In the renovated shells of warehouses and factories built when tobacco was king in North Carolina, Durham has fashioned a chic downtown that salutes its history while welcoming a new generation of companies and urban residents. Durham is in the throes of the largest historic renovation in the state's history, a $1.5 billion upgrade that has turned 3 million sq. ft. of formerly empty brick warehouses and plants into coveted downtown apartments, condos, Class-A office and retail space.

In this fresh incarnation of the city center, developers — many of them graduates of Duke and other local universities — have built flourishing restaurants and shops just a short walk from new, high-tech workplaces.

“Most cities have torn down all their old buildings and they're just building new stuff. We don't have a river; we're not a state capital. One thing we had were these old tobacco warehouses,” says Matthew Coppedge, a spokesman for Downtown Durham Inc.

But as it turned out, old buildings were exactly what the public wanted. Warehouses that languished for decades after the tobacco industry declined in the mid-to-late 20th century were targeted for renovation. Developers undertook seven major projects downtown, converting the old warehouses and other buildings to mixed-use projects.

The largest to date is a 1.3 million sq. ft. mixed-use redevelopment of former tobacco warehouses on the site of the old American Tobacco Co., which produced 90% of the cigarettes consumed in the United States in the late 19th century. The project is named after the tobacco company.

The first phase of Capitol Broadcasting's American Tobacco redevelopment cost $200 million. The second phase, at $85 million, is under construction, with an additional, $67 million mixed-use phase to follow. Running ahead of schedule, the project has helped push premium downtown commercial rents up from about $16 per sq. ft. to about $25 per sq. ft., Coppedge says.

“Everybody wants cool, authentic old buildings. You can't build 'em today,” he says. “We don't have any more left to renovate.”

Behind the scenes

But cool old buildings come with expensive challenges. It took years to create the American Tobacco Historic District, and one reason was a request for $40 million in public financing. At issue was whether the public should be asked to contribute to a commercial project, but the promise of 4,500 jobs in one of the city's most blighted areas helped convince the Durham City Council the investment was worthwhile.

Financing is often a make or break issue. Two young Duke grads — former co-captains of the Blue Devils basketball team — partnered with a Duke MBA grad and tried for years to pull together the financing to save a dozen historic Liggett & Myers tobacco buildings and transform them into part of the vibrant city they envisioned. More experienced developers warned that the project was too big to undertake.

But the trio managed to renovate five of the buildings in the 1990s, at a cost of nearly $40 million, creating 240 apartments, which were leased for about $15 per sq. ft. annually. A signature moment in the young developers' larger quest occurred on a day in June 2005.

Partner Tom Niemann, the MBA grad, stood before the City Council and in a choked voice described how hard the partners had worked to finish the first phase and how close they were to fulfilling the dream by completing the remaining seven buildings. He asked the city for $11.3 million in infrastructure assistance and tax incentives.

Less than three years later, Blue Devil Partners' West Village development is on target to become the largest historic renovation project in state history when it completes its $150 million second phase this summer. Combined with the $40 million first phase, the project edges out American Tobacco as the largest, with over 1.3 million sq. ft.

American Tobacco had its own tough road. Struever Bros. Eccles & Rouse, a Baltimore-based developer, was brought in to oversee later phases of the project. Struever bought and is redeveloping five buildings, including a former coal shed, into 53 apartments, 12 condos, 170,000 sq. ft. of office space, and a restaurant, an $85 million redevelopment project.

The project is located near the home of the Durham Bulls Minor League Baseball team, and is expected to be completed this fall. The property has its own story: A factory on the land once produced Bull Durham Smoking Tobacco.

With the success of the American Tobacco project, land prices have jumped, says Ken Reiter, senior development director for Struever. Parcels near the historic district recently sold for $1 million to $1.2 million an acre, Reiter says. Three years ago, comparable land sold for about $500,000 to $600,000 an acre.

“I think it's expensive; it's difficult to make numbers work for further development. What we're seeing in other markets is that land prices are pulling back down because they've been inflated, and with the credit markets the way they are there aren't as many purchasers in the marketplace,” Reiter says.

Debut of a restyled city

Durham's new prestige is a long time coming. Although it was home to Duke University, the city seemed overshadowed by Raleigh and Chapel Hill, sisters in North Carolina's Research Triangle, billed as the East Coast answer to the Silicon Valley. The population of Raleigh, the state capital, grew 12% from 2000 to 2003, to about 317,000, according to the U.S. Census Bureau. At the same time, Durham grew 5.9% to about 198,000 residents, while Chapel Hill, home of the University of North Carolina, grew 3.2% to a little more than 49,000 residents.

The cities' demographics differed, as shown in home values. In 2000, the median value of owner-occupied homes in Durham was $126,100, compared with $156,000 in Raleigh and $229,100 in Chapel Hill, census figures show. Of the three cities, Durham had the lowest per capita income.

But that may be changing. With Durham's new development and location just four miles from Research Triangle Park, which employs 40,000 people in private sector and government IT jobs, the downtown population is poised to grow from just 800 residents to 3,000 by late 2009, according to Downtown Durham Inc.

Downtown office occupancy has climbed from about 70% in the early 1990s to 90%, and the number of employees working downtown has risen from 5,000 to 16,000. Other signs of progress: The city is building a $44 million performing arts theater, scheduled for completion in September, and the Durham Bulls' aging ball park is slated for renovation.

Meanwhile, in Raleigh

Raleigh, too, is upgrading with $2.5 billion in new projects under construction or planned over the next three years, says Kris Larson, a senior planner for the city.

“We don't have a lot of old industrial warehouses and textile mills to convert in our downtown as does Durham,” he says. But the city does have more than 300 buildings being preserved and adapted largely through the effort of local developer Empire Properties.

Empire owns and is restoring 41 downtown buildings, about 600,000 sq. ft., at a cost of about $65 million, says Greg Hatem, president of Empire Properties, a privately held company. The buildings include old furniture stores, a newspaper plant, and commercial buildings near Fayetteville Street, Raleigh's main street.

The city is reopening to automobile traffic the corridor it enclosed for pedestrians in 1977. “It's not a major collector street, it's really just so you can have the experience of driving on Main Street,” says Larson.

A $220 million convention center is under development in the capital and has already booked 80 shows. It's also adding 900 hotel rooms to its stock of 610, a 150% increase and the most significant hotel investment in more than two decades. The new hotels include a $60 million 400-room, four-star Marriott, and an $85 million boutique hotel, The Lafayette, which Empire Properties will own and manage.

Raleigh is luring residents from costlier cities. “We get folks who come down and are able to buy park-front property in Raleigh, a condo on the 10th floor of a building for less than $300 per sq. ft.,” Larson says. A similar unit costs $1,000 or $1,500 per sq. ft. in New York City. “People are just amazed at what they can buy here.”

Developers choose local projects

The Bull City's history and legends are important to many of its developers. The legends range from the Duke family, which ran a tobacco empire and helped endow Duke University, to the ill-fated Durham Tobacconists baseball team of the early 1900s and today's Durham Bulls, subject of a 1988 film.

“I and one of my partners, we both grew up in Durham. We have deep connections here and probably a bit more passion than most. Most of our investors are local folks and I take our investment very seriously — we're making a long-term investment,” says Michael Lemanski, managing partner of Durham-based Greenfire Development, which bought and is renovating 29 buildings, mainly in the city center.

Greenfire, a privately held partnership, is pumping some $200 million into downtown, and snapping up architectural gems like the Art Deco-style SunTrust Bank building. The firm converted the Baldwin and Kress department stores to rental lofts and condos, and plans to turn the SunTrust building into a 110-room boutique hotel by 2009.

“Our downtown certainly suffered from the disappearance of the tobacco industry,” says Lemanski, an honors graduate of North Carolina State University with an MBA from the University of North Carolina. But Durham is unique.

“If you compare it to Chapel Hill and Raleigh, those downtowns have very different bases.” Raleigh is full of government employees, lawyers and lobbyists, while students stroll Chapel Hill sidewalks.

“Durham has always been more of an entrepreneurial town,” Lemansi says. When the local tobacco industry died, related retailers failed, too. But now the city is drawing businesses and individuals who illustrate a national trend, a rising urban creative class.

Overcoming obstacles

One of the toughest parts of working with historic properties for developers is dealing with old infrastructure. “You're landlocked and have to deal with say, parking decks that may be at the end of their useful life,” says Lemanski. “We're working in a city where some of the parking decks are 50 years old.” Developers work closely with the city to resolve construction issues.

Duane Marks, chief operating officer of Blue Devil Partners, overcame many obstacles related to the West Village project, involving logistics and financing. After Blue Devil purchased the Liggett & Myers tobacco property and converted the first warehouses into apartments, those efforts in the 1990s sparked renovation throughout Durham, Marks says.

“When we started phase one we were so far below market, so we kind of created a market,” Marks says. The market's reasonable prices motivated the company's competitors.

But the company's results have been heartening, as a number of Research Triangle workers have relocated to Durham. Still, Marks admits that much more work remains to be done in Durham. “It's kind of a diamond in the rough, so to speak.”

Historic tax credits

One reason Blue Devil and other developers chose to build apartments was the incentive of historic rehabilitation tax credits, which have contributed millions of dollars to Durham projects, and in many cases, enabled them to go forward. Of the roughly $200 million cost of West Village, state and federal historic tax credits contributed about $33 million, Marks says. “It's quite a bit.”

Lemanski agrees that historic tax credits have spurred restoration. The credits can be used as upfront funds, and can take some of the sting out of financing a project.

To participate, a developer finds a tax credit investor, usually a large organization such as a bank, corporation or public utility with significant tax liabilities in the state and specialists familiar with the tax credit program.

The investor might, for instance, buy $4 million worth of tax credits for $3.5 million. “To them, it's just a different type of investment,” Lemanski says. The West Village developers found that tax credits, along with other incentives, made the difference in changing the firm's — and Durham's — future.

“Use of historic tax credits sort of forces everybody to preserve,” says Marks. “You don't really have a lot of historic structures being torn down here.”

Denise Kalette is senior associate editor.

RALEIGH-DURHAM - BY THE NUMBERS

METRO POPULATION: 1.46 million

Source: U.S. Census Bureau

UNEMPLOYMENT RATE: 3.7%

Source: N.C. Employment Security Commission

LARGEST EMPLOYERS:

1. Duke University Medical Center
29,911 employees

2. International Business Machines (IBM)
11,527 employees

3. WakeMed Health & Hospitals
6,500 employees

Source: Research Triangle Regional Partnership

METRO AREA VITAL SIGNS

Office:

11.7% vacancy, 3Q 2007

14% vacancy, 3Q 2006

$19.51 rent per sq. ft., 3Q 2007

$18.79 rent per sq. ft., 3Q 2006

Source: Marcus & Millichap

Multifamily:

7.4% vacancy, 3Q 2007

8.5% vacancy, 3Q 2006

$793 mo. effective rent, 3Q 2007

$771 mo. effective rent, 3Q 2006

Source: Marcus & Millichap

Retail:

8.3% vacancy, 3Q 2007

7.2% vacancy, 3Q 2006

$17.69 rent per sq. ft., 3Q 2007

$17.25 rent per sq. ft., 3Q 2006

Source: Marcus & Millichap

Industrial:

16.2% vacancy 3Q 2007

17.3% vacancy, 3Q 2006

$4.24 asking rent per sq. ft., 3Q 2007

$4.12 asking rent per sq. ft., 3Q 2006

Source: Marcus & Millichap

Hotel:

65.7% occupancy, 3Q 2007

66.1% occupancy, 3Q 2006

$85.71 average daily rate, 3Q 2007

$78.69 average daily rate, 3Q 2006

Source: Smith Travel Research

MAJOR PROJECTS:

The Westin Raleigh Hotel & Residences at Soleil Center: The 43-story tower in downtown Raleigh will house the 290-room luxury Westin hotel, and 30,000 sq. ft. of meeting space. The tower will also house 54 upscale condominiums. The hotel will include a spa and fitness center.

Developer: Soleil Group

Completion: Summer 2009

Cost: $120 million

RBC CENTURA BANK: A 29-story tower housing 710,000 sq. ft. of mixed-use development. The project features 10 stories of office space and 10 stories of residential condos, along with several floors for parking. The ground floor will house retail and the RBC Centura Bank's U.S. headquarters.

Developer: Highwoods Properties

Completion: 2008

Cost: $100 million