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Executive Summary
Company. Seagate Development Group Industry. Commercial real estate Key. Vacancies and rents are reaching the point where development could start again.
As vacancies decline and rents rise in Southwest Florida's warehouses, developers and builders are eyeing opportunities to build again.
One such developer is Seagate Development Group. A group of experienced commercial real estate developers and managers formed the Fort Myers-based firm earlier this year to capitalize on the improving market.
For example, the warehouse vacancy rate in Southwest Florida's three counties — Charlotte, Collier and Lee — was 5.8% at the end of June, according to market tracker CoStar Group. In 2009, the vacancy rate stood at 12.5%.
The vacancy rate for so-called “flex space,” which combines warehouse and office, now stands at 10.6%. In 2008, 25% of the flex space in the area was vacant.
“The industrial market has recovered nicely in Southwest Florida,” says William Price Jr., the CEO of Seagate.
Price says Seagate is working with four clients looking to build 25,000 to 60,000 square feet of space in Fort Myers or Naples. “In Naples, there's easily 150,000 square feet in pent-up demand,” says Matt Price, executive vice president and partner with his father in Seagate.
Despite the demand and the relatively low vacancies, rents have only now started to break the threshold that makes sense for new development. And banks continue to be conservative in lending for projects unless there are tenants lined up in advance. “The issue is no one will lend for speculative development,” says the elder Price.
Fact is, there are investors ready to back development if they can get leverage to boost returns. “We have investors who are anxious to get money out,” Price says.
Deals on the horizon
For starters, Seagate acquired a controlling interest in 515,000 square feet of multitenant flex space in the Westlinks and Eastlinks business parks off Daniels Parkway near Interstate 75. The Seagate partners know the properties well because they helped develop them as part of the McGarvey Development team during the last cycle.
Because of their location near I-75 and Southwest Florida International Airport, the Westlinks and Eastlinks parks have filled up with growing tenants NeoGenomics, Staples, Walgreens, ADP and Home Depot. In 2010, the vacancy in the parks totaled 40%, and today it's down to 15%, Price says.
In total, Seagate now controls or manages more than 1 million square feet of industrial and flex space in Southwest Florida. “That's the base of our company going forward,” William Price says.
In addition to development, Price says Seagate has a construction arm, leasing and property management. “It's all under one roof,” he says. Besides the Prices, other partners in the business include Jim Hamilton, president, James Nulf Jr., executive vice president, and Joseph Schulz, executive vice president.
With 80% of its buildings leased, Matt Price says Seagate can be choosy about future tenants. “A lot of the vacancy we have is intentional. We're waiting for the right deal,” he says. “Vacancy isn't our enemy.”
The Prices say there are still buildings in the region that are selling for below replacement cost. “We have our eyes on a couple projects,” Matt Price says.
Banks are watchdogs
Rents have been rising to the point where developing new buildings is starting to make sense. For top-quality warehouse space with good access, rents are have been rising to $7 a square foot net of expenses, Price says.
“If you get a building 50% pre-leased, you'll find financing for it,” Price says.
Price projects companies will start by building their own warehouses (“build to suit,” in development lingo) because they can't find space. Developers could follow with speculative space later if demand continues to increase. “I believe the market is ready for that,” he says.
While banks remain conservative, Price says financial institutions want to lend money on good projects. “The banks we did business with before want to do business with us again,” he says.
Banks will scrutinize each deal carefully, however. “They're back in on a selective basis,” Price says. “They're going to be the watchdogs for a while.”
Residential diversification
Because it can take years for commercial real estate development to come to fruition, Seagate is also building single-family homes. “That will generate cash flow while we seek development projects,” Price says.
The company is currently developing and building two model homes in the Windward Isle community off Airport Pulling Road south of Orange Blossom Drive in North Naples. Prices start in the “low millions” for 28 homes that will measure 3,000 to 4,000 square feet. “With luck that's a three- to four-year project, maybe less,” Price says.
In addition, Seagate also is building custom homes in the high-end Quail West subdivision in Naples. Prices for those homes range from $3 million to $4 million.
Fact is, residential growth in the Naples area has been booming, especially in the high end. The overall median price for homes in the $2 million-plus range rose 16% to $3.3 million in the 12 months ending July, according to the Naples Area Board of Realtors. “Why not take advantage of the residential real estate activity?” Price says.
Industrial space tightens
Warehouse space is getting harder to find.
Naples Soap Co. CEO Deanna Renda spent more than a year scouting for space in Collier County for her growing company to no avail. She is reluctantly moving her company's headquarters to Fort Myers, where there are still pockets of vacancy and it costs 20% less.
In Cape Coral, Economic Development Director Dana Brunett says he's worried the city will run out of industrial space for existing and relocating companies to grow. He's encouraging developers to partner on projects on city-owned land.
The numbers bear out the anecdotal evidence. Market tracker CoStar Group shows the vacancy rate in Southwest Florida's industrial buildings has dipped down to 6.4%. In 2010, the vacancy rate stood at 14%.
In tight markets such as East Naples and North Naples, the vacancy rates are 3.9% and 2.3%, respectively. Rental rates in the Naples area are in the $8 range, attractive enough to lure new development.
“We're at the very beginning, the spring of the new development cycle,” says Stan Stouder, partner with CRE Consultants. “They're starting in Naples because rents have risen more quickly there. I know of two developments that are in the embryo stage of coming out of the ground.”
There are only two existing spaces more than 50,000 square feet in the market, says Jerry Messonnier, president of Lee & Associates in Fort Myers. “This time next year we'll see some projects that are beginning,” he forecasts.
“What's holding people back is financing,” Messonnier cautions. “The banks are still tough on their underwriting.”
It's unlikely any developer will build a speculative building without leverage. For now, companies that need larger blocks of space will likely have to build their own. “Financing is easier
for them because they've got an ongoing business,” Messonnier.
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