The recession may have ended in 2009, but the office-space market in some hard-hit areas is just now starting to recover from the bust.
Consider Lee County, where car-rental giant Hertz is building a corporate campus to house its newly relocated global corporate headquarters. According to market tracker CoStar Group's mid-year report, 20% of the top-quality “class A” office space remains vacant in Lee.
Based on that vacancy rate, the area that includes Fort Myers is the least-recovered major office market on the Gulf Coast from Tampa to Naples. Most areas show class-A vacancy percentages in the mid- to low-teens and some with single digits, such as Pinellas County's Gateway area with 4.6%.
This far into the economic cycle, shouldn't the office market in Lee County be in better shape?
In adjoining Collier County, for example, the vacancy rate for top-quality space is 14.5% and landlords there command as much as $5 more per square foot on their leases than their Lee County counterparts, according to CoStar.
“Collier County seems to have more allure, particularly to the office drivers like law firms, money management firms and banks,” says Dougall McCorkle with Premier Commercial in Naples. “It's where the money is.”
Fact is, the Fort Myers area may be the last major office market on the Gulf Coast to recover. That's good news for tenants looking for space or renewing their leases because they should still be able to get favorable terms.
“The tenants who are in the market want to move to protect their positions for the next few years,” says Jim Garinger, senior managing director for Colliers International Southwest Florida in Fort Myers. “They're trying to use that to their advantage to lock into lower rates for the next lease-term cycle.”
Still, the relatively high office-space vacancy in Lee County masks significant improvement this year, brokers say. What's more, increased office space absorption will lead to a shift in the balance in favor of landlords.
“I think the numbers are really darn good considering what we're digging ourselves out of,” says Randal Mercer, founding partner of CRE Consultants in Fort Myers. Vacant space is being absorbed and rents have stabilized, he says.
For example, Mercer says tenants absorbed more vacant space in the first six months of this year than they did in all of 2013 in Lee County, even as companies such as technology consulting firm Gartner have been building new offices. “We've added square footage and we've increased absorption. That's what we're looking for,” he says.
“The market may be in equilibrium in the next 18 months,” forecasts Gary Tasman, founder and executive director of Commercial Property Southwest Florida. “Then we'll see rents grow.”
Tale of two markets
Fort Myers and Naples are only 35 miles apart, but they're two distinct office markets. “Lee and Collier counties have always been the tale of two cities,” says Garinger. “The landlords [in Lee County] aren't getting anywhere near the rents that they're getting in Collier County.”
Consider the two biggest class-A office submarkets in Lee and Collier counties. The vacancy rate in the South Fort Myers area is 15% and the quoted rent is $19.13 per square foot. In North Naples, the vacancy rate is 9.9% and the quoted rent is $24.21, according to CoStar.
In addition to demand from bankers and lawyers, Collier County has become a destination for satellite offices of companies in the Northeast and Midwest. “There are a lot of senior executives and CEOs who live in this area and they want space,” says McCorkle.
McCorkle says class-A office space vacancy in Naples could fall to 5% in the next year. “Since there hasn't been any new construction in years, it's going to absorb up within the next 12 to 18 months,” he says.
Even with such low vacancies, a new speculative office building is unlikely to come out of the ground because of high construction costs and relatively high “impact fee” taxes in Collier County. Instead, McCorkle says tenants might move to less upscale space or other locations.
In Lee County, space is filling up from users coming from outside the market and from locals expanding. “Folks who work out of their homes, they can't stand it anymore,” Mercer says. “You're seeing guys band together again and open up businesses.”
Tasman acknowledges that the office market in Lee County has been slower to rebound. But he says momentum is shifting toward landlords with the most modern buildings. “A lot of space is functionally obsolete,” Tasman says.
Companies today are looking for office space that can accommodate teams of employees in open floor plans that encourage collaboration. “The way we use office space now because of mobile technology is different,” Tasman says.
Focus on Bonita Springs
As office space in Collier County fills up, brokers expect tenants to move into neighboring communities of Bonita Springs and Estero in South Lee in search of space and more affordable rents.
Hertz's new campus in Estero gave the area a public relations boost that is expected to draw renewed interest. “I do believe we're at a turning point,” says Matthew Stepan, a broker with Premier Commercial in Bonita Springs. “I'm a die-hard Cubs fan and I'm used to saying this is our year,” he chuckles.
Developers overbuilt office space in Bonita Springs during the boom, and it was one of the hardest-hit areas of Lee County during the bust. “The vacancy got as high as the 40% range,” says Stepan.
“We've absorbed about half that vacancy, but at extremely low rates.”
Rents collapsed to as low as $8 per square foot and have since rebounded to $14, Stepan says. That's still $10 a square foot lower than rents for similar buildings in Naples.
“Bonita has an awful lot of available office space,” says Garinger. “The fact that Hertz is going to move in there will have an impact on the market.”
Industry. Commercial real estate Trend. Office space is filling up. Key. The balance of power will shift to landlords in lease negotiations.
At a glance
Vacancy rates have declined and rents have stabilized or increased in many office markets on the Gulf Coast. Here's a snapshot from market tracker CoStar Group of the top-quality “class A” buildings in the major markets of the Gulf Coast at mid-year.