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Since the end of last decade's economic recession, hotel construction has boomed, industrial space can't seem to be developed fast enough to meet tenant demand and apartments have been built at a pace not seen since post-World War II.
Even the supposedly troubled retail sector has added millions of square feet of space along the Gulf Coast, though much of that has come in the form of new restaurants or single-tenant, net lease deals by the likes of Starbucks or CVS Pharmacy.
But new office development has lagged, despite declining vacancies, rising rental rate and the population and white-collar job growth that typically leads to new construction.
In 2006, 4.1 million square feet of office space was delivered in the submarket that stretches from Sarasota to Pasco counties. In 2007 and 2008, in Southwest Florida — defined as Charlotte, Lee and Collier counties — some 3.1 million square feet came on the market.
A decade later, the Sarasota to Pasco submarket delivered just 500,000. Southwest Florida will add just 400,000 by the end of this year, according to statistics compiled by real estate research firm CoStar Group.
The reasons for the declines are numerous, experts say. Advancing technology, changing work habits, architectural trends, lender restraint and the residual effects of the past decade's recession have all played a role.
“With mobilization and densification and the advent of better technology, businesses figured out that maybe they didn't need as much office space as they previously did,” says Ryan Kratz, president of commercial real estate brokerage firm Colliers International Tampa Bay.
That lack of demand has manifest itself in the form of rents that, while rising generally, have failed to reach the level needed to justify new development.
In downtown Tampa, for instance, Class A rental rates have climbed above $30 per square foot in the submarket's premier buildings. But new construction would require rents of $35 per square foot to $38 per square foot.
Even more daunting, lenders are increasingly seeking 50% to 60% pre-leasing commitments from landlords, and pushing them to secure 10-year lease deals from tenants.
Trouble is, many businesses in today's tumultuous, fast-changing environment don't want to commit to a lease term that will tie them to a space for a decade.
“Office buildings are very expensive to develop, and owners need 10-year leases to move forward in most cases,” says Claire Calzon, managing director of office services at Colliers International Tampa Bay. “But at the speed business is moving today, there's little appetite for that timeline among tenants.”
Social trends and design have played a role, as well. Open space design, shared and collaborative work spaces and other forms of densification by employers have all trimmed the amount of square footage required.
At the same time, office users like banks and law firms that traditionally could be counted on to anchor new projects have also been eliminating space.
“Businesses that have always been heavy office users, like financial services and law firms, have streamlined in recent years,' says John Harshman, president of Harshman & Co. Inc., a Sarasota commercial brokerage.
“And the way business is done is changing fundamentally. More people than ever work from home, or from outside an office, and there are more shared type of work space.”
Dave Wallace, a senior vice president specializing in office and industrial projects with commercial brokerage CRE Consultants, in Naples, agrees.
“The trend is clearly to have a denser number of employees in a space in Collier County,” he says. “Users have, since the recession, been taking a much harder look at their occupancy costs.”
Further hindering new office development, existing buildings throughout the region in recent years have sold below their replacement cost, leaving developers of new space at an inherent disadvantage vs. investors.
In Tampa and St. Petersburg, more than a dozen properties -- ranging from the Wells Fargo Center in downtown Tampa to Priatek Plaza in St. Petersburg's central business district — have traded since 2015 for less than what it would cost to replace them.
And in Sarasota, each of the three major office sales of the past two years — Sarasota City Center, the BMO Harris Bank Building and the Northern Trust Building — have been for less than replacement cost.
“To build a 100,000-square-foot office building in today's market without significant tenancy in place would take a lot of guts, but even then, you wouldn't be able to get it financed,” says Mark Kauffman, a Sarasota developer who is building a four-story, 32,000-square-foot office project.
“You just can't build on spec anymore, in part because everything in the workforce has shrunk.”
What buildings are going up are either smaller than previous incarnations at this juncture in the growth cycle, more residential in nature, a mix of uses with a relatively minor amount of office space or developed on a build-to-suit basis.
“The values between office, multifamily and condo development are vastly different,” says Larry Feldman, CEO of Tampa-based Feldman Equities, which together with Tower realty Partners and others owns a handful of major office buildings in downtown Tampa and St. Petersburg.
“It's much more expensive to build an office building, and the available financing is much greater for rental or for sale product. That's partly why the residential market throughout the region has been so strong for development.”
Class A vacancy rates, meanwhile, remain at points that are too high in many submarkets for new construction. In Tampa and St. Petersburg, new office vacancy stands at 7.5%, according to CoStar. In Southwest Florida, the figure is 13%.
Though both rates have fallen dramatically since the recession -- from 14.2% in Tampa and St. Petersburg and from 21.4% in Southwest Florida — only St. Petersburg's central business district has a vacancy below 5%, the traditional level that spurs new development.
Still, there are signs that new development could be on the horizon.
Several businesses that embraced open work spaces have met with a backlash from employees, who complain about lack of privacy and a drop in productivity. As a result, some businesses are installing more traditional offices into shared work spaces.
“Businesses that need large blocks of space are running out of options, and there's a limit to how many people you can put into a workspace,” Colliers International's Kratz says.
“As that delta of existing space continues to close, I think we'll see more new development going forward.”
As job growth continues to percolate throughout the Gulf Coast, too, businesses are having an increasingly hard time finding office options to suit their needs.
AAA, for instance, recently committed to 150,000 square feet in a new Vision Properties' spec building being developed in Renaissance Center, in Tampa's Westshore area, in part because no existing buildings could accommodate its need.
“The market is steadily improving and we're reaching equilibrium,” Feldman says. “Our job growth now in the Tampa region is greater than it was in 2006, and we're seeing a 2% jump in population annually. The amount of office supply relative to the job growth is the most lopsided I have ever seen.”
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