- April 15, 2024
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REVIEW SUMMARY
Industry. Commercial real estate
Trend. Rising vacancies, falling rents
Key. Cheap rents, more credit and less government will help the Gulf Coast region recover.
The last time there was this much vacant office space on the Gulf Coast was during the last commercial real estate downturn in the early 1990s.
But overbuilding prompted that crisis. This time, job losses have sent the overall vacancy rate in office buildings to 20% or higher in many areas of the Gulf Coast.
For example, in the Westshore business district of Tampa, Florida's largest office market, the vacancy rate surged to 21.8% in the fourth quarter from 12.6% in the same quarter in 2008, according to Cushman & Wakefield. The Tampa Bay area lost 51,000 jobs in 2009, according to the state's December employment data.
In the Westshore business district alone, there's enough vacant office space today to fill nearly 46 football fields. Throughout the Tampa Bay area, there's enough vacant office space to fill 159 football fields.
“Right now, there's very little tenant demand,” says Jack Hoskins, senior vice president with CB Richard Ellis in Tampa who represents tenants in lease negotiations. “Health care and education are busy, but besides that it's pretty quiet.”
Pinellas County is suffering more than Tampa. “Pinellas County is worse than Hillsborough because it was heavily loaded on the residential business,” Hoskins says.
Further south, in the Fort Myers submarket, 30% of the “class A” upscale office space is vacant, spurred by the collapse of the construction industry, according to Commercial Property Southwest Florida, a brokerage firm affiliated with Cushman in Fort Myers.
Despite the grim statistics, commercial real estate brokers say higher vacancies and lower rents make the Gulf Coast more competitive than it has been in the past with other markets in the Southeast. That will set up the region for the recovery.
“The cost of many things is back to 1998,” says Larry Richey, senior managing director at Cushman & Wakefield in Tampa. “That's not the case in Atlanta, Charlotte or Raleigh.”
While published asking rents don't reflect the rising vacancies, brokers report rent concessions of 20% to 50% as landlords become more desperate to fill space.
Space subleased by shrinking firms can be leased for even lower prices and push overall rates down further.
In fact, many of the largest corporate relocations to Tampa in the mid- to late-1990s occurred on the heels of the last recession, as companies took advantage of lower costs. “That's when we had economic development wins that were significant and sustainable,” Richey says.
Musical chairs
For now, much of the activity is occurring as tenants negotiate leases for less space, lower rents or to move into more upscale buildings and better locations.
“The numbers don't indicate that anything good is happening, but actually there are a lot of transactions,” says Randal Mercer, a partner in the Fort Myers office of CB Richard Ellis.
In particular, activity picked up in the latter part of the year as existing tenants sought lower rents. For example, the Fort Myers area reported a 76% increase in leasing transactions in the second half of 2009 compared with the first half of the year, according to Colliers Arnold.
“Most tenants are taking 20% less space for leases that expired, on average,” says Richey.
Companies continue to seek ways to reduce costs because revenue growth remains anemic. After labor, real estate is usually the next biggest expense. “The initial interest is from a cost standpoint, but there are some businesses that want a better location,” says John Harshman, president of Harshman & Co. in Sarasota. “We're not seeing a great deal of interest from businesses coming out of the area.”
Brokers don't expect substantial increases in vacancies because the companies that remain have weathered the worst of the recession. “I think the businesses currently in place are the last guys standing and with very few exceptions are declared the winners,” says Mercer.
Cheap rents and plentiful space won't attract companies right away, however. “There's going to be an adjustment period,” says Tasman. “I don't see it happening that fast.”
The vacancies are so high from Tampa to Naples that a return to a landlord's market remains several years away. “I can't really see what industry is going to pull us out,” says Hoskins. “There are some companies looking at this area from out of state, but it's not opening up the floodgates.”
But brokers report investors are starting to scout the market for opportunities, buying buildings for fractions of what they sold for during the boom as overleveraged landlords shed debt. That may be an indication that a bottom in the commercial real estate market is at hand.
“We had two New York groups and an offshore group in here yesterday and they're actively looking to place their funds,” says Mercer. “That's a great sign.”
Challenges remain
The biggest challenge for expansion is access to credit. Without that, the excess office space won't be absorbed. “We need to have a little bit of a loosening up on lending,” says Harshman.
What's more, the threats of higher taxes and increased government regulation threaten the recovery. “The federal government should be assisting small business and they're hindering them,” says Tasman. “Every time Obama speaks, the market goes down 200 points. That's not the way to instill credibility.”
Local government regulations continue to stifle small-business creation, especially in anti-business counties such as Collier and Sarasota. For example, despite the downturn, Collier County continues to have the highest taxes on new construction in the state and its permitting process is notoriously slow.
And measures on this year's November ballot such as Amendment 4, dubbed “Hometown Democracy,” threaten to constipate growth further as voters instead of elected officials would be required to cast their ballot for every substantial new development project.
Patrick Slevin, a Tallahassee-based development consultant who helps builders overcome community opposition, recently told a gathering of the Urban Land Institute in Bonita Springs that he expects Amendment 4 to pass. Slevin says support is especially strong in anti-growth areas such as Sarasota.
Harshman says that's one of the biggest threats to a recovery. “It could add a huge obstacle to positive and desired growth,” he says.
See-through buildings
The economic contraction of the last three years has boosted overall vacancy rates in office buildings from Tampa to Naples.
Vacancy Vacancy
rate rate
Area Dec. 2008 Dec. 2009
Pinellas 20.1% 23.6%
Lee County 17.0% 19.4%
Tampa 15.9% 19.3%
Collier County 14.9% 16.0%
Sarasota-Bradenton 10.7% 12.7%
Sources: CoStar Group, Cushman & Wakefield, Commercial Property Southwest Florida
