Raleigh-Durham Medical Office
Leasing /Vacancy Rates & a Pulse on the Market
There is a common misconception in the marketplace today based on the abundance of office space available.
When representing Medical Tenants, we are often asked how to leverage against the high vacancy rates and soft office environment during lease negotiations. This in and of itself has created a vast misconception in the market as medical office demand continues to remain strong as vacancy rates have continued to decline from prior years.
Most market reports are divided into three sectors: office, industrial and retail. Although, Medical office is an asset class of its own and rarely are the market statistics broken out from the general office statistics.
Office vacancy rates (inclusive of available sublease space) in the Raleigh-Durham market have been hovering around +/- 20% over the last trailing twelve months. Medical office however, has been around 8% market-wide which makes for a competitive landscape – more comparable to the industrial market which has remained extremely robust even throughout covid.
This pressure on the medical marketplace has been compounded by the lull in new construction. As we all experienced (excluding multi-family), 2020/2021 put a near halt on most major new developments. Inflation and the rise in interest rates further impeded developer’s abilities to come out of the ground with new products. In fact, most new construction that we have seen has been for owner-occupants or practices relocating and expanding into new markets.
The only sizeable exception to this has been “The Macon” at Edwards Mill which is a 120k SF multi-story spec building originally tailored for lab/life science users (the shell is slated to deliver Spring of this year). Given its proximity to UNC/REX’s Blue Ridge campus the tenant demand quickly shifted towards majority medical. This project has been the only one of its kind over the last 24 months in the West-Raleigh submarket which led to substantially preleasing the building before delivery.
Various economic factors have kept the capital markets along with new developments stagnant, and because of this we are seeing the institutional owners focusing towards improving and repositioning buildings within their portfolios rather than acquiring new buildings or pursuing new development. This has lead to considerable rent growth for existing product. This coupled with heightening construction costs has created challenges when renewing or leasing medical office space.
In conclusion, we are beginning lease renewal/extension conversations much earlier than in years past and beginning to search and canvas the marketplace for new opportunities in the same fashion . This, in most cases has been the only way to maintain leverage during landlord negotiations ultimately providing the best outcome for our clients.
