Pent-Up Optimism

Following a year in which Gulf Coast commercial real estate values dropped in some sectors, transactions went on pause, occupancy in some quarters fell and rent collections lagged, industry participants contend 2021 will provide a significant rebound.

Although much of the optimism is predicated on a relatively quick and effective distribution of COVID-19 vaccines, which will take months, industry watchers expect the second half of the year to be one of recovery.

Many say the economic fundamentals that made Tampa Bay, Sarasota and Manatee counties and Southwest Florida attractive to businesses and property investors alike remain in place, and that once the coronavirus is staunched the region will regain lost prosperity.

“The pandemic and subsequent economic hit that it brought was an event-driven phenomenon,” says Brian Alford, director of market analytics in Florida for commercial real estate researcher CoStar Group.

“Once the virus is brought under control, what was driving the market here will still be there. I think demand in most sectors will snap back, as the state continues to receive new residents from in-migration from the Northeast and elsewhere.

“Florida markets in general, and Tampa Bay in particular, are all positioned well to recapture the momentum they had in 2019.”

Still, many commercial real estate sectors — hospitality and office among them — remain mired in uncertainty amid what could be potentially long-term changes in leisure travel and work spaces.

Additionally, macro-economic trends such as the potential for rising inflation and housing affordability and their impacts on commercial real estate also weigh on many industry watchers.

Questions also linger going into 2021 as to how multifamily rental properties and larger retail centers will perform once lifted eviction moratoriums take effect and consumers feel comfortable enough to return to brick-and-mortar stores after shifting shopping habits largely online last year.

Many experts believe that real estate trends accelerated by COVID-19, including working from home, won’t be quick to fade even after the virus is brought under control.

Longer-term, however, there is a growing belief that as workers return to offices, the demand for additional space will percolate, reversing a trend toward the open work spaces that have proliferated over the past two decades.

“Going into 2021, I think we’ll see a tremendous pent-up demand for office space,” says Larry Ritchie, who heads commercial real estate brokerage firm Cushman & Wakefield’s Florida operations.

“A lot of executives are mulling whether Florida makes greater sense for their businesses and for them personally, decisions that are driven by taxes and the lower cost of doing business than in many places. I think that’s going to result in some corporate relocations in 2021.”

Meanwhile, there is widespread agreement that industrial properties — especially those in the Interstate 4 corridor between Tampa and Orlando — will continue to play an integral role in supply chain management and thus draw heavy investor interest.

“Industrial properties have outperformed every asset class save for residential in the greater Tampa Bay area, because of the rise of e-commerce, and I don’t expect that to end anytime soon,” says Pat Kelly, regional managing partner at Franklin Street, a Tampa-based commercial real estate services firm.

Despite concerns over rent collections — especially among urban properties — observers say apartment projects will continue to excel as a result of in-migration from the Northeast and elsewhere.

Though pockets of oversupply exist in places like Fort Myers and Sarasota, to an extent, much of the new inventory is expected to be absorbed through demand for new housing.

In the Tampa Bay area, multifamily starts and transactions are expected to continue unabated in 2021, thanks to abundant available equity and financing opportunities available from the government sponsored Fannie Mae and Freddie Mac.

“In Tampa Bay, 2020 was the strongest year ever in regards to multifamily sales, and the third quarter of last year had the most absorption of any in the past five years,” Alford says.

As a result, investor interest is almost certain to keep capitalization rates compressed throughout the new year, says Darron Kattan, Franklin Street’s managing director of multifamily sales.

Perhaps surprisingly, industry participants contend well-located and well-anchored retail properties will perform well in 2021, as shoppers return to bricks-and-mortar stores throughout the Gulf Coast with heightened consumer confidence.

John Tennant, senior director of retail investment sales and Franklin Street, says the second half of the year should be especially robust for single-tenant properties and grocery-anchored centers.

“I think there will be a huge gain in transactional volume for retail properties, in part because there’s a lot of capital out there,” Tennant says.

In the Sarasota-Manatee submarket, brokers say the coming year should exceed expectations.

“The number of development projects in the works is positive, and much of the money to finance them is coming from outside the community,” says Ian Black, founding partner of brokerage firm Ian Black Real Estate, in Sarasota.

“From the East Coast of Florida to the Northeast, Sarasota and Manatee counties are now on their radar screens,” Black adds. “There’s a confluence of things happening in this market despite our working through COVID.”

Steve Horn, another Ian Black partner, agrees.

“I think 2021 will be a much better year for us,” Horn says. “The amount of activity across all asset classes and the velocity associated with them is amazing. Have there and will there be challenges? Certainly. And there’s been heartache, with restaurants and retail. But the demand for housing has been outstanding. It’s at a level that we projected for 2025, and as everyone knows commercial follows residential.”

In Southwest Florida, the same optimism reigns.

“We’re proceeding with caution but all signs point to a go for this region for 2021,” says Justin Thibaut, president of Fort Myers-based commercial real estate brokerage LSI Cos.

He notes that medical office and industrial deals, in particular, should flourish in 2021, and that retail development is slated to gain traction to keep up with residential activity.

Even apartment building and sales, which have gained attention through-ever-growing prices despite concerns about oversupply, will likely continue in 2021 albeit at a slower pace, Thibaut notes.

Many Southwest Florida apartment projects, too, have seen upticks in occupancy as single-family home prices have appreciated.

To be sure, concerns abound in various sectors and submarkets.

In Tampa Bay, pending office deliveries and rising sublease opportunities are weighing on landlords, even as many companies are attempting to figure out long-term space needs and market direction.

CoStar Group’s Alford says Tampa Bay has a record 2 million square feet of sublease space available heading into the new year, and negative absorption has occurred in each of the past three quarters.

“It’ll be determined by COVID and how sticky work-from-home remains, but we see a soft office market for the entirety of 2021,” Alford says.

“I’m not sure anyone knows what the new normal is yet,” Franklin Street’s Kelly says.

Retail properties, too, face rising vacancies, questions over future rent collections and the ability to backfill vacant space brought about by retailer vacancies and store closures, which set records in 2020.

“There’s a lot of uncertainty over rents,” Franklin Street’s Tennant says.

Regional malls will continue to show signs of distress, and Franklin Street believes many such shopping hubs, especially older Class B and Class C centers, will be ripe for re-purposing in the coming year.

Still, analysts agree that the Gulf Coast is poised for a rebound when the pandemic is arrested.

“From a land perspective, I think Tampa Bay will be a strong market in 2021,” says Nancy Surak, who runs Phoenix-based Land Advisors Organization’s Central Florida office.

“It’ll still be one of the top commercial real estate markets in the nation in 2021, because a significant amount of capital continues to want to invest here.”

“I think by July, again depending on the availability of a vaccine, we’ll be back to some form of normalcy,” CoStar’s Alford says.

Driving much of that belief is pent-up demand for goods, experiences and gatherings.

“I think retail is going to come back roaring,” says Monetha Cobb, Franklin Street’s senior vice president of retail leasing. “People want to be together, they just want to feel safe doing it.”