Loading
By David R. Corder
Associate Editor
Office development sizzled the boom year of 1999 in the Tampa Bay area. Research produced by Cushman & Wakefield of Florida Inc. showed about 1.54 million square feet of new office space under construction during the first six months of that year in Pinellas and Hillsborough counties. This year, the commercial real estate services firm identified only 756,000 square feet of new construction in the first six months. That's a 51% decrease.
Construction of industrial space followed the same trend. Work started on about 706,500 square feet during the first six months of 1999 in the two counties. During the first six months of 2003, that figure totaled only 277,427 square feet. That's a 61% decrease.
Some of the most prominent players in the Tampa Bay area commercial real estate industry fear such softness in the office and industrial sectors shows no sign of abating - at least not over the next six to 12 months. Although lukewarm on the outlook for those two market segments, most of these professionals cite retail and residential construction as the two engines that will drive short-term development in the market.
Established Gulf Coast area office developers, such as Echelon Development LLC and The Hogan Group, consider retail development as an important market segment in each of their short-term growth strategies. St. Petersburg-based Echelon, for instance, is producing strong sales at its Carillon Town Center, a 21-acre retail center in the company's 432-acre Carillon Park office complex in St. Petersburg's Gateway submarket. Tampa-based The Hogan Group added a retail development division to offset the lack of demand for its services as a merchant developer of Class A office space.
"I'm cautiously optimistic," acknowledges Julio Maggi, Echelon's vice president of commercial development and president-elect of the Tampa Bay chapter of the National Association of Industrial Office Properties. "The economic indicators are starting to point up more consistently. We're seeing a bit of a pick up in (office) leasing activity - hopefully a precursor to the (negative net) absorption and higher vacancies than we would like to see - which could lead to the next wave of commercial development."
What's most encouraging is the makeup of the softness in the local commercial real estate industry, says Raymond E. Mills, Hogan's president and chief operating officer. Mills worked at Hogan during the recession in the commercial real estate industry in the late 1980s and early '90s, when the effects of the Tax Reform Act of 1986 and the collapse of the savings-and-loan industry brought the U.S. construction industry to a halt.
"The current state isn't as much a result of overbuilding as it was then, but it's maybe more a contraction or the less-than-optimistic projections corporations made as the economy softened," Mills says about the current state of demand for office space. "For instance, I think the financial institutions have done a pretty good job this time of controlling capital."
It's a good bet retail development will continue to follow the strong residential growth throughout the Tampa Bay area, says Craig Sher, president of St. Petersburg-based The Sembler Co., one of the top retail developers in the southeastern United States. He expects growth to follow scores of planned and existing single-family home projects along the major traffic arteries - the U.S. 301 corridor in southwest Hillsborough, the Interstate 75 corridor in northwest Hillsborough and southwest Pasco County and along the Veterans Expressway/Suncoast Parkway corridor, which links Hillsborough, Pasco and Hernando counties.
"To me, however, it's all about infill," Sher says about Sembler's retail development strategy. "Certainly, Pinellas County is all but built out. In the major metro areas, it's all but built out. The most exciting and productive developments will be the redevelopments, such as our work on the Clearwater Mall."
But even retail may have its limits, Sher says. "Is it going to be better or worse than in a year? I will say it's going to be about the same. In the retail business we've not seen hard times; we've not mirrored the national economy. My brethren in the industrial and office sectors are in pretty bad moods, though. But as the economy begins to take off, I think it will only get better."
Economic indicators figure greatly in any forecast Maggi makes for Echelon. Job growth is key, for instance, because corporations are unlikely to plan an office or plant expansion unless production output follows. State unemployment data shows the Tampa Bay area - Hernando, Hillsborough, Pasco and Pinellas counties - experienced a 1.45% loss in jobs from May to June. The latest available data showed only a 0.9% increase in June, compared with the same month last year.
"At this point a lot remains to be seen," Maggi says. "There's generally a feeling we've turned the corner, but there's a lot left to be put into place. Hopefully all the accounting scandals are behind us. Corporations are a lot more conservative in how they report their earnings, which is good for investors. That's brought a lot of buyers back into the equities markets, which bodes well for research and development, plant expansions and equipment purchases. I don't think anybody is going into a full spring, but we're starting to pick up the pace."
As the commercial market lags, long-time office developers such as Opus South Corp. adjusted operating strategies to take advantage of new opportunities. For instance, the Tampa-based office developer is investing about $170 million to build two condominium towers in downtown St. Petersburg.
"We are seeing some slight improvement in (Tampa area) office occupancies, but rental rates are still down," says Jerry T. Shaw, Opus' senior vice president of real estate. "It's not where it needs to be to stimulate new commercial development. That also holds true for industrial. I think the bright spots right now are retail and residential. The Bay area still is performing way above the national averages."
Although hopeful, Shaw expressed reservation about whether the all-important national economy is poised for a rebound. "I'm trying to be realistic," he says. "Almost every publication I read said the market was turning a year ago. So I think you hit on a key: It's going to take a little bit of patience."
Still, Shaw thinks the Tampa Bay area is better positioned for a recovery than most other metropolitan communities. "The thing that stands out in my mind is this is still a great place to live," he says. "That's what's driving the population growth, the residential growth, the retail growth and ultimately will drive the commercial growth."
In Pinellas, multifamily construction should continue to thrive over the short-term, if interest rates remain low, says Patrick Duffy, president of Clearwater-based Colliers Arnold Commercial Real Estate Services. The challenge, though, is operating in a county that is about 97% built out.
"You can't bring more supply on line," Duffy says. "So if the supply remains constant, and there is no significant new supply available, then you're going to get a big run up in prices. The beach is a good example. They're ripping up the mom-and-pop hotels and are putting up condos. But as the mortgage interests rates go up (he assumes they will), then the ability of the consumer to buy $400,000 to $500,000 condos is diminished."
As for development opportunities in Pinellas, Duffy puts his money on downtown Clearwater. "It's one of the most underused (metro areas) in the state. You've got strong demographics on Clearwater Beach and strong demographics all around downtown. There's a zone west of Missouri Avenue that used to be pretty rough industrial. That's going to get squeezed out. There's new development already on either side of it."
The outlook for industrial growth - warehouse, distribution and manufacturing - is much stronger than the office sector, says Bob Abberger, Tampa-based managing director of Florida development services for Trammell Crow Co. The firm owns, operates or manages about 6 million square feet of office and industrial space in Hillsborough and Pinellas.
"While we're seeing some indication of pent-up decision-making, I think there's enough clear indication of both direct and ghost vacancies in the office market to keep new development in this sector depressed through 2004 and into 2005," Abberger says. "I think the industrial front is far more optimistic. We've got clear signs the I-4 corridor is probably one of the hotter growth prospects in the state of Florida. But the key to whether this occurs is whether nor not we address improvements to our roadways so that the distribution corridors continue to function."
While commercial development lags, Ray Sandelli, CB Richard Ellis senior managing director in Florida, anticipates continued strength in the downtown Tampa area as an investment market. The Tampa office market, for instance, has attracted significant dollars this year from investors such as Pennsylvania-based American Financial Realty Trust, California-based Triple Net Properties LLC and Germany-based Oppenheim Immobilien-Kapitalanlagegesellschaft MBH. Those three investment groups have accounted for about $100 million in investments in downtown Tampa over the last few months.
"The investment business has been very strong, especially with multihousing," Sandelli says. "We're obviously a state of migration. So the apartment market has been sought after for development. Particularly in South Florida, and we're seeing the same trend in Tampa, it's the conversion to condominium. If you look at the way apartments were constructed over the last seven to eight years, they were constructed closely to what condominiums offer."
That's why Sandelli, who also serves as chairman of the Tampa Downtown Partnership's residential committee, thinks downtown Tampa is poised for a potential multifamily growth. But he offers that comment with a caveat.
"You're seeing a great interest in downtown, especially the Channelside District, but nothing in downtown happens in totality," he says. "Down here, it's always been one piece at a time."
Your free article limit has been reached this month.
Subscribe now for unlimited digital access to our award-winning business news.
Join thousands of executives who rely on us for insights spanning Tampa Bay to Naples.
