As the value of metropolitan property continues to plummet at the state and national level, suburban areas continue to skyrocket in demand, leading the Triangle and the Triad regions to merge together in the Tar Heel State.
Though, while suburban areas experience a surge of growth, inner cities like Raleigh, Charlotte, Greensboro, and Winston-Salem face a decline in daytime population by more than half. The booming city centers have turned outward, not only reducing the potential clientele for downtown small businesses and eateries but also completely shifting the commercial real estate market.
Cities across North Carolina and across the country are experiencing negative absorption, which means more people are moving out than are moving in. The Triangle no longer consists of six to eight counties, but rather 20 to 30 counties. Real estate experts long ago predicted the Triangle and Triad would close in on each other, but they didn’t expect it to happen as fast as it has.
“Urban America has been decimated in significant ways by multiple forces,” said Jim Anthony, CEO for APG Capital in Raleigh. In the last quarter of 2023, the Triangle hit a record-high amount of empty office space, with about a 20% vacancy rate. The instabilities of the Covid-19 pandemic, along with violent Black Lives Matter protests transpiring in cities nationwide, provoked a mass exodus to the suburbs.
“You combine those two things together, those two forces have essentially caused havoc to urban America, and that includes urban North Carolina. It’s not only emptied office buildings, it’s emptied small business spaces, and now it is emptying expensive apartment buildings,” he explained.
After enjoying the flexibility of remote work in 2020, employers remained open to employees working from home. As such, tenants are downsizing their office spaces by over 50%, leading to a surplus of empty commercial properties. Property values of high-rise office buildings, particularly those exceeding 100,000 square feet, have been significantly ‘hammered.’
The shift comes as a record amount of commercial real estate debt is maturing in the next three years. According to the Wall Street Journal, $2.2 trillion is due between now and 2027. Last year, $541 billion in debt backed by office buildings, hotels, apartments, and other types of commercial real estate came due, an all-time record for a single year.
To address the surplus of empty office buildings, many properties will eventually be converted into residential or institutional buildings, while others may face demolition to make way for new developments. Still, because many workers don’t need to be downtown, they don’t want to pay premium prices to live near the city center, another reason why the suburban residential market is on fire.
“So many people are moving here. Literally, the pace at which the Triangle is expanding is faster than it’s ever expanded before in terms of human population. That is putting pressure on all the suburbs to approve more subdivisions, approve more housing of all types, build more parks, build more retail,” he said.
From 2020 to 2024, property values across Wake County grew by approximately 51%. The population shifts are fueling growth in counties such as Wilson, Nash, Edgecombe, Granville, and Person. While more rural areas are benefiting from new business, transplants are also benefitting from the cheaper costs.
There are vast differences and imbalances within the real estate market. The residential housing market is booming, and shopping centers are doing well. However, malls continue to be in a dire situation, as well as hotels and industrial real estate. Still, real estate cycles through phases, Anthony noted, with 44 years of experience.
He anticipates a challenging road ahead for urban commercial real estate, stating that this will be the most difficult cycle for office buildings in American history. However, he believes that as corporations insist on employees returning to the office, the market will eventually stabilize. In the meantime, his company plans to convert spaces to the current demands. He plans to convert office buildings into a charter school and an apartment building in the years ahead.
In the next two to three years, corporations are going to start insisting on employees returning to in-person work, predicted Anthony.
“People are going to realize that working from home is damaging the productivity of their workers, is damaging the culture of their companies… How do you have a culture when nobody works together? Zoom calls do not create culture.”
Both Raleigh-Durham and Charlotte were ranked in the top 10 for property returns and attractive markets for investment in the CBRE 2024 Investor Intentions Survey.