25th Annual Triangle Commercial Real Estate Conference

RALEIGH, NC – January 14, 2010 – There’s both good news and bad news about the region's economy for the year ahead. But the best news? Cooperative action by local players can leverage the Triangle's fundamental strengths and tip the scales toward a faster recovery. That was the message to more than 1,800 business and community leaders who gathered at Raleigh's RBC Center Wednesday for the 25th Annual Triangle Commercial Real Estate Conference hosted by NAI Carolantic Realty. The conference is considered the authoritative ‘state of the market’ report on the Triangle’s real estate sector and an accurate bellwether on the health of the region's overall economy.

Steve Stroud, Chairman of NAI Carolantic, told attendees that one way to leverage the region's strengths would be to form a metropolitan agency to plan for infrastructure, water, sewer and public services, and to better manage economic development. Stroud also urged preferred funding for the state's flagship universities to maintain their vital role as economic generators, pointing to their direct role in the creation of such locally based, global billion-dollar companies as SAS and Quintiles. Finally, he suggested the State of North Carolina make pension fund dollars and other funds available for economic development loans through banks to help jump start the economy in the state's local communities. The money would be secure since the banks are governed by the state banking agency and rules, noted Stroud.

Jimmy Barnes, President of NAI Carolantic Realty introduced invited guest speaker Dr. Peter Linneman, NAI Global Economist and the Albert Sussman Professor of Real Estate, Finance, and Public Policy at the Wharton School of Business, the University of Pennsylvania. Dr. Linneman is widely recognized as one of the leading strategic thinkers in the real estate industry. Outlining his view of the national economy, Linneman stated, “There is no doubt that capital markets are rebounding, as witnessed by the nearly 65% bounce in the stock market, and the greatly narrowed spreads on LIBOR, high-grade corporate debt, and more recently, junk bonds. The process of price discovery always occurs first in the public markets, where assets are freely and frequently exchanged between third parties, with private markets lagging 12-18 months. As a result, we expect private asset pricing, including that of commercial real estate, to begin rebounding in the second and third quarters of 2010.”

NAI Carolantic President Jimmy Barnes reviewed the past year’s commercial real estate landscape and offered Carolantic’s forecast for 2010. “As the tailspin ends for the residential markets, our commercial real estate market continues to suffer with loan write-offs, decreasing values and reductions in cash flow. The weak economy and slowly recovering job market will see the commercial markets suffer on into 2010,” said Barnes. “But as we know, there’s not a better place to be than the Triangle area. Our adaptability has been a proven reason we always rebound before other areas.”

In a market of over 237 million square feet of office, multipurpose and shopping center space, nearly 31 million square feet remained vacant at year-end. “Vacancy rose in the office and shopping center sector with the multipurpose sector maintaining at 16%. Although leasing absorption will continue to be minimal, with the reduction in construction, (the lowest number of starts in the last 15 years), we expect vacancy to remain stable. There could be some reduction in vacancies in some submarkets if a few big deals that are circling ... land here,” said Barnes.
Barnes noted investment opportunities still remain available, however financing will be challenging and buyers and sellers will continue to struggle to determine true value. Any new development is dead until 2011, according to Barnes.

NAI Carolantic opened the conference with a flashback video of their first conference held in January, 1985. “Twenty-five years ago in the Triangle region, we were on the verge of a growth explosion. Though we had actually been doing our own market research for several years prior to our first conference, there was no public statistical information available in 1985. We realized how important it was for business and government leaders to understand exactly what was happening in our area. Our region was growing at a staggering rate of 30-50%,” said Stroud.

As in past conferences now spanning over two decades, Stroud commented that NAI Carolantic has taken an active role in the community for more than 38 years. “Nothing else we have done has been more important in helping us understand the history of our region, and thus avoid repeating the mistakes of the past,” said Stroud.

In closing the conference, Stroud noted, “Real estate is a non-renewable, finite resource. There is only so much, and no more. While it is possible to get ahead of ourselves, overbuild and overextend, in fact, demand will rapidly catch up with supply. While real estate is finite, human aspirations are endlessly renewable. Human energy is boundless. Human dreams of a better life never stop coming. That is why real estate will always be the best long-term investment you can make, and in the longer-term will always be recession-proof. Because what you are actually investing in is the boundless energy of the entrepreneur. You are investing in what is never in shambles and always on the rise—and that’s the best of us.”

2010 Forecast and Category Summaries:
Highlights of Mr. Barnes’s commercial real estate presentation:

2010 Investor Outlook for Land:

• Difficult time if you are a seller
  
• Up to 35-40% loss in value since the high of 2007
  
• Tremendous buying opportunities, especially for cash buyers in 2010-2011
  
• Land prices remain stagnate into 2011 and 2012

2010 Investor Outlook for Income Property:

• How do we finance this stuff?
  
• As lenders continue to be tough
  
• No room for shortcuts for the savvy buyer
  
• Landlords worry about tenants, and tenants worry about landlords
  
• Cap rates continue an upward trend

Summary: NAI Carolantic’s research showed a rise in area-wide vacancy rates in the office category from 13% in 2008 to 14% in 2009. Shopping center vacancy rose from 4% overall in 2008 to 6% in 2009. Multipurpose remained at 16% for the second year in a row. This category includes warehouse, industrial and flex space. All sectors have minimal construction underway with shopping centers having the most at over half million square feet.

Absorption slowed in 2009 with the office category dropping from 2% in 2008 to 1% in 2009. The multipurpose category saw positive absorption from -2% in 2008 to 1% in 2009. The retail/shopping center category also dropped from 3% absorption in 2008 to 2% in 2009.

Multipurpose Highlights: Since 2001, the Research Triangle submarket, typically the most active corridor of the Triangle, has been hard hit with vacancies in the 20-30% range. After five straight years of falling vacancy in this submarket, 2009 saw a slight rise to 12% up from 11% in 2008. Absorption dropped from -1% to -2% for 2009. Over 300,000 square feet were added to this submarket during 2009 with minimal construction planned for 2010. Another challenge in this submarket is the approximately one million square feet of sublease space available. It is clearly a tenant’s market.

Office Market: As in 2008, the Research Triangle submarket had the highest office vacancy at 19% or approximately 3 million square feet for 2009. Cary followed with 16% vacancy, up from 15% in 2008. Suburban Raleigh had positive 2% absorption during 2009 despite the almost one million square feet added during the year. In total, over 1.4 million square feet were added to the office market in 2009 with an additional one million under construction for 2010. Almost 400,000 square feet of this new construction is speculative.

Shopping Centers: Over 1.4 million square feet of shopping center space was constructed during 2009 with the majority being in North Raleigh. Less than 600,000 square feet is expected to come on line during 2010 with minimal speculative construction. Over one-half of the new construction is slated for the Cary submarket. East Raleigh had the highest vacancy with 12% followed by Cary. Absorption was strongest in South Raleigh at 6%. We expect to continue to see stores vacating underperforming centers, and anticipate tighter credit and consumer debt will hamper retail sales in 2010.

Single-Family Housing: The NAI Carolantic’s Housing Momentum Index considers the annual new and pre-owned sales volume, subtracting year-end Multiple Listing Service inventory to track sales momentum. The housing market continued to decline in 2009 with home sales dropping to its lowest point since 1995. The Momentum Index has not reported this drop in activity since the early ‘90’s. The residential market will be slow to recover due to record unemployment and the forecast for minimal job growth for 2010.

Apartment Market: Due to an increase in apartment construction, vacancy rose from 8.7% in 2008 to 9.5% in 2009, the highest level since 2002 when the rate was 11.5%. Over 1,800 apartments were added in 2009 with another 2,400 units expected to be built during 2010. Apartments will benefit from many that have to rent as they wait to sell their homes in other cities hit hard by the credit crunch. Barnes predicted that despite the new construction, vacancy should remain under 10%. Special thanks were given to the Triangle Apartment Association and Karnes Research Company for providing information on the apartment market.

Hotel Market: According to Dennis Edwards, President and CEO of the Greater Raleigh Convention and Visitors Bureau, there has been an increased interest in building new hotels in the Raleigh area, even in light of the current economy. Hotel occupancy for 2009 is expected to be around 57.5%, down slightly from 59% in 2008, and the average daily rate is expected to drop to $81.42 from a high of $86.83 in 2008. During 2010, nine hotels are scheduled to be built in Wake and Durham counties adding approximately 1,194 rooms.

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NAI Carolantic is the Raleigh/Research Triangle area’s leading commercial real estate firm with sixteen brokers, a full-service property management division, as well as an experienced marketing and research division. Established in 1972, NAI Carolantic is a member firm of NAI, the leading international provider of commercial real estate services and solutions. NAI has over 5,000 real estate professionals in over 325 markets worldwide serving corporate, institutional and government clients through its offices strategically located in major, secondary and tertiary markets. NAI is the leader in real estate technology and provides a sophisticated online transaction and portfolio management system to manage assignments and existing locations.