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Healthy Restraint
The Gulf Coast region's commercial real estate industry is well positioned for growth. Expect to see many new homes.
By David R. Corder
Associate Editor
Among some circles John Swart and Larry Richey might be cast as heretics. Neither of these real estate professionals thinks the Gulf Coast region suffered too badly this year from a lack of commercial construction. Truth be known, they regard it as a healthy market reaction that could position the commercial building industry for positive gains next year.
Any gain in the office and industrial sectors is good news for the Gulf Coast real estate industry, where the residential housing market far outpaces all other sectors and the multifamily sector continues to produce high occupancy rates.
Such restraint in the office and industrial sectors should only amplify the gains produced this year in Sarasota and Manatee counties, says Swart, president of Bradenton-based Lakewood Ranch Realty Inc. Office vacancies are down in each county's major submarkets, according to the most recent reports available from each county's board of Realtors. Both counties show continued improvements in the absorption of vacant office space.
"We're feeling pretty good about the market, and looking for good things to happen in '04," Swart says. "Part of that is the rebound of the stock market and people feeling better about their net worth. We've been really fortunate. There is no one in this market building speculative office space. They're usually pre-leased or owner-occupied. For that reason, we've not suffered from major vacancies."
To the north, Richey expressed optimism about new indicators emerging from the quarterly industrial and office market surveys his commercial real estate services company publishes for Hillsborough and Pinellas counties.
"One thing we continue to do well as a community is to restrain speculative development in the face of this modest demand that we're experiencing," says Richey, senior managing director in the Tampa office of Cushman & Wakefield of Florida Inc. "We're not exacerbating it by building a lot of speculative space, which is good."
Impact of restraint
Such restraint had a particularly positive impact in Pinellas County, according to Cushman & Wakefield's most recently published report. Direct office vacancies - total vacancies sans sublet space - averaged about 12.3% in the third quarter ended Sept. 30.
Year-to-date net absorption for the quarter improved to 304,568 square feet. The same is true for Pinellas industrial properties, where the third-quarter survey showed an overall vacancy rate of 7% and a positive year-to-date absorption of 223,310 square feet.
Across Tampa Bay, however, Hillsborough office vacancies still remain a problem. The Cushman & Wakefield third-quarter report estimated the direct vacancy rate for office properties in Hillsborough at about 18.5%. Year-to-date absorption also worsened. Consolidation of space by companies such as Cigna, Verizon and Bank of America produced negative absorption of 237,720 square feet.
"The last three years have been challenging in many ways - most specifically in the user-driven office and industrial sector," Richey says. "I say that because the real estate investment sales market has been active for a number of years at record levels and continues to be."
Unlike the county's office market, the Hillsborough industrial occupancy remains stable at about 9.4% and produced positive absorption of 96,622 square feet.
Richey says early indications are promising in Cushman & Wakefield's as-yet unpublished year-end and fourth-quarter survey.
"I will tell you that we have definitely seen an improvement in the underlying employment base in 2003," he says. "Our year-end statistical analysis will reflect that in both the office and industrial markets. We'll see positive net absorption in 2003. And we'll see a major improvement in the fourth quarter. Frankly, the way I see it, the first quarter was the most challenging, the third quarter was break even and the fourth quarter is the major improvement."
Bursting at the seams
On the other hand, residential still far outpaces all of other real estate sectors in the Gulf Coast region. The growth at Neal Communities of Southwest Florida Inc. best illustrates that fact.
"Our third quarter was 223% of plan," says Pat Neal, the Bradenton-based firm's owner and president. "The reasons are threefold: It's the confluence of a very low interest rate environment, plus an economic boom aided by consumer confidence, plus the demography of retiring Baby Boomers."
Neal doesn't see any sign of abatement in the Gulf Coast residential market. Market surveys support his contention. The Construction Guide, a Sarasota-based research service, reports that all government agencies in Sarasota and Manatee issued 5,940 single-family building permits through the nine months ended Sept. 30. That's about a 25% increase over the same period a year ago.
"My own view is we'll have a very hot housing economy in Sarasota, Manatee, Pinellas, Pasco, Citrus and Hernando for some time," Neal says. "The return of consumer confidence with such magnitude is unexpected. Everybody in my industry is busy. We'll have some growing pains in 2004, but that's a good thing as long as long as we recognize them and plan for them."
Such growing pains particularly concern residential builders such as Lee Wetherington, owner and president of Sarasota-based Lee Wetherington Homes Inc.
His firm expects to end the year with about $107 million in sales on about 300 homes. That's about a 49% increase over the $72 million in sales the firm produced last year.
"We're dialing in the same number for next year," Wetherington says. "We're not looking to expand. As with all companies, as they reach different plateaus, they encounter brand new circumstances and obstacles. Sometimes you have to stop, align your systems and then go on. The next 12 months is a refinement of our systems."
Housing growth in the Tampa Bay area counties of Hillsborough, Pinellas and Pasco remain well above the national average, says Tony Polito, director of Metrostudy's Tampa division. Total housing starts increased by 16.5% to 15,276 through the third quarter this year.
The market research group recorded 4,882 single-family housing starts just during the three months ended Sept. 30 - a 15.2% increase over the same period last year.
The research group also recorded an inventory of 14,681 vacant developed lots through the third quarter, an increase of just less than 1% over the same period last year.
"Based upon the annual starts rate, this level of inventory represents an 11.5-month supply, a decrease of 2.2 months compared to last year," Polito says.
High occupancies
Even amid this residential housing boom, the Gulf Coast multifamily sector continues to maintain relatively high occupancy levels.
Third-quarter occupancy averaged about 94.9% in Hillsborough, 94.7% in Pinellas, 93.9% in Manatee and 93.8% in Sarasota, according to Tampa-based Triad Research & Consulting, Inc., a real estate market research and economic consulting firm.
Low mortgage interest rates enticed many Gulf Coast renters into new homes over the past few years, says Michael Slater, Triad's president. So multifamily landlords responded with lease incentives as inducements to stay. That trend is slowly fading, however. "There is a slight improvement over the third quarter of '02 - not much, but slight," he says.
Hillsborough still dominates the multifamily landscape, Slater says. The Brandon area in southeast Hillsborough continues to produce the most multifamily construction followed by the New Tampa area, which covers an area from northeast Hillsborough into southeast Pasco.
"New construction has declined moderately, though several projects remain in the pipeline for development over the next 12 to 18 months along the I-75 corridor, Citrus Park (northwest Hillsborough) and south county - that area south of Brandon toward Sun City and Apollo Beach," Slater says.
In Pinellas, the issue is about supply, Slater says, especially as developers continue to convert rental products into condominiums. "The outlook for Pinellas County remains very strong with rental demand remaining constant and new construction and product inventory declining in concert with units leaving the market due to conversion," he says.
To the south, the outlook is mixed. Manatee multifamily occupancy dropped about 1.6% from the third-quarter last year.
"There are a couple of projects in the pipeline for the next 12 to 18 months," Slater says. "And Manatee County appears to be positioned to benefit from future urban expansion southward from Pinellas and Hillsborough due to the lack of developable land in Pinellas and the oncoming urban expansion southward through south Hillsborough County."
Multifamily occupancy in Sarasota climbed about three-quarters of a point from a year ago, Slater says. He attributes the increase to the stability of new products that came to market over the past 24 to 36 months.
"The pipeline of new construction projects in Sarasota County is limited," Slater says. "Sarasota County has followed the trend appearing in Pinellas County, with three recent multifamily projects converting or being acquired for conversion as affordable, 'for sale' condominium products, further reducing the available rental multifamily inventory."
Tampa Bay MSA office market
Third-quarter 2003
Overall vacancy Direct vacancyAsking
SubmarketInventoryrate (%) rate (%)Absorption*rents ($)**
Tampa CBD6,125,22720.418.5(221,152)18.56
Tampa Westshore10,709,50917.114.0(145,806)19.48
Tampa Northwest3,445,17414.513.036,50815.87
Tampa I-75 Corridor6,089,47031.429.874,27719.05
St. Petersburg Downtown2,554,76811.67.5116,76017.56
Pinellas Gateway3,752,49420.516.7107,14816.46
Pinellas Bayside1,509,02012.911.11,32815.81
Pinellas Countryside1,207,76910.910.011,15716.81
Clearwater Downtown753,97716.515.5(17,373)15.32
Total all submarkets***38,378,67219.016.711,88418.18
*Overall year-to-date absorption, ** overall weighted average asking rents, *** includes Southwest Hillsborough, Tampa Ybor City, Tampa Hyde Park, North Pinellas and South St. Petersburg
Third-quarter 2002
Overall vacancy Direct vacancyAsking
SubmarketInventoryrate (%) rate (%)Absorption*rents ($)**
Tampa CBD6,099,67517.815.5(244,239)18.54
Tampa Westshore10,513,71017.812.81,48519.42
Tampa Northwest3,490,32217.916.2188,45415.40
Tampa I-75 Corridor6,096,31035.819.4(769,697)17.57
St. Petersburg Downtown2,554,76816.511.0(64,577)17.41
Pinellas Gateway3,278,35820.219.425,18316.81
Pinellas Bayside1,509,26315.514.438,96116.33
Pinellas Countryside1,189,21712.411.7(12,489)16.94
Clearwater Downtown786,82513.013.0(26,251)15.33
Total all submarkets***37,723,40120.315.1(813,617)17.70
*Overall year-to-date absorption, ** overall weighted average asking rents, *** includes Southwest Hillsborough,
Tampa Ybor City, Tampa Hyde Park, North Pinellas and South St. Petersburg
Source: Cushman & Wakefield of Florida Inc.
Sarasota office market
Nov. 11, 2003 Net absorption
Existing buildingsTotal SFVacant SF%2000200120022003*
University Parkway area617,84325,4804.1255,871362,850105,83442,012
Downtown Sarasota2,151,859177,6298.25(45,140)55,555(23,433)62,730
I-75 Fruitville South1,397,621209,08514.9664,36245,57929,20546,769
South County315,22492,20429.2514,80023,80043,2280
Other suburban198,40645,99723.1807,09080,000(22,280)
Total4,680,953550,39511.7689,983494,874234,834129,231
April 1, 2002 Net absorption
Existing buildingsTotal SFVacant SF%2000200120022003*
University Parkway area621,73145,8047.3755,871362,850105,83421,614
Downtown Sarasota2,151,859224,19210.42(45,140)55,555(23,433)18,029
I-75 Fruitville South1,369,621236,36817.2664,36245,57929,20524,886
South County315,22492,20429.2514,80023,80043,2280
Other suburban198,40845,99723.1807.09080,000(22,280)
Total4,656,841644,56513.8489,893494,874234,83442,249
* Year to date Source: Commercial Investment Division of the Sarasota County Board of Realtors
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