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Someone's in the office

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  • | 12:27 p.m. March 25, 2011
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  • Commercial Real Estate
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Industry. Commercial real estate
Trend. Positive office-space absorption
Key. The stage is set for a recovery in the office market.

The commercial real estate office market on the Gulf Coast has been in the doldrums for so long that it's hard to believe that things will ever improve.

But the first signs of a recovery are showing in data compiled by market trackers and brokerage firms. Office markets along the Gulf Coast are seeing a net increase in the amount of leased space, and landlord concessions are less aggressive than they were a year ago.

Some brokers say the supply of sublease space — empty space that existing tenants are leasing to others — is shrinking. That's important because tenants who sublease do so at substantially discounted rental rates that undercut competing properties.

What's more, brokers report more inquiries from firms outside the region interested in moving here. In addition, existing companies that have made it through the recession have been adding staff to handle recent growth, generating leasing activity.

While the market for office space on the Gulf Coast appears to be stabilizing, rents haven't risen and vacancies haven't declined materially. Tenants with good credit continue to have the ability to negotiate relatively low rents.

But brokers who represent landlords and tenants both say the market may be starting a cyclical shift in favor of landlords. It's an echo of the last cycle of the early 1990s, when commercial real estate began recovering from the last bust.

“[The year] 2008 came very fast and very deep, and it scared a lot of people,” says Ray Sandelli, senior managing director of commercial real estate brokerage CB Richard Ellis in Tampa. “In '09, people realized the world wasn't coming to an end.” Stabilization of rents and vacancies in 2010 set the stage for the recovery, which eventually will lead to rising rents.

Leasing activity picks up

Few places were hit as hard as the Fort Myers area by the real estate collapse, as vacancies surged and rents fell in office buildings around town.

But therein lie the seeds of a recovery.

For example, call-center operator Alorica recently signed a lease for 38,300 square feet at Eastlinks Business Park in Fort Myers. Matt Price, leasing specialist with landlord McGarvey Development Co. who arranged the deal, says an abundance of labor, lower housing costs and available office space at reasonable rents are attracting companies like Alorica. “We're seeing more deals like that coming in,” Price says.

In Tampa, law firms, financial-service companies and the government have been leasing additional space downtown. For example, recently law firm Adams and Reece leased 20,000 square feet and J.P. Morgan leased 12,000 square feet, says Claire Calzon, managing director of office services for Colliers International in Tampa.

Calzon says she's twice as busy today with inquiries as she was a year ago. The Wachovia Center building she's leasing is 77% full today, compared with 69% in August 2009. “That's an indication landlords are ready, willing and able to capture deals,” she says.

In the region's biggest office market, the Westshore business district of Tampa near Tampa International Airport, there was more space leased at the end of 2010 than at the same time in 2009, according to data from brokerage Cushman & Wakefield. This so-called “positive absorption” amounted to more than two football fields of office space. By contrast, the previous year saw negative absorption of office space amounting to more than 14 football fields.

In the Fort Myers-Naples area, a similar amount of space — measuring more than two football fields — was absorbed last year. “I'm more optimistic than six months ago,” says Gary Tasman, executive director of Fort Myers-based brokerage firm Commercial Property Southwest Florida.

Because of the lack of newly constructed space recently, a few large companies boosting employment in Fort Myers could gobble up existing space. “What's going to happen here is we're going to have a spike up in rents in the next 24 to 36 months. The pressure is building,” Tasman says.

Unlike the last commercial real estate bust of the early 1990s, a drop in demand rather than oversupply caused the current imbalance. “The good news is that there's no new construction, so we're not competing with that,” says Calzon.

Sarasota is also benefiting. “There is no question that there is a definite increase in activity,” says Ian Black, president of Ian Black Real Estate.

Throughout the region, landlords have been forced to lower rents to be competitive. “We got over our hubris, which is a great thing,” says Black. “We seem to be competitive, whereas before you always had to pay a premium.”

Still a tenant's market

Despite improvements in the office market, most agree that tenants still have an advantage in negotiations because vacancy rates are still relatively high.

“It's still a tenant market, but I will say the concession pool is varied depending on the ownership of a particular property,” says Cheri O'Neil, senior vice president and branch manager of Studley, a commercial tenant-representation firm in Tampa.

Companies that cut back during the downturn are starting to add staff to manage their growing business. What's more, their balance sheets have recovered. “There are a lot of companies that are in a very strong cash position and they have the ability to make some commitments,” says Sandelli.

Barring unforeseen calamities, it's not likely rents will fall much further if the economic recovery continues. “The good news is that we're feeling a much greater sense of confidence from the business owners,” says O'Neil.

But office vacancies remain elevated, and it's not likely rents will rise until significant space is absorbed. “I think the next 12 months is going to be gradual. We're on the cusp of recovery,” O'Neil says.

“Once we start getting down vacancy rate, the rates will start to move,” says Sandelli. He adds a cautionary note: “The big question is that this is all based in large part on the economy. Where are the jobs going to come from?”


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