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REVIEW SUMMARY
Industry. Real estate
Sector. Office
Key. Ownership is cheaper than renting.
Office tenants along the Gulf Coast whose leases will soon be up for renewal may be in a position to consider another option. They could re-sign to stay in their current space for a few more years, or they could make an offer to buy the building — sometimes for even less than they are paying in rent.
Single dwellers of office buildings are pursuing ownership during the soft commercial real estate market at the same time that investors are looking for unprecedented deals. Brokers say those transactions may make the most sense for properties where current tenants intend to stay for longer periods, even at rents as cheap as most real estate veterans have seen in decades.
“We're seeing a lot more activity in that regard than we have in a long time,” says James Moler, senior vice president with Grubb & Ellis|Commercial Florida in Tampa. He points out that small and mid-sized businesses can take advantage of favorable bank financing or even Small Business Administration loans to buy their own space.
“This is the best time I've seen for users to buy their own real estate, as opposed to renting,” adds Gary Tasman, executive director of the Fort Myers office of Cushman & Wakefield.
He cites particular interest among medical office tenants, noting that some smaller buildings can be purchased at up to 60% below replacement cost.
Reasonable rents
Whether it's a bargain over time involves some serious pencil sharpening, however. In the current tenant's market, where overall office vacancy exceeds 20%, asking rents are averaging just above $21 per square foot in the Tampa Bay market, with a range of nearly $26 in Tampa's upscale Hyde Park district to $15 in south St. Petersburg, according to Cushman & Wakefield.
Yet those numbers commonly apply to multi-tenant office properties, as opposed to specifically located buildings with one tenant occupying the majority of space, if not all of it. Single-tenant situations normally command a premium from landlords, given that they don't have to share lobbies or parking with anyone else.
There is also the bigger questions of liability, operations and maintenance costs. If the air conditioning goes out or a toilet overflows, there's no property manager to call. All those things that used to be landlord concerns suddenly become your own.
The biggest example of a buy-or-lease decision in the Gulf Coast region happened this spring, when Tampa-based Kforce Inc. chose to purchase its four-story, 134,000-square-foot headquarters on six acres at 1001 E. Palm Ave. for $28.5 million. While the price may appear steep compared to most recent local transactions, at well over $200 per square foot, Kforce executives say the deal will save the company at least $1.4 million annually.
“We see it as very positive for shareholders and a strong show-us-the-money commitment to Tampa Bay,” says Michael Blackman, Kforce's chief corporate development officer and an 18-year veteran of the company. Kforce moved into the build-to-suit structure in 2001 from its previous base on Bayshore Boulevard, with plans to continue growing at its new site.
Now with at least 800 employees, Kforce has the capacity to expand at its current facilities. “We've got a lot of runway in front of us,” Blackman says. “This is a tremendous growth opportunity.”
However, staying put and buying its space wasn't necessarily a no-brainer for Kforce. Blackman confirms that the company scouted other local office options before deciding to buy the building from iStar Financial Inc., a New York-based real estate investment trust.
“We considered any and all options,” he says. “At the end of the day, it was very clear to us that this made the most sense for all of our stakeholders.”
Commercial real estate observers say Kforce's building commanded a higher price because of its prime location, at the corner of Palm and Nebraska avenues where it is now considered a cornerstone of the up-and-down Ybor City historic district.
They add that the numbers may make even better sense given the fact that the costs of relocating such a large operation would have overshadowed any savings on buying or leasing anywhere else.
Short sale bargain
The Kforce deal is in stark contrast to the one Universal Health Care Inc. made for its headquarters at 100 Central Ave. in downtown St. Petersburg. Universal, which occupied roughly half the space, paid $9 million for the 131,607-square-foot former shopping center building that had been converted to office in recent years.
At only $68 per square foot, the building was a short sale by its previous owner, Michigan-based Lutz Real Estate Investments, which had a $17.6 million mortgage. Universal plans to expand into the remaining space.
“Based on the price we were able to acquire it for, it actually helps us financially from day one,” says Sandip Patel, the company's general counsel. “It's cheaper than rent.”
However, single occupants cannot necessarily wait around for building owners to get into dire straits before making a meaningful offer. Furthermore, landlords don't plan to put themselves in jeopardy by offering rent breaks that will affect their own ability to cover debt obligations.
“The landlords do understand that these rents won't stay this low forever,” Tasman says. As a result, any renewals involving cheaper rents are signed for shorter terms in anticipation of an economic recovery expected over the next three years.
Moler says the most likely one-tenant spaces available for sale range from small office condominiums to buildings up to 20,000 square feet. Anything larger may involve a more complex transaction, he says.
Larger tenants, especially public companies, would prefer to remain renters in order to keep real estate off their balance sheets during the current recession, he says. On the other hand, corporate executives may seek to buy their company's facilities and continue leasing them as a way to fund their own retirement.
“If you're a well-capitalized owner-user occupying at least 51% of your space, you have more opportunities available to you than an investor who needs leverage to make it work,” Moler says. Companies have to determine the best fit within their own business model, he advises.
There is also the matter of financing such a deal, Tasman says. Potential owner-users must be well-capitalized and qualify for commercial mortgages, and even in those instances banks may not be willing to fund any more than half of the purchase price, he says.
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