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Monday, March 14, 2016

Downtown Raleigh finds “new normal”

By Blake Thomas (Raleigh NC)

Downtown Raleigh, like most urban environments in today’s global climate, has been a hotbed for real estate investment and development activity during the current economic recovery. This emphasis on the urban core has dominated real estate news headlines in most metro areas, with many market participants attributing the trend to the rise of the millennial generation as social influencers, economic drivers and decision-makers in the workplace. Scores of real estate investors are attempting to capitalize on this trend of reurbanization, with projects that fill voids and create vibrant live/work/play environments.

More so now than during any other preceding period in the city’s history, Downtown Raleigh’s development pipeline is teeming with hotly anticipated projects, including: Lundy’s unnamed 301 Hillsborough mixed-use project; Dominion Realty’s Charter Square North; Beacon Partners’ The Edison Office Tower; Highwoods Properties’ major overhaul of One Bank of America Plaza; HQ Raleigh’s expansion; the North Carolina Department of Transportation (NCDOT) and City of Raleigh joint-venture renovation of Union Station; various hotel projects from CN Hotels, Winwood Hospitality, Summit Hospitality and others; along with countless apartment projects that continue to pop up on nearly a daily basis.

Perhaps no project is currently more anticipated in Downtown Raleigh by the general public than Kane Realty’s “The Dillon,” a $150-million mixed-use, adaptive reuse, redevelopment project. A prolific developer, which revitalized Raleigh’s Midtown (North Hills), Kane is expected to capitalize on Raleigh’s burgeoning, eclectic and dynamic Warehouse district with The Dillon, which will sit on 2.5 acres and is projected to contain more than 225,000 square feet of state-of-the-art office space, 260-plus luxury apartment units, community-serving retail and structured parking.

However, in the opinion of this author, the biggest game-changer right now for Downtown just might be the deal that was reached to sell The News & Observer’s 3-acre office campus to a locally-based developer for a reported price in excess of $20 million. The acquiring entity, Above The Fold LLC, includes veteran Raleigh real estate investors Michael Sandman, Mark Andrews and Joe Whitehouse, in partnership with a new real estate company called Loden Properties, recently started by Davidson & Jones executive Russ Jones and former York Properties executive Henry Ward. Exactly what is planned for the site is still a moving target, and the development team is, understandably, keeping its plans close to the vest, but mixed-use is likely the play, and would include a combination of office, retail, hospitality, residential (for rent and/or for sale) and community space.

All of this activity is attracting the attention of many regional and national developers and investors, as was evidenced by the very public auction of the City of Raleigh’s 1.2-acre surface parking lot at 301 Hillsborough.

Ultimately, the site was sold to a local developer for $6.3 million, but had plenty of regional interest. Less publicized, but significant, is New York-based real estate private-equity firm HighBrook Investors’ acquisition of a 31% tenants-in-common (TIC) stake in the Wells Fargo Capitol Center for more than $42 million.

The combination of escalating demand and dwindling supply – a lack of available “boxes” with “good bones” for redevelopment, and quickly disappearing, sizable, underutilized land tracts – is causing property values to skyrocket, as evidenced by the latest Wake County real estate tax reassessment. The county looks at the assessed values for each land parcel (and the corresponding improvements made thereupon) for property tax purposes once every eight years to properly establish the property tax base moving forward. Recent county tax reassessments saw commercial properties rise an average of 19%.

The best example of rising commercial property values in downtown Raleigh is the Hillsborough Street corridor tax district, where property values rose an average of nearly 70%. It would seem that the “new normal” has land values settling in around $6 million per acre (market value) for high-density, scalable, urban core development sites.

(Blake Thomas is a Vice President with Avison Young’s capital markets team in Raleigh.)

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