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Optimistic Outlook
Colliers Arnold is bullish on the short- and long-term forecast for retail, industrial and office development in the Sarasota-Manatee market.
By David R. Corder
Associate Editor
About three years ago, Colliers Arnold made a strategic decision to increase its presence in the Sarasota-Manatee commercial real estate market. The Clearwater-based brokerage had done deals over the years in this small metropolitan market. Early indications then of the now phenomenal housing growth in the market excited the firm's principals.
They reasoned the housing growth soon would beget other opportunities in the retail, industrial and office segments. They decided to reinforce their efforts in the market - fast.
The move was something of a risk for the brokerage Lee Arnold founded 30 years ago, with a strong presence in the much larger Tampa-St. Petersburg-Clearwater metropolitan statistical area (MSA). Arnold only enhanced the firm's strategic presence in the mid-1990s when he aligned with the Colliers International organization. The firm continued its focus mostly on metropolitan markets, expanding into Orlando and the rapidly growing Naples and Fort Myers region.
Since the affiliation, the firm has become one of the top five commercial real estate firms in the Tampa Bay area, effectively competing with national firms such as CB Richard Ellis, Coldwell Banker Commercial NRT and Cushman & Wakefield of Florida Inc.
Pat Duffy, Colliers Arnold's president, says the brokerage's expansion into the Sarasota-Manatee market has paid off, so far. He sees short- and long-term opportunities in the market.
Through the end of August, Duffy says, the brokerage produced about $315 million in total sales. That compares with $200 million for the same period a year ago. Although Duffy wouldn't disclose how much, he says the Sarasota-Manatee market accounts for part of the increase.
"It's a very good market," he says.
The expansion into the Sarasota-Manatee market now complements the brokerage's overall strategic focus, Duffy says. "We always considered, since the affiliation with Colliers in 1996, that our market is everything from Tampa to Naples," he adds.
Recognizing the short- and long-term opportunities, Duffy says the brokerage capitalized on its strength as a tenant representative. For instance, the brokerage represents Office Depot in lease negotiations throughout Florida. The brokerage relies on four retail-leasing specialists who work the Tampa-to-Naples region, with two land brokers who focus primarily on development opportunities along the I-75 corridor.
Natural progression
The potential for growth in the Sarasota-Manatee area became so substantial the brokerage hired Christopher Leonard, a former Grubb & Ellis broker, to explore industrial and office leasing opportunities. He now produces quarterly market reports on the industrial and office segments published on the Colliers Arnold Web site (www.colliers.com).
"It was a natural progression for us," Duffy says.
The expansion of the brokerage's presence in the Sarasota-Manatee market has paid off in big ways. For instance, Winn-Dixie Stores Inc. retained Colliers Arnold to list the sale of its 960,000-square-foot distribution center on Clark Road in Sarasota. Interest in the property is significant, Leonard says.
"It's just a great market, a strong market," Leonard says. "I receive calls from national tenants wanting to expand into that market. They have their eyes on the market. It's hard sometimes to explain the market to people, to get a grasp on it. It's so different from other markets in the Southeast. It's quality of life, good product and good people. Other than these hurricanes it doesn't get much better than this."
Such market indicators explain why Leonard is so bullish on the short- and long-term outlook for the Sarasota-Manatee market. He cites three specific reasons: continued residential development, the market's superb quality of life and the diversity of businesses already in the market.
"It's just a nice place to live, a nice place to work and not necessarily for just people who live in the market," Leonard says. "I commute to work in that marketplace."
Industrial explosion
During the second quarter this year, Leonard says construction started on about 850,000 square feet of new industrial space in the Sarasota-Manatee market. Benderson Development, for instance, accounts for about 290,000 square feet of the total.
"As far as trends, you have a lot of developers catering to the big box retailers," he says. "Benderson also has a lot of retail on University Parkway, which, in my opinion, is going to become the hottest growth corridor on Florida's Gulf Coast. It's not just a temporary situation, either. I think it's long-term growth."
In his second-quarter report, Leonard says the overall industrial vacancy rate dropped by about 8 points to 4.9%. The report identified a negative net absorption of about 35,902 square feet, but he expects that figure to improve substantially. Even with a negative net absorption, Leonard's research shows industrial rents increased by about 50 cents to $5.79 a square foot.
Demand outstrips supply in the market, Leonard says, and he expects that trend to continue for quite some time.
For years, Leonard says, the small-market user dominated the market. That is changing, however, with the influx of big box retailers.
"Industrial is totally taking another turn and going with the larger distribution, larger warehouses, that cater to the retailers," he says. "The big boxes lease warehouse space locally. I represent one global company that is looking to build or lease a large facility there because that market is expanding so rapidly."
In some ways, Leonard says, the opportunities in the Sarasota-Manatee market compare to the development trends in southern Pasco, northern Hillsborough and western Polk counties.
"Pinellas is so densely populated there are few opportunities for development," he says. "Most of it is redevelopment. While Sarasota-Manatee does have some redevelopment opportunities, most of the development is new product. It's more new construction."
But there is one difference between those counties and the Sarasota-Manatee market.
"Sarasota-Manatee has established communities, and (developers) are filling in pockets to meet current demand," he says. "They're building throughout. All the pockets of available land are being developed so eventually it's going to become very dense."
Some concerns
If Leonard has any concerns about the Sarasota-Manatee market, then it's local government's ability to maintain existing infrastructure - particularly water, sewer and roads.
"I do have some concerns about those issues," he says. "It seems the infrastructure is tolerating the growth well now, but my concern is if they're not careful in making sure they're allocating the resources to keep the infrastructure up to date to handle the demand then eventually there is going to be some significant costs involved."
At least in the short term, Leonard says, the infrastructure costs passed on to developers seem manageable.
"For the most part costs have been reasonable," he says. "That's why developers continue to build. But if you start having infrastructure problems, and you have to increase impact fees, then that can play a role."
However, Leonard says the market strengths outweigh his concern over infrastructure.
"It's a growing population, with a strong demand for single-family homes," he says. "That translates into strong demand for retail. And the cost of living in the market is quite reasonable, other than the cost for waterfront properties."
About the only thing that could slow the growth in the market is a marked increase in lending interest rates.
"The only thing that's going to hurt us is if there is a spike in interest rates," he says. "What's happened, with the low interest rates, it's allowed developers to leverage resources to fund continued development. But the appreciation of property has been significant to a point where some developers say the numbers are too tight, meaning the margin is too thin. In other words, the cost per square foot is so great that some developers just can't get the numbers to work."
On the other hand, Leonard says, smart developers in the market have planned for what they perceive as an inevitable increase in lending rates.
"The developers in the best shape are the ones with the most cash," he says. "When those numbers starting looking tight or thin, and you have borrowed funds, and the adjustable interest rates start up, it's going to make those numbers much tighter. As they say, 'Cash is king.' "
Office optimism
Just as with industrial space, Leonard found a decrease in office vacancy rates during the second quarter. He says the vacancy rate decreased slightly to 11.3%, with direct vacancies (overall vacancies sans sublet space) averaging about 10.9%. He considers the office segment as one of the Sarasota-Manatee market's outstanding performers.
"Do not be deceived by the size of this submarket," he says. "It may be smaller than all of the other MSAs in Florida, but it is among one of the strongest."
The market shows a positive net absorption of about 61,067 square feet for the second quarter. About 480,368 square feet of new office space was under construction. That represents a 5.5% increase in new construction.
"By comparison, the 646,000 square feet under construction in (the) Tampa Bay (area) represents a 1.4% increase," he says. "During quarter two, Manatee-Sarasota has another 413,000 square feet of office product proposed."
It doesn't bother Leonard that ADT and Arthur Andersen vacated significant amounts of office space in Sarasota. "Both buildings have been repositioned into multi-tenant facilities to better serve the market," he says.
Nor is he concerned with a second-quarter decrease in office rents. Rents dropped about 70 cents a square foot to $21.06 a square foot during the second quarter.
"The rental rates are very strong in that market for retail, industrial and office," he says. "The rental rates (for office) are either flat or are increasing. Because the rates are strong, compared to other markets, that fuels development. Rental rates should continue to remain steady or even increase some."
Despite the drop in rental rates, Leonard says office property owners refuse to offer concessions. That's a trend he expects to continue.
"You don't have landlords offering concessions like free rent to attract tenants," he says. "They don't have to do that because there are so many tenants out there. They don't have to give six months free rent to attract a tenant like other markets. Offers of free rent are pretty rare in the market.
"As for concessions, the landlords in Sarasota-Manatee really demand longer term leases," he says. "It's minimum five-year deals. In other markets, they're willing to offer shorter terms, three-year deals. That's not typical in the Sarasota-Manatee market."
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