Research & Forecast Report

RALEIGH-DURHAM | OFFICE Q3 2015

Class A Sector Dominates Q3, Demand Reaching New Heights Emily Bostic Research Associate | Raleigh-Durham

Key Takeaways > The demand for space, particularly among Class A buildings, is staggering and very quickly outpacing the region’s supply. Although there are several new developments in the pipeline, most are already pre-leased and their deliveries will extend into the next two years.

> A vigorous Class A sector pushed total net asborption to 427,441 SF and decreased overall vacancy to a record 9.9%. As a result, Class A rents continue to escalate.

> The overall strength of the Raleigh-Durham region’s economy and increasing investor interest is catapulting the office market into record-breaking numbers for the third quarter and into the close of 2015.

Market OverviewThere is no doubt that the Raleigh-Durham region is thriving. Raleigh, in particular, reported outstanding economic growth throughout the third quarter of 2015. It ranks ninth among large U.S. cities for economic strength based on exponential population growth, regional GDP growth and an increased number of businesses. Both Raleigh and Durham have proven to be among the most recession-recovered cities in the United States.

Life science and technology sectors continue to flourish. In a recent study by Biospace.com, Raleigh-Durham ranked as the number two hotbed for life sciences employment, falling after Boston, MA. The Triangle market has the fourth-highest concentration of technology job openings in the nation, according to Simply Hired, with 21.7% of all open jobs being technology related. In comparison, the US percentage is only 9.3%. Raleigh-Durham is also one of the top ten U.S. tech markets with the fastest growing office rents. Triangle technology companies are investing in their commercial real estate space and are paying an average of 23.4% higher in rents.

Summary Statistics Q3 2015 Regional Office Market

Raleigh DurhamRegion

Downtown Raleigh

CBD

Downtown Durham

CBD

Vacancy Rate 10.3% 12.6% 5.0%

Change From Q2 2015 (basis points) 0.9 0.37 2.19

Absorption (Square Feet) 427,441 27,880 34,963

Under Construction (Square Feet) 1,308,331 42,667 284,000

Asking Rents Per Square Foot Per Year

Average Quoted $20.56 $27.10 $21.24

Class A Average $22.85 $29.36 $25.65

Market IndicatorsRelative to prior period

Raleigh-Durham Q3 2014

Raleigh-Durham Q3 2015

VACANCY

NET ABSORPTION

CONSTRUCTION

RENTAL RATE

2 Raleigh-Durham Research Report | Q3 2015 | Office Market | Colliers International

Absorption & Leasing Activity > During the third quarter of 2015, the Triangle experienced almost 430,000 square feet of positive net absorption. The largest Class A blocks that reported occupancy gains during the third quarter include Genband (71,253 SF) in Imperial Center, Blue Cross Blue Shield of North Carolina (50,936 SF) in South Durham and HCL Technologies (31,017 SF) in Cary.

> In the Cary submarket, HCL Technologies (31,017 SF) finalized their expansion at Regency Pines, Personify signed their lease at One Harrison Park and Jedson Engineering occupied space at 8000 Regency. This brings the total net absorption in Cary up to 50,407 square feet.

> Both Downtown Durham and Downtown Raleigh experienced positive net absorption at the end of the quarter. In Downtown Durham, Duke’s Innovation and Entrepreneurship Initiative occupied 15,000 SF in the Imperial Building. Meanwhile, in Downtown Raleigh, HDR Engineering occupied over 21,000 SF at the new Charter Square building.

> Imperial Center, in the RTP | I-40 submarket, reported the largest single tenant gain as Fidelity Investments occupied 116,300 square feet at Danbury Hall. Fidelity’s need for additional space comes after the Boston-based company announced they would be bringing an additional 600 jobs to Durham by year 2018. The Fidelity Investments backfill at Danbury Hall, after MetLife vacated their current space, resulted in net-zero absorption for the RTP | I-40 submarket.

Vacancy & Availability > The Triangle market’s vacancy rate was reported at 10.3% for the third quarter, resulting in a 0.9 basis point drop from the previous second quarter of 2015.

> 3.3 million square feet of vacant Class A space accounted for almost 40% of the Triangle market’s vacancy totals while 47% of the market’s vacancy was reported in the Class B sector.

Rental Rates > The overall average asking rental rate for the Triangle market was reported at $20.56 per square foot during the third quarter.

> The largest increase in asking rents was observed in the Class A sector where the average rent jumped $1.80 per square foot in just one quarter. The average asking rent for Class A office space during the third quarter was $22.85 per square foot.

> The Downtown Raleigh submarket posted the highest average asking rental rates during the third quarter at $27.10 per square foot. The West Raleigh submarket experienced the biggest uptick in rent from the second quarter, jumping up $1.38 to $23.08 per square foot.

> Downtown Raleigh also reported the highest Class A asking rents for the second consecutive quarter at $29.36 per square foot.

Historical Vacancy and Absorption

Source: Xceligent, Colliers Research

Source: Xceligent, Colliers Research

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

(500,000)

500,000

1,500,000

2,500,000

3,500,000

20

11

20

12

20

13

20

14

20

15

Absorption YTD Vacancy

Historical Rental Rates Per SF

Source: Xceligent, Colliers Research

TRIANGLE SUMMARY BY CLASS

INVENTORY (SF)

AVG. RENT VACANCYNET ABSORPTION

(SF)

CLASS A 33,550,059 $22.85 9.9% 237,857

CLASS B 26,304,871 $17.96 12.1% 192,412

CLASS C 5,569,659 $16.60 4.3% (2,828)

TOTAL 65,424,589 $20.56 10.3% 427,441

$18.00

$19.00

$20.00

$21.00

$22.00

$23.00

$24.00

2011

2012

2013

2014

2015

Class A Market AVG

INDUSTRIOUS | COWORKING SPACE

DOWNTOWN RALEIGH, NC

3 Raleigh-Durham Research Report | Q3 2015 | Office Market | Colliers International

NOTABLE LEASING ACTIVITY TENANT PROPERTY SUBMARKET SIZE (SF) TYPE OCCUPANCY DATE

Fidelity Investments Imperial Center RTP | I-40 116,300 Lease Q3 2015

Genband Imperial Center RTP | I-40 71,253 Lease Q3 2015

Credit Suisse Lenovo Campus RTP | I-40 70,000 Sublease | Prelease Q4 2015

PRA Health GlenLake Five US 70 | Glenwood Avenue 47,000 Lease Q3 2015

Qlik Technologies Wade III West Raleigh 26,000 Relocation | Prelease Q4 2015

*Industrious Charter Square Downtown Raleigh 23,000 Lease Q3 2015

*Colliers Raleigh-Durham transaction.

MARKET COMPARISONS

EXISTING INVENTORY (SF)

DIRECT VACANT (SF)

VACANCY RATE Q3 2015

NET ABSORPTION Q3 2015 (SF)

UNDER CONSTRUCTION (SF)

AVG. ASKING RATE ($/SF)

CLASS A ASKING RATE ($/SF)

SUBMARKET NAMECameron Village 719,495 20,146 2.8% (4,542) 12,729 $23.73 $24.06

Cary 7,723,546 556,095 7.2% 50,407 0 $20.55 $21.43

Chapel Hill | Carrboro 2,898,059 136,209 4.7% 10,172 0 $22.42 $23.71

Downtown Durham 3,046,308 137,084 4.5% 34,963 284,000 $21.24 $25.65

Downtown Raleigh 5,212,944 536,933 10.3% 27,880 42,667 $27.10 $29.36

Eastern Wake County 688,704 46,832 6.8% 10,668 0 $16.98 $0.00

North Durham 1,400,238 330,456 23.6% 3,878 0 $16.27 $18.32

Hillsborough Orange County 182,895 12,437 6.8% (1,073) 0 $12.50 $0.00

RTP | I-40 15,028,709 2,374,536 15.8% 7,116 221,947 $19.85 $22.00

Six Forks | Falls of Neuse 9,117,955 820,616 9.0% 14,149 630,000 $20.42 $22.20

South Durham 3,743,127 247,046 6.6% 48,171 0 $20.14 $20.16

Southeast Wake County 1,236,466 55,641 4.5% 18,007 0 $14.19 $0.00

Southwest Wake County 697,751 55,122 7.9% 2,828 12,000 $18.51 $0.00

US 1 | Capital Boulevard 2,776,378 235,992 8.5% 138,944 0 $16.59 $19.85

US 70 | Glenwood Avenue | Creedmoor 3,621,996 315,114 8.7% 45,725 0 $21.83 $24.60

West Raleigh 6,402,425 640,243 10.0% 18,002 104,988 $23.08 $23.81

MARKET TOTALS 65,424,589 6,738,681 10.3% 427,441 1,308,331 $20.56 $22.85

4 Raleigh-Durham Research Report | Q3 2015 | Office Market | Colliers International

Construction & Investment Activity > Year-to-date office deliveries total over 1.1 million square feet with an additional 1.3 million square feet currently under construction at the close of the third quarter. The significant amount of building deliveries over the course of the third quarter resulted in a slight decrease in the region’s current construction totals. However, the Triangle is anticipating another 3.7 million square feet in proposed development starts to add to the supply.

> There are multiple ongoing developments with significant pre-leases in place including Midtown Plaza (330,000 SF), where Allscripts will occupy 250,000 SF; Bank of America Tower (300,000 SF), where Bank of America will take 57,000 SF and G&S Business Communications 25,517 SF; Perimeter Four (191,947 SF), where ChannelAdvisors will occupy 136,538 SF; and the Center for Technology & Innovation (104,988 SF), where NC State/The Nonwovens Institute will occupy 44,644SF. Wade III was completed during the period withAvison Young occupying 12,442 SF, Qlik occupying 26,827 SF during the fourth quarter of 2015 and Choate taking 10,000 SF in the second quarter of 2016. Construction completed on 3050 Duraleighduring the third quarter, which was purchased byHealthcare Trust of America for $4.2 million and leased to Rex Healthcare.

> Investment sales were slightly less robust during the third quarter, however, the Keystone Park portfolio transaction proved to be the most notable sale of the quarter. Longfellow purchased all eleven buildings at 84% occupancy in Keystone Park for $117.7 million.

CONSTRUCTION ACTIVITY PROPERTY SUBMARKET SIZE (SF) STATUS

Midtown Plaza Six Forks Road | Falls of Neuse Road 330,000 Under Construction

Bank of America Tower Six Forks Road | Falls of Neuse Road 300,000 Under Construction

The Chesterfield Downtown Durham 284,000 Under Construction

Perimeter Four RTP | I-40 191,947 Under Construction

North Hills Tower III Six Forks Road | Falls of Neuse Road 450,000 Proposed

The Edison Downtown Raleigh 314,775 Proposed

Wade V West Raleigh 300,000 Proposed

The Dillon Downtown Raleigh 210,000 Proposed

Wade III West Raleigh 103,448 Completed

NOTABLE SALES ACTIVITY PROPERTY SUBMARKET SALES MONTH SALES PRICE SIZE (SF) PRICE / SF BUYER

Keystone Park II (portfolio) RTP | I-40 September $40,900,000 198,233 $206 Longfellow

Blue Cross Blue Shield Orange County July $34,995,000 222,994 $157 State Employees Credit Union

540 Waverly Place Cary July $15,000,000 44,680 $336 CNL Financial Group

Carolina Pointe II Orange County September $11,058,000 191,134 $58 Hammes Co.

Somerset Business Center Six Forks July $10,546,133 110,310 $96 Dilweg Companies

Wesvill Medical & Prof. Building West Raleigh August $6,900,000 37,851 $182 Brackett Flagship Properties

Headquarters Park RTP | I-40 August $6,600,000 146,658 $45 Grubb Properties

Somerset Place Six Forks July $5,353,852 56,000 $96 Dilweg Companies

Pleasant Grove Business Park RTP | I-40 July $4,950,000 70,687 $70 Proto Labs

Kirlin US 70 | Glenwood August $4,356,500 18,234 $239 Agua Properties

Copyright © 2015 Colliers International.

The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

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OFFICE SERVICES | CONTACT:Kathy GigacDirector of Leasing | Raleigh+1 919 582 3130Kathy.Gigac@colliers.com

Baxter Walker Senior Vice President | Raleigh +1 919 582 3112Baxter.Walker@colliers.com

Thomas Kenna Associate | Raleigh +1 919 582 3141Thomas.Kenna@colliers.com

Martie SerianniSenior Vice President | Raleigh+1 919 582 3156Martie.Serianni@colliers.com

REGIONAL AUTHOR:Emily W. Bostic | Research Associate +1 919 582 3136Emily.Bostic@colliers.com