Landlords' Market

Landlords' Market

By Jean Gruss

Editor/Lee-Collier

Commercial office-space brokers call it "The Box."

It's an area of Fort Myers that has suddenly become one of the hottest office locations in the region. When you look at a map, it's easy to see why: It's sandwiched between the residential boomtowns of Cape Coral and Lehigh Acres, and it's close to Interstate 75. The area is now home to many financial services firms that do business regionally, such as Merrill Lynch and Morgan Stanley.

Want office space in The Box? You'll have to look elsewhere because there isn't any, says Randy Mercer, a broker and founding partner of the Fort Myers-Naples office of CB Richard Ellis.

It's the same story in other parts of Lee County and in pockets of Collier, where vacant office space has been absorbed over the past year. Office vacancies in most areas are under 10%, and in some parts below 5%. That's a stark contrast with a few years ago, when vacancies ranged from 17% to 22%.

"I've been in office leasing here 20 years, and it's completely changed," says Robert Brooks, regional director with Songy Partners Realty in Fort Myers. "The landlords are calling the shots."

Commercial brokers and developers have this advice for the owners of growing businesses and those whose leases are coming due: Start evaluating your future needs for space a year ahead of time and budget for significantly higher rents, taxes and insurance.

Already, base rents for lower B-quality office space in Lee County have surged nearly 11% from the end of 2004 through Aug. 31, according to research by CB Richard Ellis (see chart). They've gone up 15% in the area of Fort Myers that includes The Box.

Although it's not reflected in the latest data, upscale A-quality office rents will jump as developers build new space to meet increased demand. Mercer and other real estate brokers say base rents in new upscale space could jump to about $20 per square foot in Lee, a 30% increase over what tenants are paying for the same kind of space today.

In parts of Collier County, such as Pelican Bay and North Naples, surging demand has pushed rents up too. Quoted rents on upscale offices are as high as $28 a square foot, says Scott Dunnuck, a broker and partner with CB Richard Ellis in Naples. That's 27% more than the $22 per square foot that was typical at the end of 2004. When you tack on common area maintenance (CAM) costs, taxes and utilities of as much as $12 per square foot, rents are hitting the once-unthinkable $40 mark. Collier's B-quality space now is reaching $20 per square foot, which is what landlords are charging for A-quality space in Lee.

"In some cases (CAMs) may double," Mercer warns. Much of that increase is due to taxes rising in lockstep with surging property assessments.

How did the market turn so quickly in the landlords' favor?

Charley and population boom

Many market observers can pinpoint when the office buildings started leasing more briskly: after Hurricane Charley.

Janet Watermeier, president of Florida Gulf Coast Group, a real estate consulting firm in Fort Myers, suspects investors and speculators looking for bargains descended on the area to look for deals shortly after the storm. When they realized the business opportunities in the Fort Myers area, they decided to move or expand here, she says.

Watermeier and others also point to the population and the residential real estate boom that put the region on the map for new business. Lee County's population crossed the 500,000 mark earlier this year, attracting national companies looking to expand and generating more business for existing companies.

Result: a rush to acquire available office space.

"The last time it was this way was about seven years ago," says Ron Kerr, a broker with JMK Realty Services in Fort Myers.

Back then, national companies such as General Electric and National City Corp. had leased large amounts of space for back-office operations in Fort Myers. Space was tight and landlords generally had the upper hand.

Then, the national companies closed many of their Fort Myers operations by consolidating in cities such as Tampa and Orlando, leaving large chunks of office space vacant.

"It took quite a while to absorb that space," says Kerr.

For example, rents at University Park, Fort Myers' first upscale corporate park at the intersection of Summerlin Road and College Parkway, had stagnated at $13.50 per square foot until about two years ago. Today, they have risen to $18 per square foot, a 33% increase.

Another factor that has exacerbated the space shortage is that only one upscale multi-tenant office building has been built in Lee in the last five years: Fifth Third Financial Center, a 43,000-square-foot building at the corner of Daniels and Metro parkways. It was completed in January 2002 and took two years to lease after it was built.

Naples developer Jack Antaramian, who developed Fifth Third Financial Center, acknowledges the building was ahead of its time. But, he says, "I felt that location was going to work itself out." Back then, the asking rent was $17 a square foot, a relative bargain in today's hot market.

Now Antaramian is planning a second twin building to Fifth Third and asking rates are $22 per square foot. With strong preleasing activity, Antaramian says the second building could be ready by the end of 2006.

New buildings will sprout

Because of increased land and construction costs, developers will have to ask for rents over $20 a square foot to make a profit. But if too many buildings are built all at once, competing developers may be forced to lower rents to attract new tenants.

About 1.2 million square feet of office space is either under construction or in various stages of proposal in Lee, according to Mark Neven, a researcher with market data provider Integra Realty Services in Naples. Meanwhile, about 500,000 square feet of space is proposed or under construction in Collier.

In addition, growing companies will move out of cramped space and into their own corporate offices, leaving behind big chunks of empty space. For example, in late 2007, Fort Myers-based women's apparel maker Chico's will move out of its 147,000-square-foot facility on Metro Parkway into a new campus that will be built on Alico Road. Chico's old building will be sold, say company officials, bringing that additional office space into the market.

"I think you're going to see (rents) level," Neven says. "We're going to end up with surplus property."

On the other hand, because lenders are more stringent than in the past, developers must prelease at least half the new office buildings before they build them. And it will take at least three years to build all this space, predicts Tom Woodyard, managing partner of D'Alessandro & Woodyard commercial brokerage firm in Fort Myers.

At current levels of demand, the buildings can fill up with tenants within a three-year period without dampening rents. "We have enough people moving in," says Woodyard.

The big question is who will pay rents that are north of $20 a square foot. "Some of our local tenants won't be able to absorb that cost," Woodyard says. More likely, the tenants in new office buildings will be regional or national companies that can afford to pay.

Rents Headed North

Rents are starting to trend up in Lee and Collier counties. Class A and B information was not available for Collier County submarkets. Common area maintenance (CAM) rates include taxes and utilities. Rental costs are quoted per-square-foot.

Lee County and Submarkets

Year-End Mid-Year %

Lee County 2004 2005 Change

Class A

Base Rent $15.17 $15.50 2.2%

CAM $6.87 $6.86 -0.1%

Gross $22.04 $22.36 1.5%

Class B

Base Rent $12.43 $13.77 10.8%

CAM $4.66 $4.69 0.6%

Gross $17.09 $18.46 8%

Fort Myers North and South

Class A

Base Rent $13.20 $13.33 1%

CAM $7.18 $7.13 -0.7%

Gross $20.38 $20.46 0.4%

Class B

Base Rent $12.45 $14.07 13%

CAM $4.37 $4.40 0.7%

Gross $16.82 $18.47 9.8%

Bonita Springs/Estero

Class A

Base Rent $17.68 $18.27 3.3%

CAM $6.49 $6.51 0.3%

Gross $24.17 $24.78 2.5%

Class B

Base Rent $14.50 $15.25 5.2%

CAM $5.50 $5.93 7.8%

Gross $20.00 $21.18 5.9%

Source for Lee County: Randal Mercer, CB Richard Ellis

Collier Co. and Submarkets

Year-End Mid-Year %

Collier County 2004 2005 Change

Class A

Base Rent $21.05 $21.24 0.9%

CAM $6.77 $6.47 -4.4%

Gross $27.82 $27.71 -1.1%

Class B

Base Rent $18.94 $18.69 -1.3%

CAM $4.75 $4.79 0.8%

Gross $23.69 $23.48 -0.8%

Tamiami Trail N. (All office-property types)

Base rent $18.82 $19.65 4.4%

CAM $5.15 $6.06 17.6%

Gross $23.97 $25.71 7.3%

North Naples (All types)

Base rent $19.70 $19.72 0.1%

CAM $4.76 $5.09 6.9%

Gross $24.46 $24.81 1.4%

East Naples (All types)

Base rent $13.90 $15.11 8.7%

CAM $3.35 $2.56 -23.5%

Gross $17.25 $17.67 2.4%

Central Naples (All types)

Base rent $18.59 $17.18 -7.6%

CAM $4.36 $4.53 3.9%

Gross $22.95 $21.71 -5.4%

Old Naples (All types)

Base rent $22.28 $21.13 -5.2%

CAM $5.70 $5.64 -1%

Gross $27.98 $26.77 -4.3%

Pelican Bay (All types)

Base rent $21.50 $20.25 -5.8%

CAM $8.21 $8.01 -2.4%

Gross $29.71 $28.26 -4.9%

Source for Collier County: Integra Realty Resources

Office Development to Surge in lee, collier counties

After years without any significant construction of office space, developers in Lee and Collier counties are rushing plans for new buildings in light of increased demand and lower vacancies. Here is a sample of what's planned. Quoted rental rates are net of tenant expenses, such as utilities, taxes and common-area maintenance:

Lee County

• Fifth Third II - Naples developer Jack Antaramian plans to build a 30,000- to 40,000-square-foot office building adjacent to the Fifth Third office building on Daniels Parkway near Interstate 75 in Fort Myers. Antaramian says construction could begin within a few months as soon as he signs tenants. Rents will be in the $22 per-square-foot range.

• Forum Corporate Park - Songy Partners Realty of Fort Myers is buying 42.5 acres of land at The Forum near I-75 between State Road 82 and Colonial Boulevard. It plans to build a 60,000-square-foot, three-story office building next year, and it has room for eight buildings, or 475,000 square feet. Robert Brooks, regional director with Songy, says he has letters of intent from enough tenants to fill half of the first building and is planning the second building now. Rents: $18 to $20. The Forum is a 700-acre tract owned by Miami Heat coach Pat Riley.

• The Galleria at the Forum - The D'Jamoos Group of Naples is clearing land for seven two- and three-story office buildings totaling 125,000 square feet. The Galleria is located on the south side of The Forum, along Colonial Boulevard. D'Jamoos is clearing land to build two 22,000-square-foot buildings. One is fully leased to an undisclosed tenant, and the other one will be speculative. Rents: $16.50.

• University Park - Welsh Cos. in Naples is considering two more buildings at University Park, near the intersection of Summerlin Road and College Parkway. Welsh is marketing a 20,000-square-foot office building, and there's room for another 126,000-square-foot building in the park. Says James Doane Jr., vice president of brokerage and leasing for Welsh: "I've had 12 calls this week from potential tenants." Rents: $18 to $20.

• Parker Commons - The Jack Parker Corp. in Fort Myers is developing a 10-building office park near the intersection of Daniels Parkway and Shire Lane totaling 88,000 square feet. "We started on four of the office buildings last month," says Kerry Trowbridge, a broker with Parker Realty. Parker Realty will manage and lease all the buildings. Rents: $17 to $21.

• Central Cape Business Park - Sanibel-based developer Joel Kronfeld and partner Mel Wroten are developing a business park at 1480 and 1490 Pine Island Road N.E. in Cape Coral that includes 77,040 square feet of office space in eight buildings. The buildings will be completed in November, and there's only 25,680 square feet available. Rents: $12 to $14.

Collier County

• Vanderbilt Galleria - The D'Jamoos Group is building two office buildings near Vanderbilt Beach and Airport Pulling roads. One is a two-story 30,000-square-foot office building and the other is a five-story 50,000-square-foot office building. Rents: $21.

• Buckley & Sons Nursery site - The D'Jamoos Group plans 90,000 square feet of office space on Airport Pulling Road as part of a project that will also include condos and shops. D'Jamoos has not yet filed a development plan.

• Antaramian project - Developer Jack Antaramian has purchased an old shopping center on 20 acres near the intersection of Goodlette Road and U.S. 41 and plans a development that will include 50,000 square feet of office space. Antaramian plans to sell parts of the development to individual companies to build their own offices.