.avif)
Share this article
The Raleigh-Durham office real estate market is experiencing notable changes driven by local and national factors. Two key factors driving these changes are the steep rise in property taxes and a notable deceleration in office construction. While these developments may seem daunting at first glance, they also open up opportunities for tenants to rethink their strategies and even thrive in this evolving landscape.
The Property Tax Hike More Than Just a Number
For businesses in Raleigh-Durham, property taxes are becoming a major concern. Between 2022 and 2023, the region saw a dramatic 12.1% spike in property tax assessments. This rapid rise has catapulted Raleigh into the ranks of the top ten U.S. markets for increasing commercial property taxes—a trend mirrored across many parts of the nation.
What's Fueling the Surge?
Workforce Evolution & Revenue Gaps
The shift toward remote and hybrid work models during the pandemic drastically reduced demand for traditional office spaces, leaving vacancies in their wake. As businesses vacated these offices, local governments found themselves facing revenue shortfalls and reassessed property values to make up the difference. The result? Higher tax bills for property owners, which are often passed along to tenants.
Urban Growth & Development
At the same time, the city’s ongoing investments in public infrastructure and urban development have driven up property values. From modern transit systems to new parks and mixed-use developments, Raleigh-Durham is evolving—but so are its property taxes. Tenants in full-service or triple-net leases may find themselves footing part of the bill, adding an extra layer of cost to their occupancy expenses.
For office tenants, these rising taxes can significantly impact bottom lines. The challenge lies in finding ways to manage this new financial burden as part of overall operating costs. But it’s not all bad news—strategic tenants can turn this challenge into an opportunity.
The Construction Slowdown A Double-Edged Sword
Alongside rising property taxes, Raleigh-Durham is experiencing a sharp decline in new office construction. CoStar data shows that office construction in the area has hit a decade low, with just 11 buildings under construction, totaling under 870,000 square feet of space. For context, that’s a huge drop from early 2023, when 2.8 million square feet were in development.
Why Are New Builds Stalling?
Dwindling Demand
As businesses embrace hybrid models, the demand for office space in Raleigh-Durham has plummeted. Net absorption, the difference between space occupied and space vacated, has averaged around 255,000 square feet annually—a far cry from the historical average of 930,000 square feet. This declining demand has driven vacancy rates up to 14.7%, and many of us on the ground believe this number is higher, further discouraging new construction.
Soaring Costs & Interest Rates
Building new office space has become increasingly expensive, thanks to rising labor, material, and land costs. Add to that the sky-high interest rates, which make financing development projects pricier than ever. The result? Developers are thinking twice before breaking ground on new projects.
This slowdown in construction might seem alarming, but tenants can use it to their advantage.
Tenant Strategies Turning Challenges into Opportunities
While rising taxes and limited new office space pose obvious challenges, these trends also offer tenants valuable leverage. Here’s how savvy businesses can adapt:
Negotiate for Better Lease Terms
With fewer office buildings under construction and vacancy rates rising, landlords are more likely to negotiate. Whether you’re seeking lower rents, more generous tenant improvement allowances, or shorter lease terms, now is the time to ask. The slowdown in new construction shifts the power balance, giving tenants a chance to secure more favorable terms.
Reevaluate Office Space Needs
As property taxes soar, now is a great time to reassess your actual space requirements. Does your team really need that sprawling office, or could a hybrid model work? By optimizing space usage and potentially downsizing, businesses can trim their occupancy costs and better align their office footprint with modern work practices.
Look for Sublease Opportunities
The rise in vacancies has led to an increase in available sublease space, often at a discount compared to direct leases. These spaces are frequently move-in ready, saving tenants from costly build-outs. If your business needs short-term flexibility or a cost-effective space solution, the sublease market in Raleigh-Durham could hold the answer.
Protect Yourself in Lease Agreements
When negotiating new leases, it’s crucial to carefully scrutinize tax-related clauses. Asking for caps on property tax increases or negotiating for the landlord to absorb some of the burden can help shield your business from unexpected spikes in costs. In a market like Raleigh-Durham, where property taxes are on the rise, these protections could make a significant difference in your long-term financial outlook.
The Future of Raleigh-Durham's Office Market
Looking ahead, the Raleigh-Durham office market faces continued uncertainty. High interest rates and expensive construction costs are likely to keep new development projects on hold. Meanwhile, the long-term demand for office space remains in flux, as businesses navigate the new world of hybrid and remote work.
But it’s not all doom and gloom. For tenants willing to adapt, this shifting landscape presents a unique opportunity to reassess their needs and take control of their lease negotiations. Whether it’s securing more favorable terms, optimizing office space, or finding a bargain in the sublease market, Raleigh-Durham tenants who stay flexible and proactive will be best positioned to thrive.
Adapting to a Changing Market
The Raleigh-Durham office market is in the midst of atransformation, driven by drastic changes in demand, rising property taxes andexpenses, and a construction slowdown. While these changes present challenges,they also offer tenants valuable opportunities. By negotiating smarter leases, optimizing office space, and staying informed about tax protections, businesses can successfully navigate this evolving market and position themselves for long-term success. In the end, those who remain agile will find themselves better equipped to thrive in this dynamic environment.
This is a time to embrace change, not fear it. After all, every market shift comes with its own set of opportunities—you just need to know where to look.
