Out of space

Out of space

Commercial real estate by Jean Gruss | Editor/Lee-Collier

Collier County has some of the lowest vacancy rates for office space on the Gulf Coast. But don't expect a surge in new construction anytime soon.

On a recent December morning, a small crowd of executives and county officials gathered at a construction site near Interstate 75 and Immokalee Road in Naples.

They were there to celebrate Stock Development's future corporate headquarters. Stock, a Naples-based residential developer, spent months trying to find enough existing space in which to combine its six offices and it finally partnered with commercial builder Gates McVey to build a new facility.

This kind of ceremony is becoming the exception rather than the rule lately in Collier County. The cost of land, combined with a host of other extras that include overburdening impact fees, has essentially put a halt to new development. That's so even as office vacancy rates are at levels that would spark new development.

Todd Gates, the president and chief executive officer of Gates McVey, says high impact fees have put eight other construction projects on hold in Collier. Rents would have to be in the mid-$30-per-square-foot range to make new office projects viable, he says.

Despite Collier's low vacancy rates, average rents are not near that lofty range. According to the most recent data compiled by CoStar Group, the average rent for office space in Collier was $20.54. That's net of tenant expenses, such as insurance, taxes and common-area maintenance. Those costs can add $10 or more per square foot and brokers say they're rising so fast that landlords are starting to absorb some of those costs instead of passing them along to tenants.

Integra Realty Services, which has tracked Collier office trends for longer than CoStar, pegs rents at $21.26 per square foot. Although nowhere near the $30 range that would make construction viable, rents are still up 13% from 2003. The Integra data is posted on the Web site of Investment Properties Corp. (IPC), a Naples-based commercial real estate brokerage firm (www.ipcnaples.com).

"There's no spec space down here," says Mike Carr, regional director for Coldwell Banker Commercial in Naples. He estimates there are fewer than five office buildings with 4,000 square feet of contiguous space or more in Collier.

Fortunately, Gates says his company purchased the land for Stock's headquarters about four years ago, making the project financially feasible. Eventually, Northbrooke Professional Village will have 121,600 square feet of office space, the size of just more than 2 football fields, in six buildings. Stock will occupy one building totaling 49,100 square feet.

A tight market

According to the latest CoStar data, just 5.7% of Collier's overall office space is vacant. That includes top-quality "class A" space and more moderate "class B" space. In 2002, the vacancy rate in Collier was 17.1%, according to Integra data.

Large blocks of contiguous space are nearly impossible to find. Craig Timmins, a principal with IPC, says he's marketing 18,800 square feet split between two floors in a building near Goodlette-Frank Road and Seventh Avenue North. The tenant plans to move out in a few months and Timmins expects to lease the space before the tenant moves out.

"There's not much slowdown in demand," Timmins says. "I think you'll see that vacancy rate shrink further." Timmins says rents net of expenses are now climbing into the mid-$20 range and he's even done a few long-term deals in good locations in the low $30s.

New construction typically lags a tightening market because it takes a year or longer before investors realize there's opportunity, obtain the permits and start construction. "Issue two is that costs have gone up so much," Timmins says. Land, impact fees, labor and materials have all added to the cost of building.

As a result, investor interest in existing buildings is strong, says Coldwell Banker's Carr. Individuals and real estate investment trusts are the leading buyers and they're willing to pay what Carr calls the "Naples premium." Capitalization rates have been hovering around 6%, Carr says. The cap rate is a property's annual net operating income expressed as a percentage of its price; the lower the cap rate, the pricier the property. Generally, cap rates of 8% to 10% are considered more reasonable.

Looking north

One of the consequences of rising rents and falling vacancies is that Collier tenants are increasingly looking at expanding or relocating to neighboring Lee County.

Brian Stock, the chief executive officer of Stock Development, says he looked for office space in Lee County before settling on the site near Immokalee Road. In the end, the Collier location won out mostly because it was closer to where his employees live in Naples.

"I've helped place Collier tenants in Bonita [Springs]," says Timmins. Bonita Springs is particularly attractive because it sits just over the Lee-Collier county line in South Lee County. When driving from Naples to Fort Myers on U.S. 41, it's difficult to tell where Naples ends and Fort Myers begins because Bonita Springs is now the urban area that links the two towns.

What's more, the office market in Bonita Springs leans more in favor of the tenant than the landlord. Bonita has a 12% office-vacancy rate and rents on average are $17.63, 14% lower than in Collier and 23% lower than the $23.03 average rent in North Naples.

That concerns business boosters in Collier County, who say small- and medium-sized businesses are getting squeezed by higher rents. "The saving grace has been the continuous flow of people," says Michael Reagen, president of the Greater Naples Chamber of Commerce. Population growth means businesses so far have been able to sell enough goods and services to cover rising rents.

Still, the outlook isn't favorable, especially as local government considers adding more tax burdens on builders on top of already high impact fees. Reagen says the county commission is considering adding a tax on commercial builders to fund affordable housing in Collier. Reagen calls it a "threat that may be in the DNA of this place."

Costar office focus: Collier County

Low vacancies are a fact of life for office landlords and tenants in Collier County. Here's a recent snapshot of the market for class A and B buildings that are non-owner occupied (average rent quoted is triple-net):

Submarket %Vacant Ave. rent/sq. foot ($) YTD absorption (sq. ft.)

East Naples 8.9% $16.39 9,790

Naples 6.3% $23.18 ?28,847

North Naples 5% $23.03 ?59,134

Total Collier 5.7% $20.54 ?75,678

Source: CoStar Group