Landlord's Market

Landlord's Market

By Jean Gruss

Editor/Lee-Collier

Tenants in Southwest Florida whose leases on commercial space expire this year will have to open their checkbooks when they renew them.

Landlords have regained the upper hand in lease negotiations, say commercial real estate brokers who recently gathered at the CCIM conference in Fort Myers.

In fast-growing Lee and Collier counties, new and existing companies have leased space at a rapid pace while new construction has not kept up with the growth. Low vacancy rates mean tenants won't have much choice but to pay higher rents. In addition, landlords of new buildings are under pressure to pass on the rising cost of construction materials and labor.

Vacancy rates are particularly low in upscale "Class A" office buildings in the two counties. For example, the vacancy rate in North Fort Myers is 1.1% and in South Fort Myer's it's 4.4%. "It's time for somebody to build some buildings," says Randy Mercer, founding partner of CB Richard Ellis in Fort Myers.

Whether it's office or industrial space, lease rates have risen by double-digit percentage rates and brokers say that trend is likely to continue this year. For example, base rents in Cape Coral for less glitzy "Class B" office space rose 38% last year to $14.13 per square foot, says Mercer.

For the first time, average gross rents overall have surpassed the $20-per-square-foot ceiling in the desirable South Fort Myers office market. In new "class B" buildings, tenants should be prepared to pay $18 to $19 per square foot on a triple-net basis, Mercer says. Under triple-net leases, the tenant pays real estate taxes, utilities, insurance and other costs associated with running a building (gross rents include those costs.)

Surging base rents

It's the same story for industrial buildings. In the hot Alico Road corridor in South Lee County, base rents have surged from $6.50 to $10 per square foot, a 54% jump in the past year, says Fort Myers industrial broker Bob White.

White says rents have room to grow by another 20% to 25% this year depending on the location and type of property. Scarce properties include buildings with yard space, truck docks and water access.

What's more, investors are paying record prices for buildings and they'll want to jack up the rents to justify the prices they pay. The average cost per square foot for an office building in Lee County rose from $94 to $165 per square foot, a 76% increase, according to Mercer.

Sale prices for industrial buildings also rose significantly in 2005. New buildings in Fort Myers that cost $65 per square foot at the beginning of the year were selling for $90 a square foot by the end of 2005, a 38% increase, says White. New industrial "condominiums" range in prices from $150 to $190 per square foot.

The structure of the leases themselves will change also, brokers predict. For example, landlords who once charged gross rents will convert leases to triple-net because of rising taxes and utilities, Mercer says.

Migration to fuel retail

One thousand people move to Florida every day, and 130 of them make their way to the Gulf Coast.

"That's what's driving retail construction," says Brian Tunnell, retail managing director for Coldwell Banker Commercial NRT.

Two regional malls currently under construction in Lee County will bring an additional 3 million square feet of shops to the area. What's more, Tunnell estimates that another 5 million square feet of shops may be built in the next two years, including nearly 2 million square feet in Cape Coral alone. Eight million square feet is enough space to fill 139 football fields.

One intersection - Interstate 75 at Alico Road - will have 2.25 million square feet of shops by 2007, Tunnell estimates. "How much retail space can the market absorb? My answer is: Like a sponge," Tunnell says. He expects rents to remain as high as $30 per square foot for upscale locations.

However, Tunnell says sales of shopping center out parcels will top out at $35 per square foot as restaurants and other users balk at paying more. Among his other predictions for 2006: Albertson's grocery store will be rebranded or sold off, Sears will go private and Kroger will buy Winn Dixie.

Lee Office, Industrial Market Snapshot

OFFICE (Overall Vacancy Rates)

Market 2004 2005 % Change

Cape Coral 7.6% 8% 5%

Fort Myers North 11.2% 9% ?20%

Fort Myers South 7.8% 8.4% 8%

Bonita Springs/Estero 22.8% 15% ?34%

Average Gross Rents

Market 2004 2005 % Change

Cape Coral $16.38 $19.76 21%

Fort Myers North $17.56 $18.89 8%

Fort Myers South $18.80 $20.39 8%

Bonita Springs/Estero $23.05 $23.26 1%

Source: Randy Mercer, CB Richard Ellis, Fort Myers

INDUSTRIAL

(Figures are at year-end 2005; sales are per square foot; lease rates are per square foot and triple net.)

Market Land Sales Building Sales Lease Rates

North Fort Myers n/a $144 $9.50

Cape Coral $10 $120 $10

Fort Myers (North of Colonial) $5 $154 $9

Metro Parkway $11 $115 $10

South U.S. 41 $7 $132 $9.50

Billy Creek $10 $95 $9.50

Benchmark $9.50 $89 $8.50

Westgate $10 $105 $12

Treeline $12 $75 $11

Alico Road $8.75 $167 $10

Source: Bob White, Bob White Inc., Fort Myers

CONDO CONVERSIONS: THE PACE WILL SLOW

In 2005, nine of the top 10 transactions in dollar terms in Lee and Collier counties were for apartments that investors converted into condominiums.

Last year, 2,662 apartments were converted into condos, according to Jim Garinger, a broker with VIP Commercial-TCN Worldwide in Fort Myers. Investors bought 32 apartment properties encompassing 8,000 units in 2005. The average price per apartment was $114,500, or a 36% increase over 2004, according to Real Capital Analytics.

Strong demand by investors and the influx of new residents will likely prompt new apartment development, Garinger says.

In the meantime, rents are surging. According to PCMG, an apartment property management company, rental rates for one-bedroom "Class A" apartments rose from $756 per month in 2004 to $845 in 2005, a 12% increase. Two-bedroom apartment rents rose from $893 per month in 2004 to $1,017 in 2005, a 14% jump.

Garinger predicts rents will continue to rise at double-digit percentage rates, though condo conversions will slow to allow some absorption.