For 10 years, Scott Selig has been Duke’s man downtown. The university’s associate vice president of Capital Assets and Real Estate has overseen Duke’s strategy of leasing up sizable chunks – but nowhere close to a majority – of downtown office space in an effort to spur revitalization. If you’ve been downtown anytime in, oh, the past three years, you can see the strategy has paid off. Duke leases well over 500,000 sqaure feet of office space housing more than 1,700 full-time employees, and many have praised that commitment as a catalyst for downtown improvements. But it’s no secret that the recession has slowed momentum downtown, and there are other challenges on the horizon. Durham Magazine Publisher Dan Shannon and Editor Matt Dees sat down with Scott in his American Tobacco office to get his take on when – and how – the next round of downtown growth will come to pass.
DM: Two, three years ago, downtown Durham was red hot. Greenfire, Scientific and others were developing all over downtown. Then it stopped because of the recession. Give us a view of Duke’s perception of what happened, what’s happening now and a prognosis for the future.
SS: I will tell you downtown Durham is still red hot. It still has the highest rental rates and the lowest vacancy rates in the Triangle. We keep getting positive in-flow, positive absorption downtown, which you’re not seeing in other markets. The issue is on a more global basis, if you will. The economic recession has stopped the building and development process across the board because the banks don’t know how exactly to lend in this new market. So development has stopped or has significantly slowed down. But the market has not slowed down. We still have more people looking for large spaces that don’t exist downtown. You can’t hardly find 25,000 square feet of contiguous space in downtown Durham. The problem is we have 50,000-square-foot users and 75,000-square-foot users that are boxed out, and their credit is not strong enough to have a building built.
DM: Four years ago, the banks might have said, ‘Great. Build it.”
SS: Right. And now they won’t. That’s the change.
DM: What’s the average square-foot cost to lease office space?
SS: First-class office space is going to run you about $25 per square foot.
DM: Has that gone up or down?
SS: It’s ticked up because there’s scarcity. It’s absolutely supply and demand.
DM: Duke’s strategy is guaranteeing a certain square footage to lease when a big project is up for consideration. Explain how that works.
SS: Duke’s strategy is we know that Duke is only as good as Durham is, specifically downtown Durham. We have to attract the best faculty, staff and students. In helping to revitalize downtown Durham, we said Duke will lease space, but we will only lease space as much as you lease to other people, because Duke should not be down here alone. Downtown Durham should not be Downtown Duke. Downtown Durham should be an interesting place with lots of different business of which Duke is just one. So we said we will lease 150,000 square feet in American Tobacco, but only if you have 150,000 square feet of other for-profit institutions. We are just a credit tenant, we are not a developer.
DM: Strictly speaking, you’re not even an investor.
SS: We are not an investor at all, no. But we can use the quality of our credit to help developers go to the bank and borrow money.
DM: Yale and others took a different approach, investing in properties they still own. Why did Duke go another way?
SS: There were a number of reasons. First of all, we didn’t want to take the properties off the tax rolls. The city and county needs to have that tax revenue, and a 501c3 owning it would take that away. Secondarily, we believe the private sector redevelops more efficiently than an institution would.
DM: What was the time line of all this?
SS: American Tobacco had been discussed since about 1999. We really became active in it in about 2003. We tried to do it project at a time. We concentrated to make a big splash in American Tobacco. As it appeared to us that was going to work, we began to move in a larger sense to West Village. It started with West Village in a sense. Laettner, Davis and Niemann really pioneered with that project. But, as with anything, there’s a continuum. Back before that, there was Terry Sanford Jr. at Brightleaf. But the big push was American Tobacco.
DM: So, the projects that have stalled, the Greenfire projects, the Scientific projects, have you talked with them at all about Duke getting involved as a credit tenant with them?
SS: We have been talking. But the rules have been significantly changed. So the bar is higher for the banks to lend on the same transactions. The developer has to come with more credit, with more equity. The bank wants it to be a less risky deal. So the entire equation, not just one piece of the equation – the credit tenant – has changed.
DM: Those companies we mentioned, they’re also saddled with history. They’re saddled with purchases made, commitments to banks, commitments to investors. So, they might not be the ones you go with in the future? Are they damaged goods?
SS: I don’t believe they’re damaged goods at all. They got caught with a market and got caught in buildings that are historic renovation projects, which are more difficult to do. When you take a high-rise with a relatively small footprint …
DM: Like the Suntrust building?
SS: Right, like the Suntrust building or Hill Building, as it’s called. There are fewer users that can use that kind of footprint. There are people very interested in that building that would lease it today if they could figure out how to get the financing to work. So it doesn’t take Duke. There are plenty of good tenants wanting to come to Durham. But we’ve got get some of the economics right.
DM: The residential aspect seems to have waned a bit. Is that accurate?
SS: I don’t think so. I think West Village is completely full. There aren’t a whole lot of vacant units downtown. People want to be here. This is the hottest real estate in the Triangle. People want to be where the action is. And the action is all in Durham.
DM: But the banks don’t seem to agree.
SS: The banks do, but they have lending rules that are affected not just by downtown Durham, but by what’s happening elsewhere. For example, Progress Energy leaves up to 800,000 square feet in downtown Raleigh. Values for high-rise office buildings in Raleigh could drop. The appraiser’s then going to say, ‘Well, if you’ve got an office building in downtown Durham, it’s got to be affected by that value drop in Raleigh.’
DM: Do you think the banks are being too rigid? In other words, do you think that level of caution is appropriate?
SS: On a national level, because there are national buyers, yes I do.
DM: So the million-dollar question is: if you’ve got high-quality tenants ready to go, people chomping at the bit for office space, it’s the hottest real estate market in the state, what’s it going to take for banks to open financing back up?
SS: It’s going to take time. Time for the pendulum to swing back as people at the financial institutions who were worried about losing their jobs come back and say, ‘Look, I have to take some risk, which means I have to lend money.’ That’s how they make money. But for a long time they’ve been hoarding that money simply for lower risk exposure and to clear out some of these projects that are very much teetering on bankruptcy.
DM: Has that clearing out begun?
SS: It has begun. It is not completed. I think it will be another solid year before we see any significant change.
DM: Then we’ll start to see more commitment to buildings? Because we have to build here, right? That’s inevitable.
SS: It’s inevitable. It’s probably not short-term. There will be more renovations. We also have the stormwater issues with the new stormwater rules that will make it harder to develop in downtown Durham. The basics are you have to retain all the water that falls on your property, and you have to clean it up before it leaves your property. The cost of building those tanks, those bioremediation facilities, especially downtown where land is squeezed, is very different than going out in Southpoint and building a pond to handle runoff from your parking lots. So especially in an urban environment, those requirements are going to make it much more difficult to do renovations.
DM: Are those unreasonable requirements, in your view?
SS: Well, how much is the environment worth? It’s about protecting drinking water, groundwater. It is onerous, but it is probably needed, and we will find creative solutions to handle this.
DM: So there are plenty of challenges. But let’s try to put some of the major strides downtown has made in some perspective. Ten years ago, could you have envisioned what downtown has become?
SS: In 2002, I think we knew how to help it along. I don’t think anyone envisioned how successful it would become. It was much more than Duke that made it happen, a combination of risk-takers. It was Greenfire, the Goodmons, Scientific, and, perhaps most importantly, the city and the county. They said we’re bringing the infrastructure, the parking decks, the road improvements, DPAC, though Duke contributed over $7 million. The government took the risk early on and had the vision of what downtown could be.
DM: Governments aren’t usually the recipients of credit for vision.
SS: Not at all. It’s entirely unusual.
DM: Everything seems to be going toward Durham in the Triangle, don’t you think? It seems like we’re the center of gravity now.
SS: Yes. We are significantly past the tipping point. The key is not to have Durham grow. Durham will grow. The key is to make sure we have quality growth.
DM: Define quality growth.
SS: That to me is having quality companies move their executives here who make investments in the community, who get involved in projects. Not necessarily a regional hub of some company, but when their CEO, CIO, COO and CFO, then their families attend the schools, their spouses get involved in committees, they run for everything from dog catcher to mayor. They have a vested interest in Durham, and they won’t leave at the first wind of an economic downturn. I don’t care if that’s creative class or if it’s manufacturing bobble heads. It’s that people make the commitment to be in a city and live in a city.
DM: What’s the next big thing downtown?
SS: I think you’re going to see downtown become much more of a laboratory for science than what we have seen. You could see incubators that are literally science labs.
DM: Will Duke invest in these as venture capital, sort of a Stanford model?
SS: We have not in the past, so I doubt we would start with that kind of investment.
DM: OK, so who’s doing the investing? Who’s backing this?
SS: I’m not sure, but the next logical step is for smaller companies who are creating the new interesting science to come in. Those smaller, more creative groups, want to be in a more vibrant environment than to be on a suburban campus like out at RTP. They’re going to naturally move to downtown.
DM: The chaos in the Wake education system. Some are calling it the resegregation of Wake County schools. That’s going to have an impact on Durham, perhaps with people fleeing Wake?
SS: I don’t see people fleeing Wake as much as I see people considering moving to this area and reading about what’s happening in the Wake County schools and then reading about what [Superintendent Eric] Becoats and the schools in Durham are doing. And they’ll say, ‘Wait a minute. I want to be where they’ve solved these problems and where they’re moving forward rather than fighting among themselves.’
DM: Just to play devil’s advocate here for a minute, is that really true? There’s a certain demographic, people who identify more with urban areas and lifestyle, who prefer Durham. But there are still plenty of people who dig the suburban feel of Wake and Orange. And then there are the people just look strictly at test scores when deciding where to move, and Durham’s still got a long way to go in that department.
SS: Absolutely. We’re not a complete picture yet. More people still know where Raleigh is. But Durham was not on the list 10 years ago. Durham may not be on the top of everybody’s list but I can promise you, it’s on everybody’s list. And the site selectors who are looking to move companies here, Durham is near the top of the list.
DM: It’s clear Durham is trending positively and that some more success seems almost inevitable. But what are some potential problems on the horizon?
SS: I don’t see the schools as the issue. There are two big ones I see. The stormwater issues, as boring as that sounds, are going to make it tough to develop. And the slow process of getting permits in Durham hurts businesses that want to move here. And probably the third threat would be the city’s and county’s ablility to finance the growth, making sure the quality of schools, roads, police, fire, etc. keep up with the population growth.
DM: Tell us more about the slow development approval process in Durham. Is it slower than other places?
SS: Yes, behind Chapel Hill, it’s probably the slowest in the area.
DM: When a city booms, it can crowd out the middle class, particularly those on the lower rungs of the middle class and below. Obviously socioeconomic diversity is a big part of what makes Durham the dynamic city it is. How does Durham stay Durham?
SS: I am not the best person to answer that question. But I’ll give you my answer. I believe there is plenty of high-quality, medium-priced housing in the Durham area and plenty of opportunity for more because land costs are relatively low. So, for the next 15-20 years, I don’t see [the middle class getting squeezed out] as an issue. We don’t have the same issues that Seattle and other places have that have geographic boundaries such as water and terrain that keep them from developing new housing.
DM: What about tax credits, particularly for these historic buildings? Can’t those help?
SS: Tax credits are vitally important, both historic national credits and new market credits. It takes a mixture of that recipe to make those deals work. But even the tax credit market isn’t as strong as it once was because there’s not enough companies that want to buy the tax credits, simply because they’re not making enough profits to need the tax credits.
DM: Is there some new developer better chance of moving forward
SS: The actual developer doesn’t affect Duke’s decision that much. We would prefer, if we can, to work with local developers. Both Greenfire and Josh Parker and his group are local. We’ve worked with both. Where the developer is from is not as important as the creation of value and wealth and the actual project and Duke’s ability to use that project. We didn’t bring people down here just to spend money. We brought people down here to create community. Now people want to come down here. The first few people were very afraid. Now they’re almost asking to come downtown, to leave campus, to work.