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Still Booming
Commercial Real Estate by Dave Szymanski | Tampa Bay Editor
New shopping centers, hotels and office buildings are in the plans as the Tampa Bay region continues to see low vacancy rates, growing rental rates and steady demand.
There are condominium towers going up on both sides of Tampa Bay. Office, retail, hotel and industrial space is under construction or getting ready to be built, including one of the region's largest malls. Hotel developers are sniffing around for other sites.
Vacancy rates are down and rents are up. So why the measured enthusiasm from the real estate community? Because the market has just finished a couple of years of outstanding growth and everyone knows the market travels in cycles.
Still, it is a good time to be in the commercial real estate business in the Bay area. And if growth rates continue, it will remain so.
"Looking at office, industrial and retail, for all sectors, it's very positive," says Lee Arnold, chief executive officer of brokerage Colliers Arnold in Clearwater.
Some things have cooled down. The speculative market for condominiums has slowed. The housing market, which drives new retail growth, has been affected by insurance issues and taxes, both of which are political issues.
But no matter what happens in Tallahassee, the ace for the state and region has been employment growth. Florida unemployment is healthier than the nation and sits at about 3.2%. In less than 12 months, the Tampa Bay area created 26,500 jobs. Five years ago, the region's big goal was 20,000 jobs per year. This job growth drives commercial real estate, among other business.
"We're real pleased with the quality of the jobs," Arnold says. "It all plays out with office, retail and industrial growth."
A host of new projects are under way or planned in the Bay area, including a number of mixed-use projects. For example, Colliers Arnold is one of the companies involved in developing Signature Place, an office and condominium project in St. Petersburg. When finished, it will be the tallest building in Pinellas County.
Westshore office market hot
In the office market, lower vacancy rates are driving up rents and creating the need for more space. Some of the rates in Westshore, the Tampa Bay's biggest business district that hugs Tampa International Airport, are close to $30 a square foot and some are higher. The vacancy rate in Westshore has fallen to a meager 3%.
To address this, Highwoods is building a 200,000-square-foot office building in Westshore by the Howard Frankland Bridge. Two others have been announced: One at the old Metlife site on Boy Scout Boulevard near the airport and another on Spruce, International Corporate Center Four, where it will join three other similar class A office buildings that house tenants such as Outback Steakhouse, Bay Cities Bank and Walter Industries.
Both will command $30 a square foot or greater, says Andy May, executive director for brokerage Cushman & Wakefield. "There haven't been real significant rate differences."
Downtown Tampa is healthy but not seeing as much new development. "I would describe it as steady," May says.
Older A-class space commands rents in the low to mid 20s. Newer class A is in the mid 20s.
One trend happening in Tampa Bay area real estate has been a surge in investments. This will likely lead to higher rates. For example AIG recently sold the 100 North Tampa tower, downtown Tampa's tallest building, to Prudential.
"There's so much capital chasing office buildings," May says. "They will attempt to push rents. The issue with downtown is the demand. Where will the rates settle? Demand in Westshore is greater. I-75 has become a real desired location. The market has developed. It's become a hotbed."
Interstate 75 and Westshore have the ability to offer more parking and sometimes larger floorplate sizes, which larger companies like. "It's absolutely an infrastructure issue," May says. "The ability to accommodate suburban-type users is absolutely an attractive feature."
Add to that the proximity of Tampa International, the interstate and the Veteran's Expressway and you have further explanation for this statistic: There is almost twice as much space in Westshore as in downtown. The Westshore Alliance, the business development organization in Westshore, describes it as the biggest business district in the state.
Downtown St. Petersburg has seen a great growth in residential construction. "Rents are up downtown, but the market is fairly shallow," May says. "Residential has taken up available land."
There are two office projects under way in the Pinellas Gateway area, near the Howard Frankland Bridge.
Looking ahead, there doesn't appear to be as many corporate relocations, as in years past. "Mega projects are not as plentiful as they were in general," May says.
Still, overall economic growth should bring vacancy rates down, faster in the suburbs then in downtown, May says.
Industrial strength
In the industrial/warehouse sector, the market is strong on the east and west sides. "The real key has been rental rate growth, which has been very healthy," said Rian Smith, global supply chain consultant/director with Cushman. "The velocity of deals are not as great as they were last year. The amount of deals are not as great as they were last year."
Some large industrial users are subleasing their space this year, meaning they are leasing their space to other companies. The overall warehouse market has a vacancy rate of about 3.5% this year.
Not only is vacancy relatively low for industrial, but rental rates have risen. Two recent renewal contracts saw rates increase 75 cents a foot.
"Everyone is getting smart and they are bumping their rates on tenants," Smith says.
Among the new industrial construction is a 700,000-square-foot project by Trammel Crow near Port Sutton in Tampa. Further south in Hillsborough County, The Ryan Companies bought 300 acres in the South Shore Business Park, where it plans to build 400,000 square feet of warehouse space.
There are some advantages to using new industrial space. The trends in new construction include tilt-wall (site-poured, one piece) construction, 28-foot ceilings and flow-through designs, which allow tenants to load trucks at the front or back of a property. The column spacing is wider, usually 40 to 50 square feet.
"It's a healthy market and I don't see it slowing down, unless there's a catastrophe," Smith says. "People are moving here and companies follow people. I think it's a great area. I love the ride we're on. I don't see it stopping. Deals are still happening."
There are some concerns in the industrial sector. Despite stronger new buildings and more stringent building codes, the state is entering hurricane season.
Retail: large projects, mixed uses
The Richard E. Jacobs Group, a Cleveland-based company, is developing one of the region's largest malls, the $200 million Cypress Creek Town Center in Land O' Lakes. Planned for about 1.3 million square feet with Sports Authority, Staples, Old Navy, Target, Koles, Circuit City and AMC 18-screen movie theaters, Jacobs has the bulldozers rolling now in south central Pasco County, at I-75 and State Road 56.
Only a few miles away in Wesley Chapel is The Grove, a power center with big box users, such as Babies R Us, Bed Bath & Beyond, Dick's Sporting Goods, Ross, TJ Maxx, Best Buy, Michael's, Petsmart and a Cobb 18-screen theater. It is planned at I-75 and State Road 54.
And a third Pasco retail development, Wiregrass Ranch, is being built in stages at Bruce B. Downs Boulevard and State Road 56. It has signed a lease for a 151,000-square-foot Dillard's. A freestanding JCPenney is already open there.
In southern Hillsborough, a developer is planning to break ground this fall on an open-air mall on Big Bend Road.
Ikea, the furniture retailer, plans to build a massive store on Adamo Drive and 22nd Avenue, on the south edge of Ybor City. At 336,00 square feet, it will be larger than a Wal-Mart.
In total, there's about 3 million square feet of retail planned in the Bay area, or about the size of West Shore Plaza and International Plaza combined.
Although retailers follow rooftops, and housing has slowed, there is still a good amount of housing supply. And employment growth remains strong, which drives housing and retailing.
"In '04, '05 and '06 we were going 100 miles per hour," said Patrick Berman, senior director of the retail brokerage at Cushman. "Now we're going 80 miles per hour."
Like office and industrial, driving the retail growth is lower vacancies and higher rents. There's a 4.5% vacancy rate in retail in the Bay area and an unemployment rate of less than 4% statewide. The government considers that full employment.
Since housing starts drive retail growth and housing has slowed, so has retail. However, some markets, such as Pasco, are trying to catch up to past housing growth.
The trend in retail development is open air. In fact, there are no enclosed malls in construction in Florida. The two main design styles are power centers, which feature big box stores, and malls, which feature anchor tenants and smaller retails. Both allow consumers to pull up to the store, park and go in.
Another trend in new retail development is mixed uses. For example, the 500-acre Cypress Creek Town Center in Pasco will feature two hotels with 350 rooms each, 860 homes, 540,000 square feet of offices and 43,800 square feet of restaurants. In Sarasota, the Sarasota Quay project includes stores, restaurants, condominiums and hotel rooms.
The government is encouraging this to keep people living closer to where they work and shop, reducing the need for infrastructure. It's a bit of a neo-traditional trend harkening back to the 1950s and earlier when people lived above shops and offices and walked to nearby stores and restaurants instead of driving everywhere.
Berman says: "People in apartments are shoppers. People in office buildings can live in apartments. They are compatible users. Employees are consumers."
That's why developers are looking at power centers with tenants like YMCAs, theaters, hotels and offices.
For the remainder of the year in retailing, despite the slower housing market, experts see a rise in retail rates, about 5% annualized, and a steady absorption in space.
"As long as jobs continue to grow and income and population grow, retail will do well," Berman says. "The Tampa Bay area never got overbuilt in the first place."
Pinellas County, one of the most densely populated counties in Florida, may see more retail redevelopment. Pinellas Square Mall has been torn down. Experts expect more activity on redevelopment in urban centers.
Hotel market healthy
The years 2005 and 2006 were good for the hotel industry nationwide and locally. This year remains healthy, but it is competing in the shadow of recent heady growth.
"The Tampa and Westshore hotel markets are pretty strong," says Daniel Peek, managing director of Regent Street, an affiliate company of the Plasencia Group, a Tampa hotel investment and consulting firm.
Average room rates are up 6% this year. For the first half of the year, revenue per room was up 5.2% in the United States, 3% for Tampa, 2.3% for Orlando and 7.9% for Miami.
A number of projects are in the planning or design stages. Those include:
The Westin on Tampa's Rocky Point area
• A hotel on the old MetLife site on Boy Scout Boulevard near Tampa International Airport
• Three hotels envisioned by McKibbon Hotel Group of Tampa
• A number of projects sought for downtown Tampa and the Channelside area, between downtown and Ybor City. The Embassy Suites opened next to the Tampa Convention Center last year addressing the need for more hotel rooms to support larger conventions.
The Sand Pearl is under construction on Clearwater Beach. That is part hotel, part condominiums. A number of Pinellas beach properties have been converted to condominiums. That, plus the spiraling cost of construction which has delayed or ended some projects, has kept construction in check, reducing the supply of hotel rooms in the Bay area.
"Pinellas beach areas absolutely need more supply," Peek says. "People in Westshore sometimes can't get a room."
Downtown Tampa is in the middle of a readjustment. The past two years have seen a big push for residential. Now, as the condo towers rise in downtown and Channelside, the market needs a couple of more hotels and some office space.
Like other real estate, hotels are attracting many investors, who are pouring money into projects, making new construction financing and operation more feasible.
"Tampa Bay continues to be a strong market and continues to grow," Peek says.
One of the biggest things to watch in the hotel market this year will be a decision by Ritz Carlton. The high-end hotel chain is looking at another location on the Gulf Coast, besides its Naples and Sarasota locations, and one possible site is the causeway area between Tampa and Clearwater. Up until now, other than the Grand Hyatt Westshore along the causeway, the rates in the market haven't been high enough to support a Ritz in the Bay area. But that may be changing.
REVIEW SUMMARY
Industry: Commercial real estate
Segments: Office, industrial, hotel and retail
Key: Adjust to market demand to get the right product in the right locations.
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