In this “Follow the Numbers” series, sponsored by CBRE Raleigh, WRAL TechWire will investigate local and national commercial real estate reports to better understand growth, trends, and outside interest in the Triangle and surrounding areas.
The Triangle’s commercial office space market ended 2023 on a stronger than expected note, showing nearly 99,000 sq.-ft. of positive absorption in the fourth quarter. But conditions remain soft as employers re-consider utilization, new office buildings reach completion and the recruitment pipeline for office operations slows after its pre-COVID fever pitch.
Office absorption for the year was negative to the tune of 117,630 sq.-ft., according to the most recent data from CBRE, the leading global commercial real estate services firm. CBRE’s Q4 2023 Office Report indicates that direct vacancy, which does not include subleases, ended the year at 15 percent, up 70 basis points (or seven-tenths of a percentage point) for the quarter and 160 basis points year-over-year (or 1.6 percentage points). Total vacancy, which includes subleases, ended 2023 at 19 percent, also higher on both a quarterly and annual basis. CBRE’s regional analysis includes properties in Durham, Orange and Wake counties.
Elizabeth Gates, Raleigh-based senior research analyst at CBRE, says sublease absorption surprised many. “Sublease availability is coming down faster than we anticipated,” says Gates. Master lease expirations and leasing activity converged to bring down sublease availability from 4.0 million sq.-ft. in Q3 to 3.5 million sq.-ft. in Q4. “There was an uptick in leasing activity in the fourth quarter,” Gates says. The region saw more office transactions during the final quarter than during any other time in 2023 thanks in part to moves by several state government agencies.
The N.C. Department of Administration leased 25,000 sq.-ft. of private space at 333 Fayetteville Street, while the N.C. Department of Health and Human Services subleased just over 201,000 sq.-ft. at the Charles Sanders Center in Research Triangle Park. The N.C. Department of Insurance vacated space in the state’s Albemarle Building in favor of 124,847 sq.-ft. at 3200 Beechleaf Court near I-40 and Atlantic Avenue in Raleigh, a move agency officials unveiled last August.
Last year’s final quarter also witnessed the entry of several new Class A properties onto the region’s office market. In northwest Raleigh, Highwoods Properties delivered GlenLake Three, a 205,000-sq.-ft. property near Crabtree Valley Mall. In the fast-moving Midtown Raleigh submarket, Kane Realty completed construction of One North Hills, a 264,632-sq.-ft office tower with easy access to residential, fitness and entertainment amenities.
“Midtown is seeing a lot of activity,” says Jason High, an executive vice president at CBRE who works closely with clients on advisory and transaction services. High says it’s part of an overall “flight to quality” driving tenants to Class A office spaces that can help draw and retain quality employees. “Midtown offers a high concentration of amenities these users are focusing on,” he says. “I don’t see that trend changing moving forward.”
At $47.35 per square-foot, the asking rates for Midtown Class A office space is the region’s highest, CBRE data show, well above the $40.35 average for urban office space in the Triangle. High says asking rates have remained firm in the Triangle due to rising concessions from landlords. “When you look at net-effective rates, they’re coming down.”
Meanwhile, activity for relocation and expansion of office operations has slowed to a trickle. Dave Efird, an attorney and site-selection consultant with Womble Bond Dickinson, says industrial and manufacturing projects currently dominate his work on behalf of clients exploring new locations. “There’s not a strong pipeline right now for office deals,” says Efird, who works out of Womble Bond’s offices in downtown Raleigh and RTP. “It’s definitely down.”
How are tenants responding to the softer market? Some are taking advantage of the opportunity to upgrade. “I am seeing companies changing their space models – not looking to grow square-footage but moving to nicer space,” according to Efird. He believes larger office deals will eventually return. In the meantime, his site-selection work is busy with activity in EV battery component manufacturing and life sciences. “We do have a lot of growth still in this area, but we’re not seeing much in the way of office deals,” he says.
CBRE’s Gates believes the office space market will likely look very different a year from now as supply and demand find a new equilibrium and employers get a firmer grip on utilization needs. “The pipeline (of newly constructed properties) is emptying, though it’s going to take some time for the market to work through that new availability,” she explains, citing the years-long planning process that occurs prior to construction begins. Gates likens the situation to “turning around a battleship.”
But the Triangle’s surging popularity as a global business destination makes the long-term outlook encouraging. The Triangle continues to score high on technology industry listings, for example, gathering a #7 North American rank in CBRE’s Tech-30 2023 report.
“Because we’re such a rapidly growing market, there will be investors looking for opportunities to acquire properties,” Gates says. “We’ll see more sales activity in 2024 because of that.” Older, poorly located Class B and Class C office properties could sell at significantly discounted prices. “Buildings without ready access to amenities are functionally obsolete in terms of how tenants today want to work,” she explains. Some office structures will be razed to make way for redevelopment opportunities in what could essentially be land deals, Gates believes.
This article was written for our sponsor sponsor, CBRE
