Loading
Money Poor, Problem Rich
Commercial real estate faces an array of problems,
from a lengthy housing slowdown, a credit freeze and consumer recession worries. Is it really time to buy?
commercial real estate
by Sean Roth | Real Estate Editor
Sarasota commercial broker Barry Seidel has his hope set on a perfect storm of factors boosting the commercial real estate market through the rest of next year.
There's "Season," the certainty of a new president and government administration and perhaps most importantly, the beginning effects of the government bailouts helping to thaw business and consumer financing. It's likely wishful thinking, and for now the market is embroiled in its own decidedly more negative storm.
"It's dead right now," says Seidel, president of American Property Group of Sarasota Inc. "It's as if someone switched the light right off for both retail and office in Sarasota and the entire west coast of Florida. Make no mistake there's blood in the street."
A bit dramatic perhaps, but the condition of the commercial market is much worse off than this time last year.
Industrial property in the Tampa/St. Petersburg market (Hillsborough to Sarasota County ) saw its vacancy rate increase to 8.2% in the third quarter, according to research provided by the real estate firm CoStar Group Inc.
The biggest loser in the category is flex space, which was up to an 11.8% vacancy from a 9.3% last December. That same report shows that net absorption for industrial was negative three out of the last four quarters and most recently negative by 1.17 million square feet the last two quarters.
Office space in Tampa is fairing somewhat worse, with vacancy rates up to 11.7%, two percentage points higher than the fourth quarter of 2007. Net absorption for office has been significantly negative the past three quarters and was 589,484 square feet in the hole in the third quarter. Office users appear to be budget shopping as higher-end properties reported the most vacancies - class A (14.1%), class B (13.4%) and class C (7.4%.)
Tampa's retail market reported the best vacancy rate and net absorption figures of the three main commercial types for the third quarter. CoStar pegged its vacancy rate at 5.5% with a small negative absorption of 6,635 square feet for the quarter. That was off from a reported positive absorption of 154,972 square feet in the second quarter.
Southern space galore
Industrial space in the most southern Gulf Coast counties, Lee, Charlotte and Collier counties, had a vacancy rate of 10.2%, up from just 5.7% in the fourth quarter of 2007. Flex space was the toughest part of the industrial market having gone from a rate of 21% in the fourth quarter of 2007 to 27.4%. Net absorption was 20,772 for the third quarter a big improvement from a negative absorption of 708,537 square feet in the first quarter of 2008.
The retail market reported an overall vacancy rate of 5.6% in the third quarter, up from just 3.8% in 2008. However, the three-county area reported positive net absorption of 445,971 square feet and has been positive the past three of four quarters.
Collier County's office market vacancy rate was 15% as of the first half of 2008 up from 9% a year ago, according to CB Richard Ellis' Southwest Florida 2008 Mid-Year Report. Net absorption was also negative by 3,882 square feet in the second quarter.
"We're seeing more [office] vacancies than I'd like and it's taking longer to back-fill than it would normally take," says Randy Mercer, a founding partner of CB Richard Ellis, Fort Myers-Naples. "It's a great time for a tenant to work with their landlord."
The overall office vacancy in Lee County as of early October is about 18%, Mercer says, which he describes as up about five percentage points from the beginning of the year.
On the plus side for Southwest Florida vacancy rates, and much of the rest of the Gulf Coast, new construction has slowed to a near stop, which most experts believe will force an eventual increase in absorption. Industrial vacancy of multi-tenant properties was 7.6%, while absorption was virtually zero in the second quarter.
In the first of the year, Charlotte County's industry market reported nearly zero net absorption, according CBRE, down from a net absorption of 47,398 square feet in the first quarter of the year. Vacancies of multi-tenanted industrial buildings more than 20,000 square feet increased to 7.6% in the second quarter.
Charlotte's retail market started showing growing weakness through the first half of the year with a vacancy of 6% up from 3% a year ago. Net absorption for the second quarter was negative 68,823 square feet, a significant decline from the first quarter, which was also negative.
Charlotte County saw its overall office market vacancy remain at 13%, which is 0.6% lower than a year ago, CB Richard Ellis research reports. Net absorption improved 3,441 square feet in the second quarter of the year up from the previous negative quarter.
Too much space
In Sarasota County, large-scale office space is now reporting a 15.46% vacancy rate on buildings more than 10,000 square feet and up, much higher than the 7.73% in 2006, according to the Real Estate Overview Committee of the Economic Development Corp. of Sarasota County.
The county also reported a negative absorption as of August of 2008 of 95,811 square feet, down from a negative absorption of 22,637 just a year ago.
Manatee County's large-scale office is worse off than even Sarasota County with a total vacancy rate of 19.5%, according to the newest report from the Manatee Office Vacancy Exchange (MOVE) committee for the Manatee Economic Development Council issued in September. The county reported a negative net absorption of 131,297 square feet marking the first time in four years that net absorption has been negative.
Both the Sarasota and Manatee real estate groups are working to finalize an industrial report similar to their office data reports, but even with only the early data, conditions don't look promising. Janet Robinson, chair of MOVE, the Industrial Vacancy Committee for both counties and a broker associate with Abbey Realty & Management, expects that flex space is running at a vacancy of around 20% in both counties.
"That's really from the construction boom of people coming out of their garages, when they could afford to hire people because of their demand," Robinson says. "Then the construction industry went kablooey. Companies moved back into garages, laid off help or went bankrupt."
Robinson says that while regular warehouse may appear healthier based on the vacancy numbers, as a sector it's equally bad off.
Warehouse users are more likely to own their properties, she explains, so their business troubles are more likely to show up as more properties for sale. The region has also seen a greater number of sale/lease-back financing deals, which also aren't included in vacancy or absorption figures.
Financial panic blamed
Although a number of other factors played a big part - including a not-so-small contribution from a once-a-century financial panic - most commercial real estate experts attributed the decline to the lingering hit from the depressed residential market.
In their most recent overview, CB Richard Ellis researchers attributed the troubled Lee Country economy and industrial market (a 13.6% vacancy in June, up from 10.6% in June 2007) to the small businesses in the construction industry and in related industries.
"The housing market is the heart of our community, so when you have no one living in a home there's no one fixing it up or painting it," Seidel says. "When poor people don't work they don't need warehouse space."
Although not a completely connected indicator of commercial real estate's future, its residential market sister looks to be starting to see improvements at least in certain market areas. Large-scale investment in residential is expected to pick up toward the start of next year as national homebuilders heavily discount to unload large portfolios of new homes and residential lots.
Randy Thibaut, owner and CEO of Fort Myers-based Land Solutions Inc., who's work for the Beverly, Mass.-based Brookwood Value Partners LLC led the private equity firm to invest in several hundred lots from homebuilders in Southwest Florida, expects buyer discounts and institutional home interest to accelerate toward the end of the year.
"I'm speaking to more lenders taking back property," Thibaut says. "A lot of builders are looking to clean up their books between now and March."
One of the commercial industries most closely tied to the residential slowdown, the apartment market, is facing a number of new challenges.
"It's difficult to find a deal right now where the cash flow makes sense in the short term," says Darron Kattan, apartment Realtor and partner in Franklin Street Real Estate Services. "We're seeing significant vacancies and negative rent growth. We're already starting to see a trend with defaults."
Kattan expects the properties that are no-recourse debit financing that has no personal guarantees to work through the system first as debtors have fewer incentives to fight for lower-valued property.
As for opportunities, the overriding axiom is that the current market is perfectly positioned for private equity firms or individuals with money to grab real estate at a bargain. In addition, successful tenants or new businesses with enough capital to weather the tight credit market can negotiate better lease deals at low rates that haven't been seen in years.
"Tenants are in the driver's seat for 2009," Thibaut says.
Plus, Realtors in Sarasota/Manatee and Tampa report higher than usual interest from hoteliers.
"These aren't the high-end hotels these are more the business hotels," Robinson says. "[But] If hoteliers want to be here it means we are going to be getting more guests, that increases the opportunities for our market."
REVIEW SUMMARY
Industry. Commercial real estate
Trend. Flat line. The market is dead right now.
Key. An economic rebound that is strong in the housing market, rebuilding the foundation for a strong commercial real estate market.
BY THE NUMBERS
Southwest Florida 2008 Mid-year report
Southwest Florida 2008 Mid-year report
Industrial
Mid-year Vacancy Net Absorption Construction
Collier 8.2% -15,000 0
Lee 13.6% 90,000 271,000
Charlotte 7.6% 0 40,000
Office
Mid-year Vacancy Net Absorption Construction
Collier 15.3% -4,000 192,000
Lee 19.6% -48,000 605,000
Charlotte 13% 3,000 34,000
Retail
Mid-year Vacancy Net Absorption Construction
Collier 6.1% -38,000 424,000
Lee 5.2% 392,000 456,000
Charlotte 6% -69,000 83,000
Source: CB Richard Ellis
BY THE NUMBERS
Summary Office Buildings 10,000 square feet and above Net Absorption
Total SF vacant SF percent 2005 2006 2007 2008
Manatee County 3,629,253 749,786 20.66% 262,942 158,980 213,914 -31,918
Sarasota County 5,977,409 461,863 7.73% 546,746 357,935 -22,637 -95,811
Sources: Nov. 14, 2008 updated Manatee Office Vacancy Exchange committee of the Manatee Economic Development Council and the October Real Estate Overview Committee of the Economic Development Corp. of Sarasota County
BY THE NUMBERS
VACANCY RATES
Fourth Third
Quarter Quarter
Industrial
Southwest Florida 2007 2008
Vacancy 5.7% 10.2%
Net Absorption -90,897 -20,772
Tampa/St. Petersburg 2007 2008
Vacancy 6.5% 8.2%
Net Absorption -646,169 -1,174,940
Office
Tampa/St. Petersburg 2007 2008
Vacancy 180,053 -589,484
Net Absorption 9.7% 11.7%
Retail
Southwest Florida 2007 2008
Vacancy 3.8% 5.6%
Net Absorption 229,407 445,971
Tampa/St. Petersburg 2007 2008
Vacancy 4.6% 5.5%
Net Absorption -198,258 -6,635
*Collier, Lee Charlotte counties **Hillsborough, Pinellas, Sarasota and Manatee counties Source: CoStar Group
Your free article limit has been reached this month.
Subscribe now for unlimited digital access to our award-winning business news.
Join thousands of executives who rely on us for insights spanning Tampa Bay to Naples.
