New study says office values are up nearly 30% over the past decade; experts see more growth on the horizon.
The value of Tampa Bay office properties has jumped by nearly 30% in the past decade, the result of rent growth and the prospect for further appreciation, according to a new study and industry experts.
Tampa Bay offices sold for an average of $172 per square foot last year, vs. $134 on a per square foot basis in 2010, according to a new survey by an arm of commercial real estate research firm Yardi.
But the 28.4% gain stems, in part, from a dearth of office trades at suppressed prices at the start of the decade — amid the most prolonged economic recession in decades in the U.S. — experts note.
“One has to remember that in 2010, there were almost no major office trades to speak of, and the properties that did sell were quite often distressed,” says Rick Brugge, an executive managing director on commercial real estate brokerage firm Cushman & Wakefield’s capital markets team, based in Tampa.
“Ten years later, by contrast, we’re in a very robust market,” Brugge adds.
The peak valuations for area office properties over the past decade occurred in 2015, the same year that insurance giant MetLife Inc. sold the 42-story Bank of America Plaza in downtown Tampa for a record $193.5 million to a partnership between Banyan Street Capital and Oaktree Capital Management.
That year, office properties sold for an average $184 per square foot, according to Yardi’s Commercial Café analysis.
Since the start of 2015, a number of major Tampa office towers — including Tampa City Center, Fifth Third Center, SunTrust Financial Centre and Park Tower, among others — have traded on encouraging prospects for continued white-collar job growth and the expectation that any new supply will largely be constrained.
The largest office asset to be constructed in the past decade, for instance, was the nearly 269,000-square-foot Crosstown Center I building, a six-story structure at 9527 Delaney Creek Blvd., in Brandon.
That project, which debuted in 2015, is fully occupied by USAA, a Texas, financial advisor and insurer of primarily military personnel. Late last year, Crosstown Center I and a companion building were sold to JDM Partners, of Phoenix.
JDM paid $106 million for Crosstown Center I, which was part of a larger USAA-occupied portfolio that traded for $385 million.
Nationally, by comparison, office values have risen by nearly 38%, or to $291 per square foot at the close of 2019 from $211 per square foot in 2010, Yardi notes.
But both Brugge and Clay Witherspoon, a principal in the Tampa office of commercial real estate brokerage Avison Young, say the value increase regionally is greater than 28%.
“Twenty eight percent, while an impressive figure, in my mind seems a little low,” Witherspoon says. “Because during that period of time, cap rates have compressed and rents have gone up significantly.
“Gross rental rates over the 10-year period are up 50%, and on a triple net basis, they’ve gone up by in many cases 60% in the Tampa Bay market,” Witherspoon says. “I think this market has matured. Rents justify the cost of purchases, especially involving deals that are below replacement costs.”
At Westshore Center, an office building in the dense suburban Westshore Business District, for instance, Witherspoon notes that rental rates have climbed over the past decade from about $22 per square foot, on a gross rental basis — meaning the landlord covers expenses such as utilities, insurance, janitorial services and the like — to about $33 per square foot today.
At SunTrust Financial Centre, a Class A tower in downtown Tampa, rental rates have risen from about $27 per square foot gross to over $40 per square foot gross.
Brugge says Tampa-area office rental rates increased 7.8% in 2019 alone, and they have spiked by an average of 7.4% over each of the past three years.
Both also believe that office rent growth should continue, based on anticipated job and population gains in the Tampa area projected through at least 2025.
“I think we’ll see rent growth of at least 5% per year going forward, which has a direct impact on values,” Witherspoon says. “And the new product that’s been announced, SkyCenter at the airport and Heights Union at The Heights, each are quoting rents of $43 to $46 per square foot, in that range, which will, in turn, increase rates in existing Class A properties.”
Brugge, too, contends future rental growth will send values further up.
“If the economy holds on, we could see some significant rent growth, especially if new supply continues to be limited relative to existing inventory,” he says. “There’s still plenty of room here for a lot of rental rate growth.”