Some hesitation among tenants but – for the most part – Durham is ‘still bullish’ on the office
By Brandee Gruener
Workers all over the Triangle remain holed up at home with their laptops. Offices sit empty while managers assess when everyone can return and what that will look like. Should open floor plans be walled off to prevent the spread of germs? Do workers need to stay home except for meetings and collaboration? Should company owners continue paying rent on such a large space? After a year of working remotely, how much office space does the company really need?
Real estate brokers and property owners are holding their collective breath as they wait for tenants to make decisions, but the sluggish market hasn’t curtailed optimism for Durham’s future. They remain bullish because of the city’s population growth, companies looking to relocate from other regions and major funding in life sciences. No one is certain what will happen to rents, but prices so far remain steady. Development timelines have lengthened, but investments in properties continue to happen. The market might be on pause, but it has held.
“The cost of capital is very low; there’s plenty of available capital, and we’re one of the sweetheart markets a lot of investors are looking for,” said Brad Wiese, president of Maverick Partners Realty Services. Though his brokers have seen “very little movement or demand for leasing space during the pandemic,” the full-service commercial real estate firm has remained busy.
“Purchase of office space by owner-occupants and investors, in my opinion, is as strong or stronger than pre-COVID life,” Wiese said.
Still, many wonder if the work-from-home phenomenon will lead organizations to reduce their footprints. Scott Selig, associate vice president for real estate for Duke University and Duke Health, is responsible for a real estate portfolio containing 4 million square feet. He estimated that Duke’s footprint could shrink by 25% over the next five years due to a more hybrid workforce and telemedicine. Some projects, like the replacement of the old Macy’s building at Northgate Mall, have been on hold “because people don’t understand yet what a post-COVID environment looks like.” IT, billing and appointments are easily handled over the phone, though clinical spaces could continue to expand, albeit more slowly, because of Durham’s increasing patient population.
Despite his projections for Duke, Selig called the Triangle real estate market “very promising.” Companies looking to relocate from the Northeast or other regions have absorbed vacant office space and helped to maintain demand.
“The picture for Durham is very rosy,” Selig said. “You don’t have a high cost of living and high rent, so there are going to be a lot more inbound businesses moving to places like Durham and the rest of the Triangle as they want to get away from the issues of density and expense.”
The Office is not Dead … But Workspaces Will Change
“Getting away from it all” gained new meaning after a year at home during a pandemic. Office workers could stay at home indefinitely, but many are ready to get outside of their own four walls.
Brad Corsmeier, executive vice president of the investor leasing group at CBRE | Raleigh, said he is beginning to hear from tenants in Durham and beyond who are contemplating that possibility. His tenants have held onto their leases with the expectation of returning – CBRE | Raleigh indicates the majority of its owners recovered 94% of their rents, and subleasing remains low at about 3% of total inventory.
“They’re kind of dusting off their plans; they’re doing surveys of office space, evaluating with their planners on what their workplace is going to look like,” Corsmeier said. Tenants have discussed walling off more offices or spreading out. Some have considered using less space with a hybrid workforce that rotates in and out of the office. But because of liability from COVID-19, most weren’t ready to make decisions yet. Corsmeier believed that those hesitations would begin to resolve this summer and projected a “really robust ’22 and ’23.”
“We don’t feel working from home is sustainable,” he said. “People ultimately want to get back to the office for collaboration and culture.”
Wiese at Maverick Partners agreed with that sentiment.
“I can speak for myself, certainly, having worked from home quite a bit,” he said “I am longing for the proverbial water cooler and the separation between home and work. I by no means think that we’re seeing the death of the office, but I do think until we collectively get things sorted out and folks are more comfortable moving around, it’s going to be a slow demand for coming and taking additional or new space.”
While many of the downtown tenants he works with like wide open spaces, Wiese said that he has had companies looking for more square footage during the pandemic so that they can wall off private offices.
“In the relatively near future, the pendulum will swing back, and we’ll see increased demand again,” he said.
Selig also said that Duke and other organizations must consider whether working from home was “good for long-term culture.” On the other hand, he wasn’t so sure that companies would begin rebuilding private offices.
“First of all, they’re very expensive, and second of all, people come to work because they want to be around people,” he said. “If they want to sit in an office, they can do that at home. I believe what you’re going to find is larger conference rooms and more meeting space that is more open or even outside.”
Life Sciences Real Estate: A Growing Market
Office leasing remains tepid, but the region’s reputation for life sciences has driven a lot of investment. Carolyn Coia, senior director of real estate for the Research Triangle Foundation of North Carolina, saw significant demand in 2020 for lab and life science properties in Research Triangle Park.
“RTP in general has a large life science population, and that market has just exploded in recent years for our region,” she said. “RTP has actually grown through COVID as a result of the life science market.”
RTP has made numerous announcements about new lab, office and manufacturing projects in Durham: ApiJect will build a 1 million-square-foot facility to manufacture injection devices for vaccines. Eli Lilly is also building a new manufacturing facility for pharmaceuticals. IPM Chirana, maker of critical care ventilators, selected RTP for its U.S. headquarters. And GRAIL, a company developing a blood test for cancer, began hiring for a new lab, office and warehouse.
So while subleases have increased and deals for small offices have dropped to probably 10% of what she saw before COVID-19, “RTP had a record transactional year in 2020,” Coia said. Office and lab rental rates remained the same, but life science purchase prices actually increased due to demand to get in the market. Coia expected that growth will continue at the same pace for the next couple of years.
As for traditional office space, Coia figured demand would pick up gradually as vaccines roll out and tenants figure out what kind of space they need.
“In the meantime, it’s really hurt all the retailers, all the restaurants and all the various retail operations in the area of RTP, which before COVID was a great market,” said John Morris, president of Morris Commercial Inc. and owner of a retail property at Imperial Point on Page Road. He said that retailers were hit much harder than his office tenants.
“But eventually it will come back,” he said, “and we’ve got such a great market, such a great area, that I’m very optimistic.”
Downtown Eager to See Life Return
Before COVID-19 hit, downtown was booming. In fact, there wasn’t enough office space to go around, according to Downtown Durham Inc. President and CEO Nicole Thompson. In the three years prior to the pandemic, downtown occupancy was at 97% or 98%.
“You want a little bit of wiggle room,” Thompson said. “People need to expand; we just didn’t have the availability.”
Downtown got that breathing room last year. Construction finished on an 11-story, glass-walled building containing more than 240,000 square feet of office and
retail space at 555 Mangum. Almost 25,000 square feet became available over by Durham Central Park at the Montgomery + Aldridge Building, a historic warehouse on Roney Street that was converted to office space.
Not all of the new office space was absorbed during the uncertainty of the pandemic, but Thompson hasn’t noted new vacancies or changes in real estate prices downtown. About 90% of office space was occupied in March, which she believed was a healthy number.
Still, downtown remains a ghost of its former self while workers stay at home. Arthur Rogers, principal of Eno Ventures, said it “sure has been sad” coming into his downtown office off of Parrish Street. Rogers owns a mix of office, retail and restaurant properties downtown and around Durham.
Rogers had to renegotiate leases with some tenants to keep them in place, but he’s “still bullish on Durham” as even his “most cautious tenants are starting to come back.” But the lack of office workers downtown has been hard on those who serve them.
“This pandemic has been so selective in who it really affects,” Rogers said.
Thompson said she spends most of her energy working to support the coffee shops, restaurants, retailers and more that have struggled mightily without daytime office traffic. Vaccines, the warming weather, the upcoming Durham Bulls season and a new DPAC schedule could provide some relief a few months from now.
In the meantime, Thompson started to hear “a little bit of interest” in downtown from new companies. More space is on the way for those seeking it. The eight-story Roxboro at Venable will add more than 200,000 square feet of Class A office space and lab space near the American Tobacco Campus. Construction should be completed in early 2022. Another 100,000 square feet of lab space will become available as soon as this summer when Longfellow Real Estate Partners finishes overhauling the offices vacated by WeWork in the Durham Innovation District.
Capital Broadcasting Co. also announced a joint venture to develop the former University Ford dealership property into a mixed-use project that includes two office buildings with 313,000 square feet of leasable space. Construction will begin at the end of the year or in early 2022. And Thompson believes that other projects will come along.
“Downtown is still a hot market, and people want to be in the downtown Durham area,” she said. “I feel pretty good about what the future looks like. Right now we just have to get through the next couple of months.”