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Landlords Rule
Sticker shock.
That is what tenants in Gulf Coast office buildings and warehouses, whose leases are scheduled for renewal, may soon feel.
Low vacancy rates combined with strong demand means rents will continue to escalate up and down the coast, from Tampa to Naples. What's more, the high cost of land, building materials and labor means developers have been slow to build new office complexes and warehouses to fill the void.
"It's clearly a landlord's market," says Larry Richey, senior managing director of commercial real estate brokerage Cushman & Wakefield in Tampa. "We've seen more leasing activity than has ever occurred in the Tampa Bay market."
In the Tampa Bay area, vacancy rates are the lowest he's seen in 20 years, Richey says. As a result, rental rates for top-quality space is reaching levels never seen before. "We've now become as expensive as other markets like Atlanta and Charlotte," Richey says.
The situation is especially tight in counties such as Charlotte, Lee and Collier counties. "[Office space] is being absorbed almost as fast as it's being built," says Randal Mercer, founding partner of commercial brokerage CB Richard Ellis in Fort Myers.
In Lee County two years ago, existing office space rented for $14.50 per square foot, net of tenant expenses such as insurance, taxes and common-area maintenance. Today, rents are closer to $18.50 per square foot, a 28% increase, Mercer says. Add in tenant expenses and rents are hitting the $25-per-square-foot mark.
Charlotte County has the lowest office-vacancy rate in Southwest Florida, with just 2.3%, according to CoStar Group. Real estate experts there blame Hurricane Charley's devastation two years ago. "We still have a lot of buildings that are not back up again," says Ron Struthers, a Port Charlotte broker with ReMax Properties.
In much larger markets such as Hillsborough and Pinellas counties, tenants are leasing more space than they're vacating. This positive absorption is reducing overall vacancy rates and driving up rents. In tight areas such as Bayside in Pinellas County, developers are quoting rents to prospective tenants that break the $30-per-square-foot barrier for the first time. "You know what? They'll get it," predicts J. Patrick Duffy, president of brokerage services for Clearwater-based Colliers Arnold.
Duffy forecasts about 1 million square feet of new office space will be built in the Tampa Bay market in the next 12 to 18 months, though that space will fill up fast. In Hillsborough alone, tenants have leased 400,000 square feet of space more than they vacated so far this year, according to CoStar. "Absorption's been great," Duffy says.
It's the same story for warehouse and distribution space. In Hillsborough and Pinellas combined, tenants leased nearly 1.7 million square feet more than they vacated so far this year, CoStar data shows. That's enough space to fill more than 29 football fields. The vacancy rates for that kind of space was recently 8.1% in Hillsborough and 6.6% in Pinellas.
Nevertheless, there are some indications that landlords may not retain the upper hand indefinitely. Some brokers in Southwest Florida are starting to see slackening demand just as developers are building new offices and warehouses. Some areas may even be at risk of overbuilding, some brokers say.
Insurance and tax wild cards
Fast-rising taxes and insurance could be the factors that keep rents from spiking up again this year. Typically, tenants agree to pay fixed rent for a period of time plus the fluctuating costs of insurance, taxes and common-area maintenance fees.
But as insurance and taxes spike, tenants may start balking at higher base rents. "We're seeing insurance rates going up 50% to 60%," says Mercer. "I think that rents are going to stabilize until people get over the cost of increased expenses."
In Fort Myers, gross rents - rent plus expenses - for top-quality office space hovered around $20 per square foot a couple of years ago. Today, they've risen to about $25 because of a combination of declining vacancy rates and rising tenant expenses.
Still, rents are rising to the level where developers are emboldened to start new construction, though not on a massive scale that would glut the market for an extended period of time. In Fort Myers, for example, McGarvey Development is filling up a new top-quality 65,000-square-foot office building near Interstate 75 and Daniels Parkway with asking rents of $19 to $21 per square foot, plus about $9.50 in tenant expenses. Still, William Price Jr., McGarvey's senior vice president, worries about the competition. "There's a lot in the pipeline that may affect our ability to lease," he says.
In Tampa, 643,000 square feet of speculative office space is under development, according to Cushman & Wakefield. If they're successful at filling the space, other developers are likely to jump in and start construction too. "We're entering a new moderate cycle of building," Richey says.
Still, the barriers to new office development are considerable. It can take two years or longer to obtain the necessary building permits, the cost of land has soared, and materials and labor shortages have driven prices and wages up substantially. Meanwhile, rising interest rates have increased the cost of borrowing.
What's more, tenants will likely grow more wary of agreeing to pay for fast-rising insurance costs and taxes, says Andrew DeSalvo, a land consultant with Premier Commercial Properties of Southwest Florida. At some point soon, DeSalvo says tenants will demand that the landlord take some measures to share those costs.
Trends point to some softening
Tampa, the region's distribution hub, showed impressive growth so far this year. Rents for warehouse and distribution space on average have jumped from about $3 a few years ago to as much as $5 per square foot today, net of expenses, says Cushman's Richey. Despite new construction, leasing activity is outstripping the new supply. Tenants signed over 1 million square feet of leases in the Tampa industrial market in the second quarter, but only half that amount is under construction.
But the downturn in residential real estate could start to free up warehouse and "flex" space (flex space combines warehouse and office space), particularly in counties such as Lee and Sarasota.
For example, in Lee County, as much as 70% of the industrial space is related to the residential business, estimates Robert White, an independent broker in Fort Myers. Suppliers of everything from roof tiles to pool supplies are suffering from a downturn in residential construction and they won't be expanding.
In addition, Lee's 2.7% vacancy rate for industrial and flex buildings has attracted developers eager to build. There's 7 million square feet of industrial space approved for Alico Road, an east-west corridor that stretches from U.S. 41 to I-75 in south Lee County. "There may be a temporary surplus of space and maybe a dip in rental rates, but you're not going to see any fire sales," says DeSalvo.
In Sarasota County, the situation is similar. "We're going to see a bit of thinning," says Loyd Robbins, vice president of commercial real estate for Harry Robbins Associates in Sarasota. However, Robbins says laid-off employees of larger contractors often start their own companies. "We've seen our smaller spaces become incubation centers for startups," Robbins says.
The 23.6% vacancy rate for industrial space in Sarasota is the highest of any Gulf Coast county. But that is skewed because the former Winn Dixie distribution center on McIntosh Road in Sarasota is empty and available for lease. The facility measures 945,403 square feet and is the largest single vacant bulk-distribution center in Florida, according to Cushman & Wakefield. Excluding that huge building, Sarasota's industrial vacancy rate stands at 6.1%, in line with its neighbors.
Meanwhile, Collier County is another tight industrial market with just 2.4% vacant. Although there's little construction now, there's some in the pipeline. Barron Collier Cos. is developing 165 acres off Immokalee Road in eastern Collier where it plans to sell lots for up to 700,000 square feet of light industrial space and another 300,000 square feet of retail and office space. Asking prices for industrial lots range from $7 to $9 per square foot and $12 to $15 for the retail lots, says Brian Goguen, vice president of real estate for Barron Collier.
"We probably have 15 companies that have expressed interest," Goguen says. The demand is mainly coming from companies that are helping to build Ave Maria Town, the 4,000-acre residential community being built near Immokalee.
McGarvey Development boosts building pipeline in Lee
After selling his portfolio of office and industrial buildings in Southern New Jersey to Mack-Cali Realty Corp. for about $100 million in 1997, developer John McGarvey turned his attention to Southwest Florida.
In fact, he moved his company and 37 employees to Bonita Springs and started over. Since then, McGarvey Development has relocated its headquarters to Fort Myers and is building in Lee County at a rapid clip.
It's easy to understand why. Offices and warehouses are almost completely full in Southwest Florida. In fast-growing Cape Coral, for example, the office vacancy rate is just 1.7%, according to CoStar Group. Cape Coral was the fifth-fastest growing city in the country last year, according to the U.S. Census.
In particular, larger national companies are scouting for sites now that the county has exceeded the 500,000-population mark. That puts Lee on the site-selection map for many national companies looking to expand into new markets.
William Price Jr., McGarvey's senior vice president, says the developer is building larger floors in its office buildings as a result. "By Fort Myers standards, the deals are getting bigger," he says.
McGarvey currently has about 850,000 square feet of office and industrial space that's been recently completed or is under construction. That's equal to about 15 football fields.
Projects include 10 buildings in Westlinks Business Park in the Gateway area east of Interstate 75 as well as four office buildings and three "flex" buildings in Cape Coral.
"Other people aren't sitting back watching," Price notes, adding that "2007 will be interesting to see what the vacancy is."
-Jean Gruss
The Gulf Coast CoStar Office Market Focus
Office market statistics are for non-owner-occupied buildings more than 10,000 square feet in each Southwest Florida county. Average rents are net of expenses such as insurance, taxes and common-area maintenance. Space, rentable building area (RBA) and absorption are expressed in square feet. Source: CoStar Group.
Hillsborough County
Number of buildings: 1,396
Total space: 39,297,881
Vacant space: 3,792,484
% vacant: 10.6%
Average rent: $13.32
YTD net absorption: 403,607
Pinellas County
Number of buildings: 1,210
Total space: 21,163,715
Vacant space: 2,117,148
% vacant: 11.1%
Average rent: $13.17
YTD net absorption: ?106,368
Sarasota County
Number of buildings: 308
Total space: 6,323,504
Vacant space: 415,612
% vacant: 6.7%
Average rent: $19.53
YTD net absorption: 57,538
Manatee County
Number of buildings: 153
Total space: 2,772,682
Vacant space: 319,097
% vacant: 11.9%
Average rent: $14.04
YTD net absorption: 110,828
Charlotte County
Number of buildings: 276
Total space: 2,380,132
Vacant space: 55,019
% vacant: 2.3%
Average rent: $16.45
YTD absorption: 14,155
Lee County
Number of buildings: 924
Total space: 11,197,633
Vacant space: 640,757
% vacant: 5.8%
Average rent: $17.60
YTD net absorption: 76,739
Collier County
Number of buildings: 497
Total space: 5,896,017
Vacant space: 243,399
% vacant: 4.2%
Average rent: $21.23
YTD net absorption: ?25,285
Largest buildings under construction
Hillsborough County
Building name Address RBA Delivery
1. Highwoods Bay Center – Bldg. 1 Bay Center Drive, Tampa 208,600 June 2007
2. Highwoods Preserve VII Crane Nest Drive, Tampa 115,000 February 2007
3. Highland Oaks III 4041 Highland Pk. Oaks Blvd., Tampa 99,738 April 2007
4. Highland Oaks V 10401 Highland Manor Dr., Tampa 97,244 February 2007
5. Cypress Bay Corp. Center – Bldg. 1 5598 W. Executive Dr., Tampa 84,000 December 2006
Pinellas County
Building name Address RBA Delivery
1. Progress Energy Building 299 1st Ave. N., St. Petersburg 200,000 November 2006
2. Flagship Community Bank Building 29750 U.S. Hwy. 19, Clearwater 45,459 September 2006
3. Building Two 13123 66th St., Largo 11,000 December 2006
4. Building One 13123 66th St., Largo 10,000 December 2006
Sarasota County
Building name Address RBA Delivery
1. Sarasota Memorial Med. Office Bldg. 5880 Rand Blvd., Sarasota 89,000 February 2007
2. Magnolia Green VII University Pkwy, Sarasota 51,000 February 2007
3. Unnamed building Sumter Crossing Dr., North Port 24,000 December 2006
4. Bell Tower Plaza 6240 Lake Osprey Dr., Sarasota 12,000 September 2006
5. Unnamed building 4710 Fruitville Rd., Sarasota 7,191 September 2006
Manatee County
Building name Address RBA Delivery
1. Gap Creek Office Building B 5255 Office Park Blvd., Bradenton 9,000 November 2006
2. Unnamed building 6th Ave. E., Bradenton 2,300 November 2006
Charlotte County
Building name Address RBA Delivery
1. Sunloft Center 201 W. Marion Ave., Punta Gorda 45,000 January 2008
2. Toledo Plaza 688 Tamiami Trail, Port Charlotte 9,000 June 2007
3. Unnamed building 1541 Market Cir., Port Charlotte 8,576 September 2006
4. Murdock Center Exec. Cent. – Bldg. 10 18300 Murdock Cir., Port Charlotte 2,940 December 2006
Lee County
Building name Address RBA Delivery
1. Forum Corporate Park-Bldg. 7 Champion Ring Rd., Fort Myers 100,584 November 2006
2. Forum Corporate Park-Bldg. 1 Champion Ring Rd., Fort Myers 80,000 November 2006
3. Forum Corporate Park-Bldg. 2 Champion Ring Road, Fort Myers 60,000 November 2006
4. Forum Corporate Park-Bldg. 3 Champion Ring Road, Fort Myers 60,000 November 2006
Collier County
Building name Address RBA Delivery
1. Office at Magnolia Square Pine Ridge Roadd, Naples 37,000 December 2006
2. Treasury Building/Partner's Bank Bldg. 3021 N. Airport Pulling Rd., Naples 24,423 November 2006
The Gulf Coast CoStar Industrial/Flex Market Focus
Industrial-market statistics are for non-owner-occupied industrial and "flex" buildings. Flex buildings usually contain a small portion of office space and may skew average rents higher. Average rents are net of expenses, such as insurance, taxes and common-area maintenance. Space, rentable building area (RBA) and absorption are expressed in square feet. Source: CoStar Group.
Hillsborough County
Number of buildings: 1,414
Total space: 52,520,031
Vacant space: 4,165,220
% vacant: 8.1%
Average rent: $6.86
YTD net absorption: 930,066
Pinellas County
Number of buildings: 1,200
Total space: 30,466,919
Vacant space: 1,966,340
% vacant: 6.6%
Average rent: $7.07
YTD net absorption: 680,580
Sarasota County
Number of buildings: 274
Total space: 5,421,817
Vacant space: 1,278,021*
% vacant: 23.6%*
Average rent: $5.81
YTD net absorption: ?11,076
Manatee County
Number of buildings: 267
Total space: 7,067,207
Vacant space: 522,465
% vacant: 7.4%
Average rent: $5.28
YTD net absorption: 173,747
Charlotte County
Number of buildings: 315
Total space: 3,446,941
Vacant space: 30,245
% vacant: 0.9%
Average rent: $13
YTD net absorption: ?13,947
Lee County
Number of buildings: 1,493
Total space: 24,261,833
Vacant space: 659,624
% vacant: 2.7%
Average rent: $9.37
YTD net absorption: 295,998
Collier County
Number of buildings: 867
Total space: 11,361,956
Vacant space: 268,343
% vacant: 2.4%
Average rent: $17.77
YTD net absorption: ?51,732
Largest buildings under construction
Hillsborough County
Building name Address RBA Delivery
1. Port Ybor-Bldg. 2 1802 Grant St., Tampa 156,000 September 2006
2. Eagle Creek Business Ctr.-Bldg. 1 8701 Florida Mining Blvd., Tampa 110,710 September 2006
3. Oak Creek Distribution Center-Bldg. V Eagle Palm Drive, Riverview 100,240 October 2006
4. Silo Bend XVI 150-182 Kelsey Ln., Tampa 54,400 September 2006
Pinellas County
Building name Address RBA Delivery
1. Valpak Direct Marketing 28th St. N., St. Petersburg 500,000 January 2007
Sarasota County
Building name Address RBA Delivery
1. Dolphin Chase 1541 Sarasota Center Blvd., Sarasota 16,478 August 2006
2. Unnamed building Sand Pine Blvd., Venice 7,600 November 2006
3. Building 1 5626 Palmer Blvd., Sarasota 6,000 November 2006
4. Building 2 5626 Palmer Blvd., Sarasota 6,000 November 2006
5. Building 3 5626 Palmer Blvd., Sarasota 6,000 November 2006
Manatee County
Building name Address RBA Delivery
1. Gammerler Corp. 7501 Westpark Pl., Palmetto 80,000 January 2007
2. Bakker Building 1851 67th Ave. E., Sarasota 68,266 August 2006
3. Building C 2300 S. Dock St., Palmetto 64,400 October 2006
4. Lot 10 10521 Portal Crossing, Bradenton 18,462 January 2007
5. Lot 9 10531 Portal Crossing, Bradenton 14,541 January 2007
Charlotte County
Building name Address RBA Delivery
1. Unnamed building Janice Ave., Port Charlotte 60,000 May 2007
2. The Endeavor Building 23422 Janice Ave., Port Charlotte 60,000 June 2007
3. Unnamed building 3857 Acline Rd., Punta Gorda 41,580 October 2006
Lee County
Building name Address RBA Delivery
1. Building D 7874 Drew Cir., Fort Myers 60,000 December 2006
2. Nicholas Pines-Bldg. 1 650 S.W. Pine Island Rd., Cape Coral 40,000 September 2006
3. Unnamed building 10080-10090 Intercom Dr, F. Myers 35,200 September 2006
Collier County
None listed
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