Commercial real estate is a window into the economy, both present and future. One project that has interested me of late is Eastgate 540 in Knightdale, a collection of large, white industrial buildings on rural Hodge Road on the east side of Wake County. The buildings are about a half mile from where Interstate 540, the Raleigh Outer Loop, ends at U.S. 64/264, which is also known variously as the Knightdale Bypass and Interstate 87.
To learn about the project, I talked with Jeff Sheehan, a partner at Trinity Capital Advisors, the Charlotte-based commercial real estate company that is developing Eastgate 540. There are now six buildings totaling around 1 million square feet, with a seventh under construction. Six have been sold, for $180 million to BentallGreenOak, the Toronto-based real estate investment affiliate of insurance giant Sun Life. The seventh – more than 200,000 square feet – is expected to be sold when completed in the second quarter.
The market for industrial buildings is hot. Some of this is because of e-commerce, and companies needing warehouse space close to booming markets such as Raleigh-Durham. There’s also a desire for more inventory on hand because of less reliable supply chains. The pandemic has made it more difficult to get containers from snarled ports in Asia through snarled ports in the U.S. And some of this is just the continued growth in the Southeast, and in particular, the booming life sciences industry in the Research Triangle, which is vacuuming up space.
Trinity bought Eastgate 540 in 2019, when there was just one building. It had a five to seven-year plan to develop and lease more buildings, as demand warranted, and then sell them to the folks who buy these projects ultimately – the pension funds and insurance companies of the world. The market speeded up the timetable significantly.
“Just as soon as we’d announce a building, the tenant demand would gobble it up,” says Sheehan. “And we said, ‘Well, I guess we need to get going with one,’ and by the end, we were saying, ‘OK, let’s build two speculative buildings this time.’”
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[/media-credit]When finished, Eastgate 540 will have about 1.2 million square feet of building space, occupied by a diverse set of companies, including: PCX, which manufactures prefabricated modular electrical distribution and power systems; Eby-Brown, one of the largest convenience store suppliers; CHEP USA, which provides pallets and containers for global supply chains; and Ernest Packaging Solutions. There are a couple of big moving companies – All American Relocation and PODS Moving & Storage, as well as companies that serve the home décor markets – Trade Venture Stones, Francini, Inc., and Highland Cabinetry.
Industrial buildings have changed to reflect their many uses. “Most of the tenants today are demanding precast concrete buildings,” says Sheehan. “The floors are super-reinforced, highly polished, and have a flatness level to them that’s very particular. These quote, unquote industrial buildings are cleaner, to my eye at least, to restaurants and some medical facilities I’ve been in.”
Distribution operations are using inventory systems that “are so much more sophisticated than they were 20 years ago. They can rack higher, they’re tracking it in inventory management systems. So these buildings are totally different than what I think most people historically have called to mind.”
Trinity’s founders didn’t have development in mind when they launched their business more than two decades ago. In 1998, three veteran Charlotte commercial real estate professionals – David Allen, Gary Chesson and Peter Conway – formed Trinity Partners to sell and manage office and industrial buildings in the Carolinas for institutional clients and investors. A few years later, they created a sister company, Trinity Capital Advisors, to own and develop properties. Chesson, in a 2017 interview, said it started as a “side business for us to recycle the profits from Trinity Partners into acquiring and developing real estate.”
“At first, we were pretty nervous about competing with our clients at Trinity Partners,” said Chesson, “but what we realized is that a lot of those clients want to joint venture with us to own properties. They want us to operate the properties and invest with them . . . Trinity Capital has grown from being a side business to really, I think we’re one of the more active players in what I’ll call the private equity real estate sector in the Southeast.”
The company has invested $4.1 billion in 28 million square feet of buildings that it has acquired or developed. It was particularly active during the recession a dozen years ago, when many developers found themselves over-extended and credit was tight. Trinity Capital was able to turn around NASCAR Plaza, a nearly 400,000 square foot office building in downtown Charlotte that was in foreclosure, by teaming up with outside investors.
In 2015, Trinity Capital and its partners bought much of Indianapolis-based REIT Duke Realty’s commercial real estate portfolio in the Triangle. Duke was exiting the suburban office sector to focus on industrial and medical office projects. Sheehan, who had been with Duke Realty for 15 years and was the company’s senior vice president of the Mid-Atlantic region, joined Trinity Capital to lead and expand its Triangle presence.
In addition to Eastgate 540, Trinity has been active throughout the region. The Nortel Networks complex in Research Triangle Park, where 9,000 people once worked, had been mostly empty since the telecom giant went bankrupt. In 2019, Trinity and its partners launched the redevelopment of what is now known as Park Point into a 650,000-square-foot life sciences and office complex. “We have run into so many people who would say, ‘Oh, my brother worked there for 20 years.’ It was just sitting there, fallow,” says Sheehan.
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[/media-credit]Trinity is developing a three-building industrial complex, Alexander Commerce Park, with 441,000 square feet just outside RTP. In Durham, it is developing The Roxboro at Venable, an eight-story office and life sciences complex. It has also acquired the 30,000-square-foot Reynolds Building in downtown Raleigh, where it wants to build a 40-story tower.
And Trinity just announced another project, a $1 billion development with Starwood Capital Group: Spark LS will be a 109-acre life science campus in Morrisville, with around 1.5 million square feet of lab and bio-manufacturing space, along with retail, restaurants, parks and recreation areas.
Industrial real estate has been one of the bright spots in the work-from-home pandemic economy. The annual growth rate in rental rates has been “astounding,” says Sheehan. “Five to 10 percent growth. I’ve never seen anything like that.” The demand for life sciences space, with unique requirements, has helped fuel the surge.
“Over the last 18 months, with land in RTP – because of the life science influence, demand is also crazy. Look at what Alexandria [Real Estate Equities] paid for the site that’s called Genesis. It was pushing $1 million an acre,” he says. “Which is absolutely unheard of in RTP. It’s not like it’s downtown, right?”
On the office side, Sheehan says, “We’re starting to see some new life.” Before the pandemic hit in early 2020, the Triangle’s office market was surging.
“The knock on the Raleigh-Durham market, as you well know, for decades for office, was yeah, the growth is great but you sign somebody at $18 net, and through the course of their five-year lease term, it grows to $22, then it comes renewal time and you renew them at $18. We never had any rental rate growth,” says Sheehan, “or they would move to a brand new project.”
“And so for the first time in my career here, since 2001, we actually had phenomenal rental rate growth in office. And what we’re seeing right now, of course, COVID has got everybody confused. People are paying their rent, the companies themselves are very healthy, but they’re not sure what to do from an office space standpoint.”
“I don’t see anyone really panicking,” he adds. “We are signing some leases and rental rates are holding. They just aren’t increasing at the rate they were, and the volume of absorption has fallen way off, obviously.”
Companies, says Sheehan, “don’t want to make a big, bold move that’s the wrong move. So, we’re seeing short-term lease extensions when leases are coming up, but they’re not really giving up the space.”
