Poise for the Next Surge

Poise for the Next Surge

Broker John Burpee plans for the next expansion as the Tampa Bay area commercial real estate market returns to a more normal level. Becoming a national franchisee to gain name recognition tops his list.

COMMERICAL REAL ESTATE FOCUS by Janet Leiser | Senior Editor

As interest rates dropped in 2001, John Burpee, a 20-year commercial real estate broker with his own multimillion-dollar portfolio, started his own business.

"Luckily, we foresaw the future a little bit," Burpee says. "We jumped in with both feet."

Burpee saw that his own commercial real estate portfolio rose in value as the prime rate dropped and demand shot up. Turns out the market was on an even hotter streak than Burpee had hoped for when he opened his brokerage in a 500-square-foot office condo in late 2001 after leaving Coldwell Banker.

In 2005, John A. Burpee & Associates had sales of $350 million. Overall, sales have doubled each of the preceding five years. The firm, now with 16 full-time employees, including sales and maintenance workers, recently moved into its own 4,000-square-foot building in central Pinellas County that Burpee paid $650,000 for in December.

But sales are expected to rise only slightly this year. Burpee is concerned some deals will die once prospective buyers complete due diligence and see how much insurance costs jump, he says, adding, "It literally is a gamble every time you write a contract as to whether or not it's going to get past due diligence."

Listings, however, have shot up.

"In the last three months, we have listed more than we probably did all of last year," he says. "Most sellers understand that the market hasn't changed, the market factors have changed. The insurance factor is something no one counted on."

Burpee, 43, says he's not surprised the market is tapering off. The boom years of 2004 and 2005 couldn't last indefinitely.

"What a lot of people think is the norm is not," Burpee says. "The froth of the whip cream has gone off the chocolate."

Would-be condo converters are now paying less for apartment complexes, he says. They have to get a better deal to make up for the huge increase in property insurance costs and the rise in taxes based on new, higher values.

"If it makes money it's sold," he says. "That's the bottom line.

You're dealing with a lot of investors that have made a lot of money in the real estate market in the last couple years and are now just looking to park that money in an asset and reap the benefits of the cash coming out of it."

New owners are raising rents to cover costs, he says. For instance, one 50-unit building managed by his firm, JBI Property Management, recently saw its annual property insurance rates more than triple, from $15,000 to $47,000 in a year.

Burpee held a tenant meeting to explain why rents would rise more than $100 monthly for each tenant. The firm even provided copies of the insurance bills, reflecting the increase, to renters.

"They didn't like it, but they understood it wasn't us just trying to take more of their money," Burpee says.

Last month, Burpee sold a 375-unit complex to an investor who plans to sit on the property for several years. When the market improves, he'll convert the apartments to condos to sell.

In the meantime, the rents should cover the debt, he says. To keep maintenance costs down, JBI Property Management has three full-time workers who fix anything from air conditioners to clogged pipes.

Westward bound

Burpee sees growth in commercial markets outside of Florida, too. For example, while most people complain about the rising price of gasoline, Burpee sees opportunity.

He and a group of Australian investors are in the process of buying apartment complexes in Houston, Texas, a historically stagnant market. He contends that market is undervalued, and with the recent strength in the oil sector, he expects the economy there to pick up and push up property values.

On a recent trip to Houston, he walked 30 apartment complexes and only two had an empty apartment to rent, he says, adding, "We're looking at a three-to five-year business plan on everything we do out there."

About 30 of the Australian investors recently visited the Tampa Bay area. Burpee showed them the area on a Greyhound bus.

To adjust to the market, Burpee is diversifying his firm away from large complexes only to include smaller apartment complexes, shopping centers, warehouses and other commercial property.

And he's considering becoming a franchisee for a national firm.

"The national firm offers us a lot of instant respect that we're having to build now," he says. "A good example is Lee Arnold, who built his business around the Colliers brand. The two national firms we're looking at right now would give us that instant recognition."

It costs several hundred thousand dollars to become a franchisee, as well as a percentage of future sales. But he says it's money well spent, enabling the firm to compete with the "Marcus & Millichaps, C.B. Richard Ellises and Cushman Wakefields."

Burpee plans to open an office in Tampa next year, and one in Pasco County or Orlando in 2008. "It depends on how fast Pasco County continues to grow," he says.

And he expects the commercial real estate market to surge again in a year or so after the Fed realizes it raised rates too aggressively. In the meantime, a lot of people are sitting on the sidelines waiting for prices and interest rates to drop, he says.

Burpee doesn't expect prices to drop, at least not in Pinellas County.