Speculative Growth

Speculative Growth

By David R. Corder

Associate Editor

By last year's fourth quarter, something remarkable occurred at Tampa's Highland Oaks. Tenant occupancy was at 100% in this Class A office park at I-75 and Dr. Martin Luther King Jr. Boulevard. This leasing success created a new opportunity for Duke Realty Corp., the Indianapolis-based property owner.

It had been nearly five years since the publicly traded real estate investment trust (REIT) had constructed any speculative Class A office buildings in the Tampa Bay area. Vast improvements in occupancy rates over the past year or so in the I-75 corridor submarket - particularly at what was the Worldcom Inc. corporate campus- only heightened the confidence levels of the REIT's local executives.

So, Doug Irmscher, a Duke Realty senior vice president in Tampa, and Tim Hain, a local senior leasing representative, initiated discussions with Bob Fessler, a regional executive vice president in Atlanta, about the possibility of a new spec building in Highland Oaks. Together they put together a proposal and pitched the idea to the REIT's commercial investment committee.

It was a convincing proposal. The committee quickly approved plans for a new 99,000-square-foot building, dubbed Three Highland Oaks, in the 70-acre office park. Construction should begin shortly. And the activity may signal the beginning of a new trend in this once beleaguered submarket.

"If you look at Class A on I-75, then back out the Worldcom space, the vacancy rate was about 7% when we decided to do it," Hain says about the decision to build. "We were hearing from tenants they were having a hard time finding suitable space."

As preliminary plans proceeded, the REIT experienced a stroke of good fortune. The management team at Quality Distribution Inc. made a strategic decision to relocate from its corporate headquarters site in east Tampa's Corporex Office Park.

To help with site selection, the publicly traded bulk-tank truck carrier hired the Tampa office of Cushman & Wakefield of Florida Inc. Jim Paladino and John Fish, senior directors in C&W's office brokerage group, headed the search.

Just as most local real estate professionals, Paladino and Fish knew about Duke Realty's plans for the new building. They pitched the idea of the Highland Oaks site to Quality Distribution's management team as one of several options.

For the most part, the management team made it easy on the Cushman & Wakefield team. Trucking company officials wanted to remain within a five-mile radius of the existing headquarters site because most of the company's employees live in the Plant City area, the site of the company's prior headquarters up until about five to six years ago.

"So we didn't want to go too far west because of the commute burden," says Tim Page, Quality Distribution's chief financial officer. "That was one of the driving factors."

Two other factors figured in the management team's decision to pick the Highland Oaks site, Page adds. For one, Quality Distribution's existing lease expires a few months after Duke Realty expects to complete the new building.

"Effectively, there's more space because the current configuration is not as efficient," Page says. "We looked at the various options, between Sabal Park and around Brandon to see what's available. The location we picked was the location of best value."

Negotiations went well - in the beginning. A few months ago, Tom Finkbiner announced his resignation as Quality Distribution's chairman, president and CEO. Gerry Detter, former Con-Way Transportation president and CEO, replaced him.

The change left everyone wondering how Detter would react to Duke Realty's leasing proposal. "We had a concern when they changed to the new CEO," Hain acknowledges. "Fortunately, he liked the proposal a lot. It went pretty smooth after that."

Hain attributes much of the success of the deal to the Cushman & Wakefield team.

"We have a great relationship with Cushman & Wakefield, especially with Jim Paladino and John Fish, and that facilitated the transaction," Hain says. "It also helped they had a good relationship with their client.

"There were things we had to negotiate that one side or the other didn't want," he adds. "But we found common ground and got a fair deal for all parties involved."

While no one would talk about financial details of the deal, the documents Quality Distribution filed with the U.S. Securities and Exchange Commission show the company leased 52,776 square feet for 10 years at an average annual rental rate of $1.2 million. That's an average of $22.73 a square foot or a total lease value of $12 million over the 10-year contract.

The price still appears to fall below market averages for the I-75 corridor, especially since deals such as this include modified going-in rates that then escalate at an annual rate around 3%. Direct weighted asking rates - rates sans subleased space - for Class A space in the I-75 corridor submarket averaged about $20.38 a square foot, according to Cushman & Wakefield's second-quarter office market survey.

To many real estate observers, this deal typifies the vast improvements in a submarket awash a few years ago with about 800,000 square feet of vacant Class A office space because of the Worldcom bankruptcy. Overall submarket vacancy rates, including subleased space, reached as high 33.7% in the first quarter of 2002 because of the space Worldcom vacated in the Highwoods Preserve office park.

Much of the credit for the rebound in this submarket goes to Andy May, a Cushman & Wakefield senior director, who led a team of brokers that focused considerable energies on Highwoods Preserve over the past few years.

"There's always going to be activity out there because of the infrastructure and the access to labor," Paladino says. "What wasn't predicted was the speed with which Highwoods Preserve would be backfilled. It is good news."

That view is shared by Ron Ruffner, Tampa Bay area development director for Charlotte's Crescent Resources LLC. Over the years, his firm established itself as one of the largest builders of spec buildings in the Tampa Bay area.

"It's healthy now," Ruffner says about the I-75 corridor submarket. "There is a lot of good activity out there. There are large users with good credit, which we haven't seen for quite a while."

Despite the improvement, however, Ruffner says it is too soon to talk about whether his company might explore spec building opportunities in that submarket. Right now, he says, the company is focused primarily on opportunities in Tampa's Westshore district - the largest office submarket in the Tampa Bay area.

Meanwhile, other indictors point at positive movement in the I-75 corridor office submarket.

At east Tampa's Interchange Center office park, the joint venture of Triad Investors Inc. and Alex Brown Realty Inc. has started work on two Class A buildings, each with about 60,000 square feet of space. Company officials were unavailable for comment.

Besides its Class A spec building, Duke Realty also has started work on an 85,856-square-foot speculative building in Brandon's Regency Park North office park. "Regency is a little bit of a different product," Hain says. "It's valued-added office product. It's new but considered Class B."

Consequently, the improved market has created new challenges for tenant leasing representatives such as Paladino and Fish. In just a short time, the submarket has become a landlord's market.

"One of the challenges brokers will have to deal with along the I-75 corridor is shrinking vacancy, which translates into fewer options, particularly in the Class A component," Paladino says.