Landlords are counting on more companies like eMason Inc.
The fast-growing Clearwater-based technology company recently leased nearly 41,000 square feet of office space in the Gateway area of Pinellas County to accommodate its growth.
The Gateway area, located across Tampa Bay from Tampa via Interstate 275, is the shining example of a slow yet steady recovery in the long-suffering office market on the Gulf Coast.
Technology, health care and financial-service companies have been filling up the best office space in Gateway. According to first quarter data from CoStar Group, the vacancy rate in Gateway's 24 top-quality “class A” office buildings in Gateway is now just 5.3%.
While it's the only market in the region from Tampa to Naples with a “class A” vacancy in the single digits, Gateway nonetheless points to a recovering office market. Vacancy rates throughout the region have declined by several percentage points in the last two years into the mid-teens, especially in the Tampa Bay area where job growth has been more significant.
According to the most recent employment data, the Tampa Bay area led the state in job growth for the year ending May 31. During that period, employment grew by 17,300 jobs, or 1.5%, in the Tampa-St. Petersburg-Clearwater metro area, according to the Florida Department of Economic Opportunity.
Tenants in lower-quality space have been expanding to better office space because rents have fallen. “We always see that as the markets are recovering,” says Anne-Marie Ayers, first vice president with commercial brokerage CBRE in Tampa.
Areas further south, such as Fort Myers, still post persistently high vacancies because job creation has been slower there. The employment data for the year through May showed virtually no change in the Cape Coral-Fort Myers metro area, for example.
Still, low rents, relatively high vacancies and a lower cost of living set the stage for corporate relocations when the economy regains strength. “We're going to get to a tighter equilibrium faster than most people think,” forecasts Scott Garlick, a director with commercial brokerage Cushman & Wakefield of Florida in Tampa.
While overall vacancies in the Tampa Bay region have been falling modestly, large blocks of top-quality space are harder to find, brokers say. It's one of the first signs that the office market is improving.
“Gateway is coming back the fastest,” says Jane Dizona, first vice president with CBRE. Centrally located between St. Petersburg and Tampa on I-275, Gateway has benefited from the fact that rents have traditionally been lower than the Westshore business district across the bay in Tampa.
Besides such financial service companies as Raymond James and Franklin Templeton, Gateway is becoming a hub for technology and health care companies. “Gateway has attracted larger tenants,” Dizona says.
But Westshore is seeing significant improvement in vacancies, too. That's important because Westshore is Florida's largest office submarket, with nearly 17 million square feet of office space. That's enough space to fill nearly 300 football fields. “Westshore will lead the market by virtue of volume of space,” says Ayers.
According to CoStar, the total vacancy rate in the Westshore business district has fallen two percentage points in the year ending March 31 to 14.7%. Top-quality “class A” space vacancy has fallen from 21.7% to 18.4% in that same period.
Even in areas with higher vacancies, such as the suburban office parks along the Interstate 75 corridor in eastern Hillsborough, a few tenants leasing large blocks of space could alter the market. “I think over the next six months that vacancy will drop fairly significantly,” says Garlick. “Some of those big chunks of space have been absorbed.”
While rents generally remain depressed, brokers report that landlords aren't as generous with concessions as they were during the depth of the downturn. Concessions include tenant improvements and months of free rent.
Still, relatively high vacancy rates mean it's still a tenant-driven market. Brokers say rents generally lag vacancy rates by nine months and won't rise meaningfully until overall vacancies hit the low teens or single digits.
Downtowns hold onto tenants
During the last commercial real estate downturn in the early 1990s, central business districts such as downtown Tampa fared especially poorly with vacancies rising to 30% or higher.
However, in this cycle, central business districts in Tampa, St. Petersburg and Clearwater have held up surprisingly well with vacancies in the mid-teens. Unlike the last cycle, few new office towers have been built in downtowns. Also, tenants such as law firms have managed through the downturn and expanded.
“Our downtowns have been rejuvenated,” says Garlick. Shops, restaurants and entertainment have given tenants reasons to relocate or expand downtown. In addition, downtown Tampa will get national exposure when it hosts the Republican National Convention this August.
There's even plans to build a new office complex in downtown Tampa. Developer Trammell Crow recently announced plans to build SouthGate, a 20-story, 400,000-square-foot office building and 350-room luxury hotel on four acres at the southeast corner of Brorein and Morgan streets. If built, it would be the first such tower built in downtown Tampa in 20 years.
Much of the absorption so far downtown and in suburban markets has been by existing tenants expanding or relocating to better space. So far, brokers say corporate relocations have been few.
But that could change if the economy improves because the Tampa Bay area and the rest of the Gulf Coast is again relatively less expensive than competing areas such as Charlotte, N.C., Dallas and Nashville. “Prior to the recession, we slipped a little bit. Now we're back in that top two or three spots,” says Garlick.
Jobs hold the key
Job creation is the key to an improving office-space market and the Tampa Bay area's growing labor market provides clear evidence of that. The opposite is true, too; in areas with little job creation, such as Fort Myers, large amounts of office space remain vacant.
While CoStar reports the Lee County overall office vacancy rate is 16.7%, the actual vacancy rate is higher if you exclude buildings with government tenants and bottom-quality “class C” buildings, says Randy Mercer, founding partner of brokerage CRE Consultants in Fort Myers.
By that measure, and counting only better-quality office buildings with at least 15,000 square feet, Mercer says Lee County's vacancy rate is 30%.
“The office market is going to improve very, very slowly because the growth is organic. No one is coming across the border,” says Mercer.
Further south in Collier County, the picture is somewhat brighter. Collier's employment growth for the year ending May 31 rose 2.2%, or 2,500 jobs.
Mercer says the vacancy rate in Collier has fallen two percentage points in the last six months as businesses expand. “I think you're seeing an expansion of every business type in every submarket, from Vanderbilt Beach Road to downtown,” he says.
Still, Naples-area landlords have been aggressive with good-quality tenants. “Good tenants are getting very attractive packages,” says Craig Timmins, principal with Investment Properties Corp. in Naples.
Timmins says he's been working with law firms and companies related to the recovering residential real estate market, in particular. “People are cautious, but they also know they need real estate to meet their business objectives,” he says.