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Commercial Clouds
COMMERCIAL REAL ESTATE by Jean Gruss | Editor/Lee-Collier
Office-space vacancies are creeping up, rents may fall in some areas and prospective tenants are becoming more hesitant about leasing new space. But that's not stopping new development of offices along Interstate 75 from Tampa to Fort Myers.
evelopers are building again.
Spurred by low vacancies, strong rents and price appreciation in recent years, developers are building speculative office buildings from Tampa Bay to Naples.
But there are some cautionary signs on the horizon. Vacancies have edged up and office-space net absorption is declining so far this year, according to data from CoStar Group. Developers watch net absorption carefully because it tells them how much space has been leased after deducting for vacated space over a period of time.
When net absorption is positive, as it has been in the last few years, it means more tenants are moving into space than moving out. But with a few exceptions, absorption has been flat or slightly negative in most Gulf Coast counties so far this year.
"There are some flags out there," says Jerry Shaw, senior vice president of real estate with Opus South in Tampa. Opus is the second-largest office-building developer in the country.
Shaw and other developers are concerned about slowing job and population growth, which are the main drivers of office leasing. If that trend persists, they wonder what that will do to vacancies and rents.
Pockets of opportunity
Developers and brokers say some areas are especially ripe for new development. Take the Westshore business district of Tampa, which has seen vacancies dip near an ultra-low 6% and where rents have topped $30 per square foot.
There's 3 million square feet of new office space planned in the Westshore area, says Andy May, a broker with Cushman & Wakefield in Tampa. That's enough space to fill 52 football fields and would boost the amount of office space by 25% in that area near Tampa International Airport. "It's the most popular market," says May.
The I-75 corridor is hot too.
For example, Larry Wilson, president of the southeast region of Koll Development Co., says the northeast area of Tampa near the Pasco County line is particularly appealing.
"If you look at the overall Tampa market, there is a general slowdown," Wilson says. "However, in the northeast Tampa market, the opportunities for tenants are very limited."
Koll is building a 200,000-square-foot, four-story office building at Tampa Telecom Park called Intellicenter Tampa and there's room for another 150,000-square-foot building on adjacent land. Tampa Telecom Park is near the intersection of Fletcher Avenue and I-75. Asking rents will be in the low to mid-$20s.
Also at Tampa Telecom Park, Ryan Cos. has plans for a two-building, 220,000-square-foot office project. "Our perspective is that the I-75 corridor is one of the most desirable submarkets in the area," says Gary Bauler, Ryan's vice president of development.
Bauler says that's because the area is close to the supply of labor from residential communities of northeast Tampa and south Pasco County. Although Bauler says the vacancy rate in office buildings along the I-75 corridor is 15%, he estimates it's less than that in northeast Tampa. "There's a nice submarket up there," he says. Asking rents will be in the mid-$20 to $30, though he says: "We haven't really finalized what we'll ask."
Nearby, Opus is building a three-story speculative office building at Tampa Oaks, an office park near Fletcher Avenue and I-75. Opus' other office building in the park is fully leased. "We felt like the time was right to build a spec office building," Shaw says.
Further down I-75 in Sarasota, Meridian Development Group plans to break ground within a month on a 144,000-square-foot office park on Clark Road. "We recognized there was limited office space available in the Clark Road area," says Steven Kossoff, managing director with Meridian. The developer plans to sell the built-out offices for $295 per square foot to accountants, lawyers, doctors and other professionals.
Sarasota is one of the healthiest office-space markets, CoStar Group data shows. Combined, Sarasota and Manatee counties showed positive net absorption of nearly 650,000 square feet of office space for the year-to-date. Brian Kennelly, executive vice president with Lakewood Ranch Commercial Realty, says much of that absorption was probably due to Beall's expansion into Tropicana's former headquarters in Bradenton.
There's 285,000 square feet of office space now under construction along I-75 in Sarasota and Manatee counties. That's manageable if net absorption continues at its 400,000-square-foot annual pace, says Kennelly. One area of concern is that some real estate, mortgage and engineering tenants may be downsizing their operations and subleasing the space at discount rates. "We're tracking that closely," says Kennelly.
In Fort Myers, Miami-based Greenwich Development Group and Fort Myers-based Realco Group broke ground this summer on Meridian Center, a development that will include as much as 700,000 square feet of offices, shops and industrial space.
Meridian Center is located on Ben Hill Griffin Parkway near I-75, Southwest Florida International Airport, Florida Gulf Coast University and two new regional malls. That area will be the bright spot in an otherwise slow market in Lee County, says Gary Tasman, executive director of the Fort Myers office of Cushman & Wakefield. "All this space is going to get absorbed," he says.
In particular, he says the rapidly growing university's expansion into areas such as engineering, hospitality and biotechnology will attract tenants who want to locate near researchers.
Lenders are watching carefully. "Banks are definitely going to stop it from getting overbuilt," Tasman says.
Red flags
Employment drives the need for new office space and job growth has slowed in the first seven months of this year. For example, total employment grew by 6,137 jobs in Hillsborough County from January to July compared with employment growth of 20,857 in the full year 2006, according to the Florida Agency for Workforce Innovation.
In Sarasota County, employment growth was flat in the first seven months of the year compared with employment growth of 6,741 in 2006. In Lee County, employment declined by 2,158 jobs in the first seven months of this year. Last year, employment in Lee grew by 14,401 jobs, the state reported.
Tampa is still leading the job-creation engine. From October to December, 32% of companies in the Tampa-St. Petersburg area polled by Manpower plan to hire more employees.
Although corporate relocations have slowed, Tampa still competes well with other southern cities. "Tampa and Charlotte have gained on Atlanta as far as attractiveness," says Wilson of Koll Development. "That being said, Atlanta is still the queen of the South."
Wilson attributes some of the slowdown in corporate relocations to some of the recent market turmoil. "The volatility of the credit markets has had a ripple effect throughout the industry," Wilson says. "Companies are more cautious in their decision-making process."
In the Fort Myers-Naples area, 33% of companies plan to reduce their payrolls and 17% plan to hire more employees. "The [Fort Myers] office market is not faring well right now," says Cushman's Tasman, who forecasts rising vacancies and declining rents.
Tasman says tenants who are shrinking their workforce are subleasing empty space at lower-than-market rates. Buildings that now ask $22 per square foot will soon have to lower their rents to $16 to $17 a square foot because tenants are subleasing space as low as $14 a square foot.
Still, there is a silver lining. Home prices are more reasonable today, the labor pool is growing because the unemployment rate is rising and office lease rates will decline as a growing number of developers compete for tenants. "My prediction is within 24 months our market will be attractive," Tasman says. "Southwest Florida is going to be better in the long run."
REVIEW SUMMARY
Industry. Commercial real estate
Trend. Office vacancies rising
Key. The key to a healthy office-space market is job creation, and the pace has slowed this year.
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