August 5, 2016
The Triangle’s commercial real estate capital markets logged more than $1 billion in major property acquisition deals in the first quarter 2016, a 56 percent increase compared to the year prior.
Let that sink in.
This is truly a booming market. What’s driving this demand for CRE in the Raleigh-Durham market? Today we’ll discuss some of the factors behind this amazing level of activity, and explore what it may mean for the Triangle’s commercial real estate market moving forward.
1. International Investment
Capital from foreign investors accounted for around 20% of all CRE acquisitions in the U.S. last year. As prices have risen in the gateway cities, international investors are showing increased interest in secondary markets.
For example, last year the sovereign wealth fund of the government of Abu Dhabi paid nearly $103 million for 2 hotels in the area. And the prices being commanded in the Triangle are not bargain rates. The $79.91 million price tag for the Renaissance Raleigh North Hills translates to nearly $350,000 a room, and that’s comparable to what some hotel investors pay in major U.S. urban markets like New York or Chicago.
2. Demand Across Sectors
The Triangle’s heavy CRE activity is not limited to one particular sector, but runs the gamut from multifamily to industrial. In the first quarter of this year, of the 23 deals totaling at least $7 million, 12 were for apartments or mixed-use communities, 4 for industrial properties, 4 for office and 3 were for retail. And investors from out of state completed the majority of these deals.
3. Rapid Rent Growth
Rent rates in the Raleigh-Durham area are growing at a rate of around 5.3% annually. Whether this drives greater multifamily development remains to be seen, but demand is tremendous for space, and inventory is exceedingly low across the region while population growth continues.
These factors all contribute to the Triangle’s attractiveness to outside investors as well as demand from within. The infusion of outside capital boosts the value of local transactions, increasing competition and encouraging new development.
4. Less New Activity for Office Properties
While transactions in the office sector have been brisk, most of them have involved local companies relocating within the area, and there’s very little new construction in the office sector. A need has been identified to attract more new companies to the area. Job growth has not been as strong here as in some other areas, such as Austin or San Francisco.
Increased investment in Triangle-area CRE isn’t necessarily translating to new employers moving into the region. It does seem to be signaling a move toward a more cosmopolitan identity for the area, which observers suggest will lead to a new phase of development in the downtown areas. Higher land prices may usher in higher density development, taller buildings, and a new big-city environment for Raleigh-Durham.
The influx of outside investment is already affecting prices in urban areas, and a more diverse base of ownership in Triangle properties will expose the area to attention from a larger range of business interests. This could result in the influx of new companies needed to boost area job growth and jump-start development in the office sector.