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Commercial Caution

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  • | 8:05 a.m. January 31, 2013
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Here's a joke making the rounds in commercial real estate circles today: What's the difference between a tenant looking for space and a terrorist?

Answer: You can negotiate with a terrorist.

Although the residential real estate market may be making a comeback, brokers at the CCIM Real Estate Outlook Conference in Fort Myers recently offered a more cautious view of the commercial real estate market in the region that includes Charlotte, Collier and Lee counties.

The commercial brokers' tempered assessments contrasted with municipal officials eager to attract new business. A panel of mayors and economic development boosters gushed about a proposed convention center hotel in downtown Fort Myers, a 600-job distribution center in Punta Gorda, a new auto dealership in Naples and undisclosed commercial projects in Cape Coral's new enterprise zone around the Veterans Affairs center.

Looming over the conference like an unwelcome elephant in the room is the federal government's unpredictable role. “When you have uncertainty, investors require higher returns,” warns Tim Allen, finance professor at Florida Gulf Coast University.

While all participants agreed that the economy is improving, economic and political uncertainty continues to threaten the beginning recovery.

The good news
The economic cycle of commercial real estate usually lags its residential cousin by about one to two years. With the residential market recovering lost ground during the bust, there are signs commercial real estate is reviving now, too.

The biggest beneficiary of a starting recovery is the retail sector. In the three-county region of Charlotte, Collier and Lee, the vacancy rate in retail establishments has declined to 7.7% as tenants absorbed 257,689 square feet of space in the fourth quarter, according to the CoStar Group. That's enough space to fill about five football fields.

“Retail activity is good, we've really turned the corner,” says Matt Yaniglos, managing director of the retail services division of LandQwest Commercial in Fort Myers.

Yaniglos cited a new Dick's Sporting Goods store scheduled to open on U.S. 41 in Fort Myers near Page Field as one sign of the recovery. In addition, he says companies such as Starbucks, Zaxby's and Wawa's convenience stores are scouting cites around the region. “All these guys are looking at corners,” he says.

With rents rising in the top locations, retailers are considering locations they would have passed over in the recession. “You're now starting to see secondary properties get attention,” says Yaniglos.

In Collier County, a new Hyundai dealership will be built on Airport-Pulling Road near Orange Blossom Drive, says Fred Kermani, a partner with CRE Consultants in Naples.

In addition, Kermani forecasts 30 new or relocating restaurants in Collier this year. “Restaurants are a hot market in Naples,” he says.

Meanwhile, industrial buildings are starting to fill up as companies supply retailers and homebuilders. In the fourth quarter, companies absorbed more than 400,000 square feet of industrial space in the three-county area, pushing vacancies down to 10% from 11.6% at the end of the first quarter in 2012, according to CoStar.

In particular, brokers cite a lack of large blocks of space greater than 10,000 or 20,000 square feet. “We have a lot of people looking for space we don't have,” says Jerry Messonnier, partner with Lee & Associates in Fort Myers.

It's the same story in Charlotte County, where Cheney Brothers plans to build a 250,000-square-foot food distribution warehouse near the Punta Gorda Airport because there's no space large enough to accommodate a facility of that scale.

On the office front, Fortune 500 companies are scouting locations in Southwest Florida, says Adam Palmer, director of the office division of LandQwest Commercial.
Still, most areas of Charlotte and Lee have high office vacancy rates and absorption in the fourth quarter in the three-county area was slightly negative because of slow job creation. “Collier has a more balanced market,” says Palmer.

Prices remain depressed
Because the office market is usually one of the last sectors of the commercial real estate market to recover, the vacancy rates remain high. For example, the vacancy rate for top-quality class A office space in the three-county area was 23.4% in the fourth quarter, according to CoStar.

“There's still a lot of room for improvement,” says Palmer.

In some submarkets, such as the Bonita Springs-Estero area in south Lee County, office landlords are raising rents. Palmer says they're doing so prematurely. “It's too early,” he says.

Lower office rents will help bring the vacancies down, Palmer says. For example, he says rents in Bonita Springs on average are $17 a square foot with a 25% vacancy rate. By contrast, in north Fort Myers, rents are $8 a square foot and the vacancy rate is 3%.

There is still pressure on rents, and the price paid for buildings in the industrial sector, too. “It's still a buyers market,” says Messonnier.

For example, developers need rents to rise another 30% to make a new building economically feasible. Recently, a building on Metro Parkway in Fort Myers traded for less than it sold for in 1993, says Messonnier. “It's back from an activity standpoint, but pricing is nowhere near where we expect it to be,” he says.

But investors are scouting opportunities, says Lee Arnold, chairman and CEO of Colliers International Tampa Bay, Central & Southwest Florida. Investors sold investments at the end of the year to lock in the lower capital-gains rates before Congress raised taxes and they're now sitting on cash. “A lot of smart money went to the mattresses in December, and it's now back in the market,” he says.

So-called “special servicers” that help banks sell distressed commercial real estate are actively marketing buildings of all kinds. “The special servicers are going to be with us for the next four to five years,” Arnold says.

Arnold says the low-interest-rate environment has tempered investor return expectations on commercial real estate. While they might have expected internal rates of return in the 20% to 25% range a year ago, now expectations are closer to 18%.

Foreign investors are particularly active from unstable countries that see the U.S. and Florida as a safe haven. But residents from stable countries with relatively strong currencies such as Canada are looking at Florida, too. “The Norwegians are very hot in this market,” Arnold noted, citing that country's strong oil sector.

“It's definitely come alive,” Arnold says.


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