Durham Development Post-Pandemic

Starting a thread to hear from others how they believe the trajectory of Durham will change in the post-pandemic world. I have a few free form thoughts to get the discussion started. Typing this on my phone so apologies for rambling or grammatical issues.

From a purely economic perspective, the Triangle as a whole feels well-positioned to weather a recession better than comparable regions across the country. Growth here has been strong but not explosive over many years. I was talking to the woman who sold me my house the other day and she said residential housing demand has continued to be very strong even in the middle of this. Maybe some of the more ambitious projects in Raleigh get tabled/reduced in scope but otherwise the region has been in fairly responsible growth mode. We are well-diversified from an industry perspective. No region is immune to what’s happening obviously but likely a less dramatic decline/faster recovery here.

With respect to Durham in particular, I think being in the early stages of the city’s resurgence is clearly beneficial. Most of the major projects on the horizon haven’t been launched or even have final development plans that have been made public. Original notions of those plans will have to be revisited and likely modified. I believe there will be less emphasis on density and building vertical. Commercial components of these projects will likely be scaled back as perceived demand for office space declines in the near term. We rely fairly heavily on expansion and second HQ projects that will likely take a hit temporarily. I personally am not a believer that this will dramatically change work from home posture for most companies on a permanent basis. We’ll see. Side note, will be very interested to see how this impacts the $1B Hub at RTP development that is very much predicated on the idea of creating density in the park.

As Dave has mentioned previously, a correction in construction costs could benefit these projects assuming capital is available. Assume folks like Northwood won’t have any issue in that regard but not as sure about the likes of Capitol Broadcasting or Austin Lawrence. The aggressive Triangle projects that are mid-phase or near completion will likely be challenged by the near term decline in demand relative to project costs. So I think the future projects in Durham likely become smaller, less dense and possibly will see changes in the intended use. I also expect that this crisis will encourage expanding development out into the urban tier versus maximizing the downtown core.

All that said, I think developers of the larger Durham projects have to be very happy to have the opportunity to reassess their plans prior to breaking ground. I expect that most or all of these projects will likely look quite a bit different than we have been anticipating. We could also see them substantially delayed or even put on hold indefinitely. But the long term continues to look promising based on all the factors we’ve previously discussed at length. My concern is that some of these folks will swing too far to the other end of the spectrum and we’ll end up with a bunch of cheaper or smaller projects that look very shortsighted in 5 years.

One big X-factor is how much of a hit Duke takes financially and how that impacts their plans for growth. Realize they have a massive endowment and will always enjoy strong demand from prospective students but even elite universities are suffering tremendously right now.

On the local government level, we are in better shape than most. I came across an analysis of local government finances from Brookings that showed that, relative to the 140 cities they looked at, Durham was actually likely to see the smallest impact in the short-term:

Those cities likely to feel mid- to longer-term impact are more reliant on property taxes and have a less-exposed local economy. Durham, N.C., for example, does not have a local sales or income tax, and less than 12% of regional employment is in high-risk industries.

It is possible, however, that foreclosures in property-tax-dependent cities (due to unemployment and the inability to pay taxes and mortgages) might happen more quickly than anticipated, driving property tax revenue down sooner than the typical 18 to 24 months.

Now, the situation is still obviously not great but I am optimistic that the City and County will have a year or two to adapt instead of the few weeks that a city like Columbus is facing.

I am a little curious about the methodology, considering both Durham City and County do collect sales tax revenues, not to mention the City collects hotel taxes and parking fees (both gone). Yet their spreadsheet shows Durham with 0% elastic revenues.

That said, property taxes still make up the majority of both entities' revenues, so the analysis is unlikely to have come to a much different conclusion. Furthermore, both are fiscally quite well managed with AAA ratings and very manageable debt burdens. All things considered, we are pretty lucky in this regard.