Demand has slowly returned to the commercial real estate market, driving large gains in multifamily real estate and leasing.
Commercial real estate has had a miserable few years. It was bad enough when the residential slowdown left a trail of vacant space in its wake, but following the financial collapse of late 2008, nearly all industries were left struggling to survive.
Two years in, conditions are by most measures still very bad.
So why then are commercial experts like John Burpee so optimistic? It helps to have some small victories in 2010 on top of an abysmal 2009 — and some real hope for a better 2011.
Greenest shoot — multifamily
Burpee, chairman of NAI Tampa Bay, is swimming in positivity. His brokerage's specialty, Class A and B multifamily real estate, is in growing demand from both investors and renters.
Multifamily real estate has accomplished the seemingly impossible — higher sale prices. Pricing for large, quality multifamily units in the Tampa market has grown by $8,000 to $10,000 per unit, he says.
Capitalization rates, which measure the value of income-producing property, for transactions have also been declining — another sign that buyers are paying more for multifamily properties.
“Buyers are less concerned with the underlying financials,” Burpee says. “It doesn't seem to have as much impact on the assets. Class A and B product is getting gobbled up as soon as it's on the market. We're getting multiple offers. There's been a pretty significant uptick.”
Jonathan Richards, director of the Investment Properties/Multi-Housing Group for CB Richard Ellis in Naples, is seeing a similar trend in Collier, Lee and Sarasota counties.
“From an investor standpoint, multifamily has completely turned around,” he says. “We hit rock bottom last year ... in late 2009, probably [in the third quarter].”
Richards says that occupancies for large class A or B properties in Collier county have improved to around 93%. Lee is currently running between 90% and 91%, and Sarasota is more than 90%. Charlotte County, which only has a single large multifamily property, is seen as an anomaly at 60%.
National apartment tracking firm MPF Research reports that in the third quarter, the Tampa Bay area multifamily market is averaging a 92% occupancy. The best performing region in the Tampa area is North Pinellas County at 95.4% occupied, while the worst is the University submarket at 88.2%.
Those improved occupancies have also allowed landlords to end many of the costly recession-era concessions, such as months of free rent or discounted security deposits.
A big factor driving demand is the lack of new multifamily product. Jim Bobbitt, senior vice president of Tampa's multifamily housing market for CB Richard Ellis, says that many developers are only now looking for new development sites, pushing most future developments into 2013 or 2014.
However, the increase in demand doesn't apply across the board to smaller multifamily developments and C or lower class properties
“That tenant base hasn't gone back to work yet,” Burpee says.
Burpee says that the increase in multifamily demand has translated into revenue growth this year of 30% to 40% for just his company alone.
“The multifamily market led the way into the recession, so we are coming out two years ahead of the [rest of the market] recovery,” Burpee says.
Shoot fertilizer — activity
Most of what makes multifamily investment grow is that it is more easily financeable, according to Darron Kattan, managing director of Franklin Street Real Estate Services.
“Buyer demand for investment real estate is feverishly high,” he says. “Something good is happening. A year or two ago nobody wanted to buy anything. Today, [multifamily] debt is very financeable, which is pushing values up.”
David Stevens of Investment Properties Corp. says that low interest rates for investments and the chance to “steal” extremely undervalued distressed properties have combined to finally grow demand. It has led to some compression of yields for national triple-net leased properties. For example, Walgreens drug store buildings throughout much of the area have fallen from an 8.5% cap in early 2009 to 7%.
“The facet is turned back on [for investment],” Stevens says. “We are definitely seeing the restoration of the demand side.”
Nearly across the board real estate professionals are noting a sharp increase in interest in the second half of the year for most types of commercial. Although so far, most of the evidence of the shift is anecdotal.
For Randy Thibaut, of Fort Myers-based Land Solutions Inc., that upturn has translated into more activity from homebuilders. Recently, a few national homebuilders purchased land in 20- to 40-lot portfolios. In July, Thibaut's Land Solutions helped Toll Brothers purchase 122 acres of residential land on Imperial Parkway in Bonita Springs, marking the first time in several years that a builder bought that large a parcel of raw land in Lee County.
“Do I expect this is the beginning of an onslaught? No,” he says. “But I do see this as a sign definitely that we are at the bottom and at the beginning of an uptick. We have been seeing an increase in activity the last six months. A lot more people are looking and talking.”
Along with an increasing number of transactions and leases, Barry Seidel, president of American Property Group of Sarasota, is seeing growing call volume. Before the real estate decline, Seidel's firm averaged 73 calls a day. In the recession it fell to around 20.
“We're up to 50 now,” he says. “We are busy all day. We're doing more leasing for national companies. Two-and-a-half months ago, people started putting down contracts for significant money. Things are starting to move now.”
Fred Pezeshkan, CEO of Naples-based Kraft Construction Co. Inc., is also hearing a lot more chatter.
“I'm not seeing a lot of commitments, but there are a lot of conversations,” Pezeshkan says. “That was almost nonexistent a year ago. Some people are hiring consultants and doing due diligence.”
One exception is in the car industry, according to Pezeshkan says. He says that car dealers are pursuing new or expanded facilities. Developers are also moving forward with medical office space.
Ian Black, president of Ian Black Real Estate in Sarasota, believes a level of surety has entered the market over the past two years. Investors already have an understanding of what a worst-case scenario looks like, he says. There is also more of a comprehension among banks and sellers that a lot of people will have to take an economic hit to make a transaction happen.
“People are starting to hear that if you don't get in now you're not going to be able to get in [at the bottom],” Seidel says. “People are starting new businesses ... [and] making improvements to properties. I'm gutting a building I own on Main Street... Eventually it will pay off.”
Watering shoots — rentals
While sales are slowly growing in the marketplace, the rental market has roared back to life.
Brokers are consistently reporting a sharp increase in leasing activity compared to 2009. Tenants are choosing to take advantage of the down market to move to cheaper space or expanding to higher-profile or larger space.
Contractors are seeing this in an increase in tenant improvement jobs, Pezeshkan says.
“We've seen that in Tampa, Sarasota, Fort Myers and Naples,” he says. “No one is building new office buildings. We've got to burn off that [vacant] inventory, and in that way, I think its positive.”
Driving much of this leasing are vastly lower rental rates.
In Naples rents have fallen 25% to 35% from the peak, Stevens says, but the result has been a healthy absorption rate.
“Landlords are choosing half a loaf by filling space over letting it sit dark,” says Stan Rutstein, a Realtor with Re/Max Gulfstream Realty in Bradenton.
The only crane in town
Tampa-based Sage Partners LLC is one of the only developers currently building a new multifamily project along the Gulf Coast, but Debra Koehler isn't nervous.
Koehler, president of Sage Partners LLC, is positive that the company's planned six-story 120-unit Metro 510 development on the grounds of the historic St. Paul AME Church will be a winner. She's fine with being the only crane in downtown Tampa.
“We specialize in workforce and affordable senior housing and this is a very opportune time for that,” she says. “We also have a track record developing over 10,000 units of this type.”
Demand for workforce and senior housing, she says, is huge and there is almost none in that part of downtown near the Marion Transit Center facility. In addition, the construction slowdown allowed the project to receive extremely attractive construction pricing.
More difficult than actually building, she says, was financing Metro 510's construction. Assembling the entire deal took about 17 months and required seven different layers of financing. In one of the most important pieces the developer sold off federal tax credits to Bank of America and PNC Real Estate.
“We are obviously seeing a recovery in the financial institutions,” Koehler says. “The most impactful part of the equation was that [the banks] are profitable again. Buying these credits allows them to defer taxes.”
Sage properties plans to have Metro 510 completed in about a year.