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RALEIGH, NC-Class A and class B office tenants in the 38.5-million-sf Raleigh-Durham market are preparing for rent sticker shock in the coming quarters because of a tightening inventory of space, according to a new analysis by the Raleigh office of Grubb & Ellis/Thomas Linderman Graham.

Average asking class A rent in the 3.5-million-sf central business district submarket is $18.86 per sf; class B, $15.06 per sf. In the 34.9-million-sf suburban market, class A space is at $19.04 per sf; class B, 16.02 per sf. “The Triangle’s average class A asking rate rose by 23 cents or 1.2% in the second quarter,” notes Elizabeth Raiford, vice president of marketing and research at the independently owned and operated affiliate of Grubb & Ellis. Asking rates have increased for three consecutive quarters, rising by 2.3% since the third quarter of 2005.

Free rent and cash incentives are dwindling and many landlords are beginning to increase annual escalations. “Tenant improvement dollars remain a strong negotiating point, but they, too, will begin to wane over the next 12 months,” Raiford predicts. As an example of the tightening office market, she points to second-quarter net absorption which surged to 363,346 sf compared to 77,661 sf in the first quarter.

Scant new construction also is a factor in rising rents. Only 908,006 sf of new product is under construction. Of that total, 43% is already preleased. The one building completed in the second quarter totaled 38,731 sf. “Large blocks of space have already become increasingly difficult to find,” Raiford says. At the same time, demand from tenants needing 10,000 sf or more “has increased dramatically,” she says. “As a result, market-wide asking rates will continue to climb in the coming months despite vacancy not yet having reach equilibrium.”

The 8.4-million-sf Research Triangle Park led the Triangle in second-quarter net absorption with 142,225 sf and a year-to-date total of 185,709 sf. That performance “sent vacancy in the region’s largest submarket down to an impressive 210 basis points and marked the first time in five years that the submarket has witnessed vacancy below 20%,” Raiford says. Vacancy is at 18.5% with 120,000 sf of new construction nearing completion. Average quoted rents are $18.06 for class A space; $15.54 for class B.

The 4.97-million-sf Durham submarket also turned in a strong second-quarter showing. Net absorption totaled 54,098 sf but the year-to-date total is only 52,577 sf due to first-quarter negative numbers. Vacancy is at 16.2%. Class A rents average $20.03 per sf ; class B, $15.37 per sf.

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