – rose just .8 percent year-over-year, CBRE|Raleigh found. That’s compared to increases of 5.4 percent, 4.6 percent and 6.3 percent during the first quarters of the previous three years, respectively.

Amid both higher interest rates and uneven results in coaxing employees back to the workplace, investors have sensed weakness in the national market for office space. Performance of the leading office space real estate investment trusts (REITs) during the past year, for example, foretold the turbulence. As of May 24, the share price of Raleigh-based Highwoods Properties (NYSE: HIW) is down 46 percent from a year ago. The stock of Boston Properties (NYSE: BXP), whose portfolio includes “premiere” office towers in major U.S. markets like Boston, New York City, Los Angeles and Seattle, has declined a whopping 55 percent since last May.

CBRE graphic

‘Some green shoots’

Tom Barkin, president of the Federal Reserve Bank of Richmond, affirmed during a May 16 interview with Bloomberg that he is watching commercial real estate closely for evidence of how the Fed’s run of interest rate hikes is impacting activity, occupancy and valuations. “Commercial real estate is a big sector,” Barkin said. “If you’re in industrial or you’re in retail or you’re in multi-family [residential], I think folks there feel the normal everyday pressures but nothing out of the ordinary.” The concerns he hears regard downtown office space, particularly Class B and Class C properties in major markets. “It’s certainly a vulnerability I’m focusing on,” says Barkin, who, as a member of the Federal Open Market Committee (FOMC), influences the nation’s interest-rate policy.

CBRE|Raleigh’s Gates says there is reason for optimism moving forward.

“There are some green shoots,” she says, primarily in the movement of the sublease availability. In the current quarter, “some sublease deals are getting signed or being pulled off the market,” Gates says. Subleasing often gives tenants a chance to move into properties quickly at lower up-front costs.  In submarkets such as Downtown Raleigh and Midtown Raleigh, recently constructed Class A buildings with popular amenities either on site or within walking distance, in fact, are enjoying fairly strong demand. “They’re actually performing quite well,” she says. Companies downsizing office footprints can justify spending more on a cost-per-square-footage basis, Gates adds.

In the Triangle, a softening market for office space doesn’t portend larger concerns about the technology industry, an economic mainstay here. Mike Walden, William Neal Reynolds Distinguished Professor Emeritus of Economics at N.C. State University, remains “bullish” about the long-term outlook for the region’s tech sector. “Tech will continue to be a major driving force in the economy with new innovations and products,” Walden says. “The current downsizing in the tech sector is a temporary situation resulting from the industry’s rapid expansion during the pandemic and concerns about a dip in the overall economy.”

Site-selection consultants report robust activity among companies considering North Carolina for new investments – just not the run of marquee office and headquarters deals the state saw just a few years ago with names like MetLife, Advance Auto Parts and Pendo moving hundreds of administrative, managerial and tech jobs at a clip. “I’m as busy as ever,” says Chris Kouri, a location advisor and attorney at Maynard Nexsen’s Charlotte office. Kouri’s clients are seeking office space as part of larger relocation and expansion initiatives that also involve manufacturing, assembly and distribution operations. “The interest in office space I’m seeing right now is largely a component of other client projects,” he says.

Kouri, whose clients include fintech companies, says there is a noticeable shift in the design of Class A office space that may relate to tenants’ desire to lure talent back to the workplace from the home offices they grew used to during the pandemic. “It’s really striking,” Kouri says of the amenity-rich office buildings that now include cafes, recreational areas and open-air workspaces designed to induce collaboration. Older buildings with fewer amenities “will have to catch up,” he predicts.

With many workers preferring to work from home, banks, tech firms and headquarters operations continue to struggle with “return to office” policies, Kouri says. A new paradigm is emerging that likely will involve a hybrid workplace that includes mandatory time at the office and optional work from home. Until employers get a firmer grip on the future, few are willing to place big bets on office properties. “Corporate America is tapping the brakes on investment in commercial real estate until it figures out a strategy for bringing people back in,” Kouri says. “This has been a theme for over a year now.”

Part Two: Q1 Industrial MarketView Report


This editorial package was produced with funding support from CBRE Raleigh.  WRAL TechWire retains full editorial control of all content.