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There's a rule of thumb that commercial real estate lags the residential real estate cycle by 18 to 24 months.
If that holds true, a recovery in commercial real estate doesn't seem as far away as it once did.
The residential real estate market's recovery has already been under way in Collier and Lee counties for about a year, and some market participants have started to see some improvements in the commercial vacancy rates. Those two counties are among the first to benefit from a housing recovery on the Gulf Coast.
“The commercial is following just like it typically does,” says Stephen Hagenbuckle, managing principal of Terracap Management in Cape Coral, whose second investment fund has raised $100 million to acquire commercial real estate in the region. “We're raising capital and acquiring assets in lockstep.”
One sign of market improvement is the vacancy rate. Overall, the percentage of vacant space in retail, industrial and office buildings has been declining this year, according to data tracker CoStar Group (see chart).
Anecdotally, there are plenty of signs that commercial real estate is on the mend, too. For example, Gary Tasman, founder and executive director of Cushman & Wakefield Commercial Property Southwest Florida, says civil engineers and architects have been filling office space lately. They're a leading indicator of a recovery because those businesses are the first to benefit from future land development.
Shelton Weeks, the Lucas Professor of Real Estate at Florida Gulf Coast University's Lutgert College of Business, says the school has been getting more phone calls from developers seeking to hire recent graduates. That's because many commercial real estate professionals left the area after the bust.
“We're at the doorstep of commercial,” says Jeffrey Halvorsen, whose company, Halvorsen Holdings, recently developed a Publix-anchored shopping center on Bayshore Boulevard in north Fort Myers within a well-established population zone.
Still, there are concerns that the recovery in commercial real estate will be pushed further than a few years because banks have been slow to dispose of distressed properties — and slow to lend. “Commercial may take a little longer because of the dysfunctional credit markets,” says Tasman.
What's more, recent residential land deals haven't translated yet into significant home sales. “We're not going to see the effects of this as quickly as we have in the past,” says Randy Thibaut, president of Land Solutions in Fort Myers. “You've got to get the whole housing industry back in gear.”
Fill the warehouse
Warehouse space is among the first kinds of property to benefit from a residential recovery. Such industrial space has always filled up with companies that cater to the homebuilding business in Southwest Florida.
“The trades will be the ones who help with the residential growth, and they're going to need space,” says Randy Mercer, founding partner of CRE Consultants in Fort Myers.
“This season is going to be a real gut check for the Southwest Florida market,” says Jerry Messonnier, a principal with Lee & Associates in Fort Myers. He's referring to the winter and spring home-buying season in 2013 that many hope will be better than this year.
The critical ingredient for commercial development is rental rates, which will only rise once more warehouse space is absorbed. “There's still a lot of inventory to work through,” Messonnier says.
But there are opportunities in pockets. For example, Messonnier cites a lack of large blocks of industrial space along the Interstate 75 corridor. He believes as much as 500,000 square feet of large distribution space could be filled within 18 months.
“We're not far away from seeing industrial being built again,” Messonnier says. “It leads the commercial market out of the swamp.”
Shops and offices
Already this year, the region has seen 400,000 square feet of new retail space, or enough to fill seven football fields, says Mercer. Those include two Publix-anchored shopping centers and two car dealerships. “That's a real good indication that there's some stability in the market,” says Mercer. “Retail is already starting to show a comeback.”
Unlike the boom years, however, retailers want to see actual population figures instead of projections. For example, Halvorsen says he held off on leasing the Publix shopping center on Bayshore Boulevard until the traffic numbers were proven and other retailers in the area showed success. “What I like about Bayshore is it's the gateway to Cape Coral,” he says.
Relatedly, construction firms say they are starting to see a pickup in retail projects. For example, Jerry Wallace, president of J.L. Wallace, says he's seeing opportunities to build bank branches, gasoline stations and dollar stores. That's good because Wallace says some of the public-sector work is drying up as municipalities cut back. “In the last three months commercial has picked up,” he says.
Meanwhile, the office market is unlikely to see improvement until employment picks up significantly. Currently, the labor picture in the area is mixed. The Cape Coral-Fort Myers area lost 2,000 jobs and Punta Gorda lost 300 jobs in the year ending in August, but the Naples-Marco Island area added 3,500 jobs in that same one-year period, according to state estimates of nonagricultural employment.
Land and investment
Investors say banks are starting to sell buildings and land that they've delayed foreclosing. “Those are coming to an end now,” says Hagenbuckle. His fund, Terracap Partners Fund II, has acquired 600,000 square feet of office, hotels, apartments and industrial buildings in the area. The fund has also bought 330 acres of commercial land. “We've spent about $35 million,” he says.
Hagenbuckle, whose first fund focused on residential land, has returned 30% of the invested capital as it sells assets in that first fund to builders and developers. “Residential is already well into the recovery,” he says.
“Investor interest has been picking up over the last 12 months,” says Andrew DeSalvo with Premier Commercial in Bonita Springs. “We've dealt with almost exclusively cash buyers.”
DeSalvo says the Federal Reserve's efforts to push down yields on government bonds will drive investors to alternative investments such as commercial real estate in search of higher returns. “They're trying to buy at really good prices,” he says.
“The interest level in commercial land is higher now than this time last year or any time since the correction,” says Tasman. “The velocity of the transactions is so light it's hard to tell whether commercial land has bottomed. I believe it has.”
Mercer says he recently sold a land parcel on Summerlin Road to a doctor who plans to build a building to house his medical practice. “He hit the market at just the right time,” Mercer says.
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