Building in Durham Changes Hands for Half of Its 2022 Value: Possible Indicator of Future Real Estate Market Trends?
In the blink of an eye, Crescent Communities recently offloaded SouthCourt, a 140K sqft office building in Durham's University Hill neighborhood, for a cool $11.8 million. Just a hot minute ago, they had dropped a bombshell by spending $22.35 million for the very same property.
Let's not mince words; the Charlotte-based developer is trying to downplay their losses. At the time of the change of hands, the building was roughly 75% occupied. Katie Harris, a spokesperson for the company, casually mentioned that the transaction is part of their long-term strategy to invest wisely in fresh opportunities.
But here's the real kicker: analysts aren't buying it. They warn this sale is just another red flag in the troubled waters of the commercial real estate market. Why? Because of the rise of hybrid work, sky-high interest rates, and the ever-looming specter of a recession, developers are being hit with record-breaking office vacancy rates.
Alarm bells are ringing loud and clear, my friend. The national vacancy rate clocked in at a staggering 20.4% in the first quarter of this year. You might think that's bad, but in the heart of the Triangle, it's even worse. It's currently hovering at a terrible 21.3%, up from 21% in the last quarter and from 19.3% in the same period last year.
You know what they say, misery loves company. Across the land, office buildings young and old are finding themselves neglected and lonely. As companies reevaluate their needs, analysts predict that the trend will continue with tenants scaling down their footprints during renewals or relocations. Oh, and guess what else is on the rise? "Distressed sales," those sweet deals where shrewd investors scoop up buildings at bargain prices.
Speaking of bargains, Crescent Communities no longer owns any commercial property in the Triangle. Instead, they are focusing their efforts on the booming residential market. They've got six active communities on the go, and right around the corner, they're building over 400 rental homes on a 6.5-acre site at 3737 Durham-Chapel Hill Blvd.
You might think that plunging office property values are the new norm. That's not necessarily true. While sales are predicted to rise for the rest of this year, driven by opportunistic investors and distressed sales, analysts warn that Class B and C properties, underutilized and decades old, could drop even further.
On the flip side, the rise could pave the way for the rehabilitation or redevelopment of buildings that are showing their age. While Class A buildings might have bottomed out, experts warn that Class B and C properties are still in for a rocky ride.
"The occupancy isn't coming back," says Eric Maribojoc, a UNC professor and associate director of the Wood Center for Real Estate Studies. "As banks adjust to the new realities, we'll see more distressed sales in 2025 and 2026."
Landlords and leasing agents are pinning their hopes on a silver lining. Arnold Siegmund, the principal of office leasing in Avison Young's Raleigh-Durham office, says, "We're starting to see an uptick in leasing activity in recent months as tenants look for their footing in a post-pandemic world."
In a mixed bag of a market, the regional landscape remains split. On the one hand, newer, amenity-rich buildings are attracting the lion's share of demand. On the other, older suburban properties could become relics of the past. Submarkets near Falls of Neuse, US 1/Capital Boulevard, Six Forks, Downtown Durham, and West Raleigh are "all seeing positive absorption," according to Siegmund.
Among recent signings, Genesys leased the entire fifth floor at Hub RTP in the RTP/I-40 Corridor, and Kiewit leased an entire floor at GlenLake Three in the Glenwood/Creedmoor submarket. Let's face it: predicting the future is a roller coaster ride, but strong leasing activity is the first step to success in the office sales market. That's already happening, "and things are looking up," Siegmund said. Keep your fingers crossed for better days!
Sports enthusiasts might find solace in the thriving residential market at Crescent Communities, as they focus their efforts on the construction of over 400 rental homes. Meanwhile, the commercial real estate market grapples with rising distressed sales, vacancy rates, and the looming threat of a recession, making it a challenging landscape for property investors.
