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After battling government bureaucracies for almost three years, Michael Sporer's commercial real estate project in Manatee County, just east of Interstate 75, was finally ready for tenants last year.
There was only one problem: There were precious few tenants to be found last spring and summer, given the looming recessionary atmosphere His long sought certificate of occupancy for the industrial and flex space park, Creekwood Commons East, became like a certificate of 'oh- my-gosh, what did we just do?'
“We came out at absolutely the worst time, during the teeth of the recession,” says Sporer. “But we had a strategy: We didn't want to be the last to lower prices. We wanted to be the first.”
Indeed, Sporer and his team of seven agents at Bradenton-based Interstate Commercial Brokers took that strategy to heart. They made the first month's rent free for potential tenants and in some cases, threw in two free months rent — relatively common practices in the local office space market, but rare for industrial and industrial/flex space. Agents also waived build-out costs in order to allow flexibility for tenants and they even set buy options on the leases going out as long as two years, double the norm.
Interstate Commercial agents cut the lease rates, too, from as high as $16 a square foot, including triple net lease provisions to about $10 a square foot. “The market was getting weaker,” Interstate Commercial agent Don Swartz says, “and we had to get more aggressive on pricing.”
The strategy to lease out the $3.5 million project has been a qualified success. One the one hand, about 30,000 square feet, or 80%, of one part of the 37,000-square-foot project is leased — leases that were signed in the dead zone of the last half of 2008. On the other hand, Sporer is agreeing to concessions that he never would have thought possible when the project was initially conceived almost five years ago.
Call it the new math of the Sarasota-Bradenton commercial real estate market, from office to industrial to warehouse: More tenants, even dropping rates with dramatic incentives and giveaways, is better than empty space.
'Price erosion'
That's also the way Jag Grewal, longtime commercial broker with the Sarasota office of Coldwell Banker Commercial, sees it.
Also the current head of the Sarasota Association of Realtor's Commercial Investment Division, Grewal says over the last six months he has seen some concessions and rate cuts that make him scratch his head in the same way people did four and five years ago, when the market was booming beyond any sense of comprehension.
Grewal and his partner at Coldwell Banker, Michelle Fuller, recently were part of a concession-laden lease deal for office space in a high-end building in Burns Court, a trendy neighborhood just outside downtown Sarasota. The tenant ended up getting space for $14 a square foot triple net, $12 off the $26 a square foot a neighboring tenant is currently paying. “Prices are not what the landlords want,” says Grewal, “but at least we are getting tenants to pay rent.”
Meanwhile, fellow Coldwell Banker Commercial agent Anthony Migliore recently aided a client, a boarding agency for dogs, in finding space in a light industrial area just north of downtown Sarasota. The franchise business, Boulder, Colo.-based Camp Bow Wow, got a price break Migliore had never seen before
“There's a lot of price erosion,” Migliore says. “It's happening in every sector and it's happening rather quickly.”
As deep as the concessions have been, vacancy numbers are still charting upward, a trend that began in 2008 and many brokers and industry experts expect to continue well into 2009.
“I think it's going to be a challenging year,” says Grewal, echoing the thoughts of many of his peers and competitors.
The data backs up those projections.
CoStar Group, a commercial real estate data tracking service, reports that through Jan. 15, the first quarter office space vacancy rate for the Sarasota-Bradenton-Venice market was 10.9%, a hearty jump over the 7.8% vacancy rate for that subsector in the 2008 first quarter. And the average asking rent for the office market in the region is dropping, from $22.28 a square foot in the 2008 first quarter to $21.57 so far in the 2009 first quarter.
Rates in the industrial and retail sectors are showing similar trend lines, an analysis of the CoStar data shows. And a check on the mounds of other data in the research-heavy commercial real estate industry shows a similar prognosis.
For example, the vacancy rate in large-scale office space in Sarasota County surpassed 15% last year, more than double the rate in 2006, according to the Economic Development Corp. of Sarasota County. It's even worse in Manatee County, where the vacancy rate is hovering just under 20% and the county reported a negative net absorption rate for the first time in four years.
“It's dead right now,” Barry Seidel, a longtime Sarasota-Bradenton commercial broker told the Review late last year. “It's as if someone switched the light right off for both retail and office in Sarasota and the entire west coast of Florida.”
The fact that the lifeblood of commercial real estate — jobs — is spiraling downward is obviously of no help to people like Seidel and Grewal.
A total of 10,000 jobs were lost in the Sarasota-Bradenton metro area from November 2007 to November 2008, according to the most recent Colliers Arnold quarterly market report. That pushed the unemployment rate up from 4.7% in November 2007 to 8% in November 2008, Colliers Arnold reported.
A positive spin?
All of these negatives numbers is enough to make a commercial broker weep, which is significant, given how inherently optimistic the industry tends to be. Grewal, for one, says he has tussled for weeks with the question of what's positive about the current state of commercial real estate in Sarasota-Bradenton.
“Trying to spin something positive is challenging,” concedes Grewal. “But people are still doing business. We are not slashing our wrists.”
That's positive.
Instead, brokers, agents and Realtors are resorting to more traditional ways of generating business, past the previously mentioned concession brigade. Some brokers are resorting to slogans made popular in the 2007 residential real estate slowdown: Instead of “Time to buy,” it's “Time to lease.”
Others are gearing up for what could be the next trend to hit the market: Commercial foreclosures.
A handful of local commercial brokers agree that a foreclosed property cluster bomb, from warehouses to small industrial space to office buildings, is on the horizon.
But the biggest skill commercial brokers and developers are going to have to lean on in 2009, many in the industry say, is patience. It starts with small things, such as leases — Grewal says one deal he worked on late last year took three months, a process that would have taken one week a few years ago.
And that carries through to the big things, such as market absorption. Sporer says the down market means that it could be three years until new buildings hit the office or industrial market.
“We will have to make due with what's already built,” he says.
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