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Charlotte-Lee-Collier
Business Observer Friday, Nov. 20, 2015 3 years ago

Naples, revisited

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Despite its affluence, Naples has historically been a bronze medal for national developers. Those thoughts are turning gold.
by: Kevin McQuaid Commercial Real Estate Editor

Naples didn't take the hit some areas along the Gulf Coast experienced when last decade's economic boom turned to bust.

Now in the recovery, Naples has surged ahead of much of the region in new investment.

Residential development has spurred talk of luxury condo towers for the first time in a decade. Senior housing is flourishing with higher rents and project openings.

High-end retail space, meanwhile, is commanding top dollar from investors who cite barriers to entry and limited potential for competition. And office space has traded for significant profit, snapped up by the same institutional investors who once considered Naples a purely third-level play.

“I don't see the area ever slowing down,” says Greg Hoffmann, a principal in Hoffmann Commercial Real Estate, a St. Louis firm that spent $74.4 million in October to buy the 5th Avenue Collection, a seven-building retail portfolio on Naples' tony 5th Avenue.

“Anyone who goes there understands why it's so unique,” he adds. “The look and feel of the properties, the whole dynamic of the restaurants, the quality retailers and the community is very exciting. There's really nothing like it in the world.”

Hoffmann's purchase of the 122,275-square-foot property is only one of a number of deals that have occurred in Naples so far this year, however, that point to a sustained recovery.

Perhaps most notably, Prudential Real Estate Investors, a subsidiary of the giant insurance and financial services firm, spent nearly $240 million in May to buy Mercato, a complex that contains 456,400 square feet of high-end retail and office space.

Mercato features more than a dozen restaurants such as Capital Grille and McCormick & Schmick's, a 12-screen Silverspot movie theater a Whole Foods Market, and retailers such as Nordstrom Rack.

“The prominent location, on-site amenities and high-quality tenant base in a market with a favorable economic outlook and strong demographics make Mercato an ideal income-producing investment to add to our clients' portfolio,” says Kevin Smith, head of the Americas for Prudential Real Estate, which had gross assets under management of nearly $59 billion at the end of last year.

Analysts note that institutional buyers like Prudential wouldn't have considered Naples even a decade ago, bypassing it in favor of so-called first-tier markets such as New York or Chicago or secondary locations like Tampa.

Today, Naples is evaluated along with the larger areas for significant investment on select assets, they maintain.

“From an institutional investment perspective, Naples has always been seen as a tertiary market,” says Gavin Campbell, a principal in Steelbridge Capital, itself an institutional investment firm formed in 2008.

“But now, it's viewed as a solid secondary market along with cities much larger in size,” Campbell adds. “That's been a sea change there over the past decade.”

Steelbridge also has profited from the upgrade in perceived stature.

In July, for example, it sold the SunTrust Bank office building it owned at 801 Laurel Oak Drive in Naples for nearly twice the amount it had acquired the property for in 2014.

Texas-based American National Insurance Co. paid $23.6 million for the seven-story building, according to Collier County property records.

Campbell maintains that high-profile corporate relocations to the area, like that of auto and truck rental giant Hertz's world headquarters, have also put Naples on the radar of many office users.

“What we're seeing now, and what we didn't see 10 years ago, are corporate office users examining our properties,” he says. “That's part of the reason we've doubled down on Naples as an area for investment.”

'Limited Competition'
But while retail and office deals have garnered the most attention, the residential sector — from senior housing to condominiums — has driven much of the growth and new capital.

Both WCI Communities and London Bay Homes have been particularly active in the area constructing single-family homes. That has driven condo and other types of residential building.

Lutgert Cos., one of Naples' premier development firms, has sold nearly half of the 52 Residences at Mercato homes it is building.

“It's the right project at the right time and in a great location,” says Howard Gutman, Lutgert's president. “The high-end market here, especially, got hit a bit, but really, not a lot went bad in this area. Now, prices are increasing and inventory is low. And there's limited new product because there's a lack of land, so competition is limited.”

In the exclusive Pelican Bay residential enclave, demand has picked up so significantly that Gulf Bay Marketing Group in June unveiled plans for the first luxury condo tower there in more than a decade.

The 21-story Mystique, slated to feature 81 residences on one of the few remaining buildable lots in the community, will be a joint venture between Gulf Bay Group and investment firm Kohlberg Kravis Roberts & Co.

Discovery Senior Living that same month debuted its new Discovery Village at Naples, which features a 120,000-square-foot clubhouse and independent and assisted-living residences, together with memory care units.

Those developments come amid a shift in living arrangements and demographics that benefit Southwest Florida as a whole and Naples in particular.

“A few years ago, people from up north couldn't sell their homes and move south to Florida, and now they can and they are,” says Ray Sandelli, managing partner of CRE Consultants, a commercial real estate brokerage with offices in Fort Myers and Naples.

“We're seeing a shift from more temporary housing on an annual basis to more permanent housing,” he adds. “And on the commercial side, that's prompting a tremendous amount of capital to chase a limited amount of product.”

Campbell notes, too, that the influx of residents has spurred demand for office space among service companies such as law firms and wealth management teams. The push is also drawing younger workers.

“The Naples area is not bulletproof, but the wealth that's there tends to insulate it a bit from economic dips,” Campbell says.

Even with the recent $74 million outlay, Hoffmann is already scoping the Naples market for his firm's next acquisition.

“We're hoping to get more real estate in that area,” he says. “Our goal is to own as much as we can on Fifth Avenue South.”

- K.L. McQuaid

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