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NAI Carolantic Realty on Target with Commercial Real Estate Forecasts

RALEIGH, N.C. (January 18, 2012) -- At last year’s conference, NAI Carolantic predicted that 2011 would be a painfully slow recovery year, but that we would see bottom.  They were right on target once again.  We finished the year with a drop in vacancy in the multipurpose and office sectors and remained the same in retail.  We also had increases in absorption in all but two submarkets.  That was the message to more than 1,700 business and community leaders who gathered at Raleigh's RBC Center Wednesday for the 27th 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, SIOR, Chairman of NAI Carolantic, welcomed attendees noting NAI Carolantic was celebrating “Forty Years of Forward Thinking.”  He also said he was glad to be there given a tractor accident three months earlier.  He thanked family, his team at NAI Carolantic and friends for their numerous acts of kindness during his recovery.

Following Stroud’s comments, NAI Carolantic President Jimmy Barnes, SIOR took center stage to review the past year’s commercial real estate landscape and offered Carolantic’s forecast for 2012.

“Remember, leasing is big business, as it has been reported there is over a trillion dollars nationally in lease obligations for public companies alone.  We are finally making headway, but nowhere near where we were in 2007.  The national capital markets are affecting business here in the Triangle. The primary stories are lots of money available but also billions of dollars of maturing debt.  Local and community banks are trying to work with their customers, but vacancies and declining values are big obstacles. In addition, a lack of institutional grade, Class A product, low interest rates, and an abundant money supply have driven up activity and consequently prices.  The Triangle has benefited from this activity with large transactions in the apartment market ($850 million) as well as the office market.  There is still a lot of political unrest, but we are seeing a national recovery, and our local real estate market is as active as we have seen it over the last 36 months.  Nothing robust, but we are optimistic moving into 2012”, said Barnes. 

NAI Carolantic’s survey and analysis showed that, in a market of almost 240 million square feet of office, multipurpose and shopping center space, nearly 32 million square feet remained vacant at year-end.  “Vacancy decreased slightly in the office and multipurpose sectors, and the shopping center market remained at 6% for the third year in a row.  Absorption improved slightly in 2011 and we expect minimal construction in the first quarter of 2012.  The apartment market continues to be on fire with the vacancy rate the lowest in the past decade,” said Barnes.

Following Barnes’s presentation, he introduced invited guest speaker Dr. Peter Linneman, NAI Global economist, CEO of the American Land Funds as well as the founding principal of Linneman Associates.  He is Professor Emeritus of Real Estate at the Wharton School of Business, the University of Pennsylvania where he served for 32 years.  He holds both Masters and Doctorate degrees in Economics from the University of Chicago.  The third edition of his book, Real Estate Finance and Investments:  Risks and Opportunities, has been adopted at over 80 leading universities.  His quarterly report called The Linneman Letter forecasts employment growth and examines how macroeconomic factors influence real estate markets. 

Linneman provided insight into the national economy's recovery process, as well as offered his outlook for 2012.  Outlining his view of the national and state economy, Dr. Linneman stated, “The Fed cannot be blamed for failing to foresee that liquidity would go dollar-for-dollar to excess reserves rather than loans.  This situation is historically unprecedented, leaving observers of all political stripes at a loss for a coherent explanation.  The lack of rules meant that businesses were uncertain about the future and how the game of Old Maid would end, and chose to be very conservative.  As a result, banks kept their capital in reserve.  And when faced with an attack on “millionaires and billionaires,” the owners of small firms retrenched rather than borrow to expand.  The result has been a lack of lending and a lack of strong job growth.”

Returning to the stage, Jimmy Barnes concluded the Conference by inviting everyone to attend the reception to celebrate NAI Carolantic’s Fortieth Anniversary.
               
2012 Forecast and Category Summaries:
Highlights of Mr. Barnes’s commercial real estate presentation:

2012 Investor Outlook for Land:
•             Location is still king, just so much inventory
•             Slowdown in foreclosed properties by year-end
•             This allows some looks at other properties
•             Financing still challenging
•             Cash continues to create opportunities
•             Best time to buy since the 70’s

2012 Investor Outlook for Income Property:
•             Investment sales activity up another 40%
•             Pension funds, insurance companies, public funds and particularly REIT’s will continue to be active
•             These folks will buy properties somewhere. They want the fees and have a mandate to invest funds
•             Private investors continue to push cap rates upward.  They want strong cash flows
•             Institutional investors focusing on global and primary markets, but Triangle area is on every watch list

Summary:  NAI Carolantic’s research showed a decline in area-wide vacancy rates in the office category from 17% in 2010 to 16% in 2011.  Shopping center vacancy remained at 6% for the third year in a row.  The multipurpose category also dropped slightly from 17% to 16% in 2011.  This category includes warehouse, industrial and flex space.  The office category expects the least amount of new construction since 1993.  The multipurpose construction level is up slightly from 2010, but still low as compared to a high of 3.62 million during 1997.  Shopping centers had the most new construction underway with just under one million square feet to be built primarily in the Cary/Morrisville/Holly Springs submarket.

Absorption improved in all categories during 2011.  The office market went from -1% in 2010 to 2% year-end.  The multipurpose category went from 0% in 2010 to 1% overall, and the shopping center category improved 1% over 2010 to end the year at 2%.

Multipurpose:  The Durham/Chapel Hill submarket had the highest vacancy for warehouse/industrial space during 2011 at 21%.  South Raleigh and Downtown Raleigh followed at 18% and 17% respectively.  Despite the high vacancies, no submarket had negative absorption.  Once again, the RTP submarket had the most sublease space at just over half million square feet.  With approximately 300,000 square feet of new construction underway, we expect 2012 to be another year of positive absorption, and Landlords will consider increasing lease rates.

Office:  As in the past several years, the Research Triangle submarket had the highest office vacancy at 22% in 2011, which equates to approximately 3.8 million square feet.  Suburban Raleigh followed with 15% vacancy, though down from 17% in 2010.  The Suburban Durham/Chapel Hill area had the strongest absorption at 4% or 473,000 square feet.  With minimal new construction, any substantial demand for new, speculative property is 2-3 years out.  Rental rates should hit bottom and Landlords will begin testing the market with higher rates in 2012.

Shopping Centers:  Once again, the East and South Raleigh submarkets had the highest shopping center vacancy during 2011, both with 9%.  However, each of these submarkets also experienced a slight improvement in absorption over 2010.  The Cary/Morrisville/Holly Springs areas expect to have the most new construction in 2012 with just over 900,000sf.  Absorption was strongest in the Cary submarket at 7%.  Though we expect the retail sales momentum will be tough to sustain in 2012, grocery-anchored developers are now revisiting the market, and are considering sites they viewed three years ago.

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 had a slight decline in activity in 2011 with home sales of just over 11,000 units.  According to Barnes, inventory levels will continue to shrink in 2012 as new construction is minimal.  He expects average home prices will level off by year-end due to an increase in population and projected job growth.

Multi-Family Market:  The apartment market was very active in 2011 with vacancy dropping to 6.0%, a level not seen since 1999-2000.  The highest reported vacancy was ten years ago when the rate reached 11.5%.  Just over 1,150 apartments were added in 2011 with another 11,054 units expected to be built during 2012.  This is the highest level of proposed units since Karnes Research Company began tracking the market in 1997. 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 predicts with continued population growth, the vacancy rates will remain in the 6% range.  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 in Wake County for 2011 was 63%, up from 60.0% in 2010, and the average daily rate increased to $82.86, up from $79.92 in 2010.  During 2011, two hotels were built in Wake County, adding 213 rooms.  Durham County added one hotel in 2011 and estimates two more will be built in 2012.  Wake County expects several other developments opening in the next two years including the Hilton Garden Inn Raleigh/Cary, West Raleigh Hyatt Place and the Hampton Inn South Glenwood.                        

NAI Carolantic is the Raleigh/Research Triangle area’s leading commercial real estate firm with seventeen 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 Global, the world’s premier network of commercial real estate firms and one of the largest real estate service providers worldwide.  NAI has over 5,000 real estate professionals in over 350 offices around the world with regional management, global infrastructure, best practices and technology to provide clients with consistent, quality results.  NAI Carolantic and NAI Global are trusted partners, committed to your long-term success.  www.naicarolantic.com   www.naiglobal.com

Contact:                              
Kerry Saunders
NAI Carolantic Realty, Inc.
Raleigh, North Carolina
919.832.0594
ksaunders@naicarolantic.com

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