Too hot to handle?

• Author: Mildenberg, David
• Position: Real estate development in North Carolina - Includes related articles - Industry Overview

The Triangle is a hot real-estate market. But developers who recall the '80s are trying to keep their cool.

Craig Davis thought he was pretty hot stuff as a basketball player until David Thompson jumped over him to jam a dunk during a practice session his freshman year at N.C. State. That lesson in humility convinced the touted recruit, who succeeded Monte Towe as the Wolfpack's point guard, that his future probably lay off the basketball court.

A sense of one's limits also has helped Davis score some winning points in the Triangle commercial real-estate market, which has tripped up more than a few overly confident developers during the past decade. Davis foresaw a niche in the plain-Jane warehouse market, figuring out a way to stay active when most of his rivals were idle. "Our goal originally was to be the main warehouse supplier of RTP," he says. "We've now developed 1.7 million square feet of this kind of facility, which is saying something since there wasn't even 500,000 square feet in this market."

In both attitude and performance, Craig Davis exemplifies the sobering attitude sweeping real-estate development. What's remarkable is that such an attitude is prevalent even in the Triangle, arguably the hottest commercial real-estate market in the nation. This is, after all, the place Fortune magazine described as the best in the nation for "knowledge workers," that Ernst & Young's "MarketScore" rated the best for investing in commercial real estate, that a half-dozen other surveys and studies praised for its real-estate potential.

"There's nowhere else in the country that's doing this well," says Carlton Midyette, president of Carolantic Realty, one of Raleigh's biggest real-estate companies. Adds Davis, who has become one of the Triangle's top developers before he has turned 40: "We think the Raleigh-Durham market is uniquely positioned to grow."

Talk to folks in Charlotte and you'll hear the same thing about their city. "Charlotte has one of the tightest office and industrial markets in the nation," says Thomas O'Brien, senior managing director of CB Commercial Real Estate Group's North Carolina office. As of the end of last year, only three cities -- Columbus, Las Vegas and Washington -- of 54 markets CB Commercial surveyed had lower office vacancy rates in their central business districts.

Then how come everybody is so cautious?

The answer is, there are still a lot of people whose memories go beyond three months and whose enthusiasm is tempered by a harsh reality: A similar surge in optimism a decade ago led to a burst of development that caused such Triangle veterans as Smedes York, Roddy Jones and Harold Lichtin to get overextended and wind up losing properties to their lenders. And those are among the lucky ones who had pocketed enough to hang on and now stand poised to profit from this upturn. Others whose bank accounts got vacuumed are idle or making a living some other way.

The new reality, survivors say, is that to make dirt move in the '90s -- even in the hottest markets in the country -- requires a thick wallet, a deep organization and a good deal of luck.

"Given the cost of land, you're not likely to see a new office project in Charlotte's central business district that is smaller than 300,000 to 400,000 square feet," O'Brien says. "That's a $35 million or $40 million investment, so it's not a simple decision. And lenders ask developers all kinds of hard questions nowadays, like how are you going to pay the money back."

While bankers say that the money is flowing more freely, they concede there's considerable wariness about real-estate lending. "The bad loans are made in good times," says Jim Beck, president of Alabama-based Southtrust Corp.'s Raleigh bank. "Banks again seem to be going after the best deals with the best developers. And 'best' now means those developers that are left."

The fortunate survivors have well-heeled, patient financial backing. For example, Connecticut-based GE Capital is the money behind Craig Davis Properties' Research Tri-Center Park -- a massive conglomeration of warehouses adjacent to Research Triangle Park. The Pitcarin family of Pennsylvania, PP&G heirs, are backing Lichtin, whose developments include Interchange Plaza, an office park aimed at small companies that want to be close to, but not inside, RTP. New York investor Jack Parker owns Parker Lincoln Developers, which has scooped up a variety of Triangle office, retail and manufacturing developments in the past year.

Most agree that it's a much saner market than 12 to 15 years ago, when vacancy rates were similar. Back then, almost anyone able to do lunch with an S&L executive or limited-partnership syndicator could get a project going. Largely due to the beneficence of those S&Ls and deal makers, Midyette notes, there were 25 to 30 investor groups capable of building a 25,000-square-foot, multitenant office building in the Triangle. At the peak of the cycle, 1985-86, as many as 16 office buildings were under construction, each aimed at landing part of IBM as a tenant.

Now, with fewer lenders and tax-code changes making real-estate investing much less lucrative, no more than three or four such groups remain in the Triangle, Midyette says. Speculative office and warehouse projects can be counted on one hand. "A lot of people are dead and buried because of what happened here," he says. "Others can't get financing or don't have the will, pre-leasing, equity or organization to pull off a project."

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