From Great to Good

From Great to Good

By The Review Staff

The theme for the commercial real estate market for most of the Gulf Coast of Florida over the past year has been playing like a country music song: It might not be as hot as it once was ­- like 2003 and 2004 ­- but it's still pretty hot.

And the robust market has given birth to a second theme, one of falling vacancies leading to rising rents. That in turn has led to an increase in constructing new buildings. A drive through the Fort Myers and Naples areas is the proof, as orange barricades, bulldozers and construction signs are normal and growing parts of the landscape.

The attitude many commercial brokers and developers seem to have is that they are so busy renting and selling space they have little time to worry about an economic slowdown that some national economic forecasters are predicting.

Seemingly no one in the Gulf Coast market is singing that tune. Just as in the Fort Myers area, growth remains the word of the day in Sarasota and Manatee counties. And it's the same, if not better, in Tampa Bay, some industry players say. One Tampa-area real estate company chief said that 2005 has been like a Super Bowl, and he expects next year to be just as big. He said the possibility of a national recession means little to him because there are so many other positive factors to the Florida industry.

Here, then, is a recap of some of the Gulf Coast's commercial real estate sector by region in 2005 and what the trends, expectations and predictions are for 2006.

Tampa Bay

Super Bowl year

in '05; not quite in '06

This year is the Super Bowl of commercial real estate for us," says Lee Arnold Jr., chief executive officer of Pinellas County-based Colliers Arnold, whose presence is growing statewide. "It's the most remarkable year in my 31 years of brokerage, development and consulting. We're up 54% over budget. We think we'll do a $1 billion in sales. This is in all sectors: office, retail, industrial, investment and land."

Annual sales are up about 30% from 2004, Arnold says.

"We've been doing $50 million every two weeks for awhile now," says Patrick Duffy, president of Colliers Arnold.

Ray Sandelli, senior managing director-Florida for CB Richard Ellis Inc., says his company also had a great year. "We are substantially ahead from a business perspective for 2005 over 2004, both in Tampa and in Florida," he adds.

In addition to healthy job growth and in-migration, the Tampa region benefited from a low inventory of speculative building in the office, industrial or retail sectors, Sandelli says.

"The cost of land, labor and materials has risen," Sandelli says. "Developers are being very careful in how they approach the market. They're building to suit or with pre-arranged commitments. It translates to a great-value proposition for existing inventory."

Plus, the area is seeing a lot of foreign investment, especially with investors buying apartments to convert to condominiums.

What's in store for the region in 2006?

Says Arnold: "Our operations have been very robust and continue to look strong through the first quarter of 2006. We don't see any dramatic downturns in the marketplace just by the sheer volume we have now in business activity."

Arnold doesn't expect the dip in residential housing to cause much of a slowdown. "While the increase in housing prices will slow somewhat," he says, "there'll still be a fairly robust residential market, which has driven a lot of the various markets we support.

"It's good business practice to be conservative in these kinds of markets when forecasting next year," Arnold adds. "But as in other years where I've had serious recessionary concerns, I do not have those concerns in '06."

Sandelli of CB Richard Ellis also expects the growth to continue, at least for the first half of the year. "It's hard to look beyond that," he says.

"We may have a slowdown," Sandelli says, "but the reports show it won't be as severe.

"I think we're all very appreciative of where we live and the health and economic platform that is the state of Florida," Sandelli adds. "We're all very encouraged that growth will continue into the foreseeable future. I think the challenge will be how well we manage that growth."

- Janet Leiser

Manatee-Sarasota

Buyers, developers will be more selective

"The year has truly been mind boggling," says Barry Seidel, president of American Property Group of Sarasota Inc. "In my opinion we have already slowed down a bit. I have definitely noticed a cooling in the volume of calls I'm getting. I'm just not seeing the frenzy out there that I was before."

Likewise with John Swart, president of Lakewood Ranch Realty, which is headquartered in one of Florida's fastest-growing planned communities. "This year has been on par with the last few years, which is good," says Swart. But while the construction this year of retail and light industrial space at Lakewood Ranch surpassed that of 2004, new office development contracted 11%, or 32,000 square feet, from a year ago.

Even so, the contraction was not alarming. Office development at Lakewood Ranch still was twice as much in square feet as retail and industrial space.

Dan DeVito, manager of Michael Saunders & Co.'s Commercial Group, sees a slowdown in commercial activity through his statistics. He tracks the growth in property values on his firm's commercial deals. Nine-month sales, show that property values increased 10% in 2000, dropped 10% in 2001, increased 40% in 2002 and 30% each in 2003 and 2004. But in 2005, the growth rate over the same period in 2004 was 15%.

Says DeVito: "Fifteen percent is still pretty incredible. There is still a big demand for commercial properties. Maybe this tremendous sellers' market is just scaling down a little. Commercial property has become more and more scarce in Manatee and Sarasota counties."

From Oct. 2, 2004, to Nov. 1, 2005, office vacancy rates in four of the five regions in Sarasota County (see chart) declined. The total office vacancy rate for Sarasota County fell from 7.97% in October 2004 to 6.22% in October 2005. Two of four regions in Manatee County also experienced declining office vacancy rates. Lakewood Ranch's Manatee County vacancy rate went from 17.71% to 1.7%, and the University Parkway area went from 34.56% to 17.38%. The changes in those two regions was enough to improve the office vacancy rate for Manatee County from 21.68% to 17.9%.

Even with the two counties' brisk absorption rates for 2005, DeVito, Swart, Seidel and others are keeping a sharp watch on the effect of rising interest rates. None of them expects rates to rise to problematic levels, but they'll have a slowing effect on the market if the new Federal Reserve chairman, Ben Bernanke, continues to raise them.

The three commercial executives are more concerned about the rising property-tax burden put on businesses and sharp increases in property insurance.

"The insurance companies are going to drive a number of business owners away from ownership," Seidel says. "I know someone whose insurance premium, for wind damage only, went from $5,500 to $12,000 in a single year. Second, real estate taxes are going crazy. I had one client in today who owned three acres of vacant land. His tax bill went from $6,130 to $23,200. I know a strip center where the taxes went up four times what they were in a single year. What that does is trickle into the price of the product the consumer pays."

Adds Swart: "Taxes have gone from about 80 cents to adding around $1.80 per square foot to the cost of a new building," Swart says. "This has hit manufacturing building owners particularly bad. In one case, the tax rate more than doubled in two years. Insurance is a little bit scary, but for the moment it is still controllable. That has gone from probably about 20 to 25 cents per square foot to between 35 to 40 cents."

Taxes aside, Swart is expecting another robust year in 2006 based on buildings that are already planned for Lakewood Ranch. The ranch is scheduled to add 400,000 square feet of office space, including a new medical office building, a second Keiser College building and more of the office portion of Main Street. A new Publix Super Market is also planned.

Says Stan Rutstein, a Realtor with Wagner Realty and former national retail-chain executive: "The bottom line is in life everyone has to adjust to the situation at hand whether it be with taxes, fuel or insurance. The good business people will adjust their business model to make things work. I think next year is going to be a very good year, but I do think that people will be more selective. There is absolutely nothing wrong with that though."

- Sean Roth

Lee-Collier

Rush is on to build;

buyers more careful

Land deals were the stories of the year in Lee and Collier counties in 2005, as developers positioned themselves for a new round of construction.

Falling vacancies and rising rents now mean the rush is on to build new buildings. One example: In late September, a Pompano Beach developer that is one of the state's largest developers of industrial space made a big move into Lee County. Premier Commercial Realty, which owns 5.2 million square feet in Broward and Palm Beach counties, acquired 231 acres near Southwest Florida International Airport. The company's preliminary plan calls for developing about 2 million square feet of industrial buildings.

"Most of my largest transactions were land deals," says Gary Tasman, a commercial real estate advisor with VIP Commercial in Fort Myers.

Specifically, Tasman says he has seen an increase in out-of-state buyers, including pension funds, insurance companies and real estate investment trusts. "I think you're going to see that increase," Tasman says.

Brokers report that industrial land values increased 30% this year, to about $8.50 a square foot. In some cases, it's about double that amount for land zoned for offices.

Banks have been particularly active in Lee and Collier counties, scouting land for new sites. "We did more bank business than we've ever done," says Andrew DeSalvo, a broker with Premier Commercial Properties in Bonita Springs.

Vacancies have dropped and rents have risen quickly. Anecdotally, vacancies are below 10% in most areas, down from over 20% several years ago. Rents for new upscale offices in Lee are jumping over the $20 hurdle, net of tenant expenses such as taxes and utilities. In Collier, office rents jumped to $28 a square foot.

"I can't build fast enough in Collier," says Andrew D'Jamoos, vice president of sales and marketing with The D'Jamoos Group, a Naples-based commercial builder. "Once the walls go up, it gets leased," he says.

Meanwhile, rents for warehouse and distribution space have risen too. "The fair-haired child was flex space," says DeSalvo. Flex is a combination of office and warehouse space.

From a regional standpoint, brokers say the hottest area for new development is Estero in south Lee. "It's exploding right off the charts," says Dave Wallace, associate broker with Premier Commercial Properties.

Estero is witnessing the development of two new malls with nearly 3 million square feet of shops and restaurants, widening of the Alico Road industrial corridor and the expansion of Southwest Florida Airport, among other projects.

The airport's expansion is likely to spur development of distribution and office space for tenants who want to be close. "In any community, the airport is the hub of business," says Jerry Lamb, regional director for Coldwell Banker Commercial NRT.

Looking ahead, however, expect a cooling down even though the area is experiencing strong population and job growth. Already, Tasman says, properties that used to get 20 offers are now getting about seven.

Rising interest rates are likely to make company executives think twice about buying or building new space. In turn, that may lead to a slowdown in new construction.

Meanwhile, investors are being more careful about how much they're willing to pay for properties. Low capitalization rates - a number that tells investors whether they're overpaying - indicate a superheated market. Expressed as a property's income divided by price, cap rates have fallen to 5% and 6% from the more normal 8% to 10%.

Shelton Weeks, director of the Lucas Institute for Real Estate Development and Finance at Florida Gulf Coast University, says today's low cap rates are akin to the overvaluations of tech stocks in the late 1990s. "There are sectors of this market where we're seeing cap rates that no one has seen before in their careers," Weeks says.

What's more, tenant expenses are likely to rise significantly because of the increase in property taxes. DeSalvo says it may raise tenant's expenses by 50% next year. "It's going to have a major impact," he predicts. Some landlords may eat some of those costs to retain valued tenants, he says.

On the construction side, escalating labor and material costs may keep some developers at bay. Still, major projects that have been planned in advance will continue to move ahead. "Our costs are up significantly," acknowledges Blake Gable, project manager of Ave Maria Town for Barron Collier Cos. Still, he says, "this isn't a project that has snuck up on everybody."

- Jean Gruss