More Space on the Way

By Business Observer Staff
| 6:00 p.m. July 6, 2007
| 2 Free Articles Remaining!

Entrepreneurs

RETAIL SPACE by Jean Gruss | Editor/Lee-Collier

Despite the real estate slowdown, retail space continues to expand, giving tenants more leverage on rents. The national chains want in.

Last year, two new malls opened up nearly 3 million square feet of new shopping space in southern Lee County.

Brokers and landlords then fretted that adding the equivalent of 52 football fields of retail space would act like a giant vacuum cleaner, sucking up the retail life from other parts of Naples and Fort Myers.

One year later, some of that has happened, but no one is ready to say whether that's because of the new malls, a building boom or a decline in the residential real estate market.

"It's still too early to see the impact of the malls on more distant areas," says Thomas Tippett, managing director and principal with Integra Realty Resources in Naples. "You'd think an area could only handle so much new retail."

But by all accounts the market for shopping space appears healthy today. Tippett's research showed rental rates jumped 12.3% in Lee County from $15.61 in 2005 to $17.54 in 2006. Absorption tripled in 2006 to 1.6 million square feet.

Vacancies are low, rents are stabilizing and demand is vigorous, especially from national-caliber tenants who want to tap into the area's population boom for the long term.

"Retail is the most robust sector of the commercial market right now," says Karen Johnson-Crowther, principal and director of retail services for Colliers Arnold in Fort Myers.

"Land costs haven't really come down because it's still a hot area," says Tiffany Luongo, director of sales with Select Real Estate in Estero. That's especially true along the Interstate 75 corridor, she says.

Tippett says the consensus is land with good locations is selling for $18 per square foot, and those prices have been rising at 8% to 12% as year. No one expects them to fall soon.

After a lull this winter, prospective tenants are coming back into the market, scouting for new sites. "I've gotten more calls in the last three weeks than in the last three months," says Luongo. "People are sort of realizing that we're not going to have a recession."

Low vacancies will rise

With vacancies in the 5% to 7% range and rents rising, developers are going forward with new shopping centers. In a one-mile stretch near Coconut Point mall in south Lee County, nearly 500,000 square feet of retail space is under construction, says Andrew DeSalvo, a land consultant with Premier Commercial Properties of Southwest Florida in Bonita Springs. He dubs it the "Miracle Mile."

New construction will drive up vacancies and put a cap on rents, he says. In 2006, the retail-space vacancy rate hovered in the 3% range. "By year-end, we'll be banging between 5% and 6%," says DeSalvo. Depending on the level of construction and demand, 2008 could see vacancies in that area reaching 8%.

Still, says Gary Tasman, executive director with Cushman & Wakefield in Fort Myers: "Everything that's getting built is still being absorbed."

Florida Gulf Coast University's 11,000 students and the 9 million people who travel through Southwest Florida International Airport every year further boost the Bonita Springs-Estero areas.

Nonetheless, Tasman has been warning development clients to hold off building speculative retail buildings in the Pine Island Road corridor of Cape Coral. He says it's overbuilt and hurting and likely to take at least one to three years to absorb the nearly 1 million square feet of space that's expected to be built there.

"It may slow the need for a regional mall in Cape Coral," he says.

Developers and retailers were attracted to Cape Coral because of the mushrooming population. The U.S. Census estimated Cape Coral was the fourth-fastest growing city in the country, its population growing 8.1% from July 2005 to July 2006 to 154,470. Tasman estimates investors bought 40% of the homes sold there in recent years, and the result has been that many newer homes in Cape Coral are now empty.

The silver lining, of course, is that Cape Coral will once again be more affordable and that will draw new residents. "Now, we'll look attractive," Tasman says.

Rents will stabilize

The double-digit percentage rise in retail rental rates in 2006 won't continue this year, brokers say. With new buildings, tenants will be in a better position to negotiate.

"The big unknown is: How much is going to come out of the ground?" wonders Johnson-Crowther. "It's going to be a very difficult call for developers."

In the Bonita Springs area, tenants who were considering leasing space for $20 may now pay $18 and get a $25- to $35-per-square-foot buildout allowance. "It's a tenant/buyer market," says DeSalvo.

The new space in Lee County has cooled the rise in rents in Naples, its neighbor to the south. Retail rents in Naples can reach as high as $60 per square foot, among the highest on the Gulf Coast. "I wouldn't expect to see any increases," says David Wallace, a broker with Premier Properties who covers the Naples market.

The two new malls in south Lee County have affected sales at stores in Naples. "It has had a negative effect and everybody knows that," Wallace says. "To what degree, I don't know."

No one is forecasting Naples' rents will fall, however. That's in large part because construction and land costs remain elevated. "I've never seen land costs go down in 20 years," says Dougall McCorkle, vice president of commercial properties with Lutgert Cos. The company is building Mercato, an upscale mixed-use project in North Naples.

"Most landowners, unless they have great impetus to sell, they're typically not anxious to drop their prices because they can wait it out," McCorkle says.

Housing's impact on retail

The decline in the housing market mostly has affected locally owned, single-proprietor stores. But national tenants are still scouting sites in Southwest Florida because they have a long-term view. Lee County crossed the 500,000-population mark two years ago, vaulting it in the radar for national site selectors.

For example, Whole Foods, the Texas-based organic grocery store chain, broke ground last week on a 50,000-square-foot store at Vanderbilt Beach Road and U.S. 41. Kohl's Department Store is also scounting sites in the region. "With these super-regional malls, it creates a frenzy nationally," says Integra's Tippett.

"The projects that are in very close proximity [to the new malls] are doing very well," Johnson-Crowther says. "But as you move further away, the absorption is slower."

What's more, brokers say, even though population growth has slowed this year compared to the height of the real estate boom and even though lenders have become more cautious about financing projects, the demand from national tenants continues unabated. They want a presence in Southwest Florida before the rebound.

Says Wallace: "Our office is busier at this time than it was last year."

AT A GLANCE

RETAIL-SPACE VACANCIES

New construction has boosted retail-space vacancies, but rents kept rising last year. Most brokers forecast rents will flatten as tenants gain the upper hand. Figures are for square feet.

Lee County

Vacancy Net Rental rate/

Year Inventory Completions % absorption % Chg.

2005 15,111,039 575,273 5.3% 512,535 $15.61 / 2%

2006 17,050,728 1,939,689 6.6% 1,613,907 $17.54 / 12.3%

Collier County

Vacancy Net Rental rate/

Year Inventory Completions % absorption % Chg.

2005 9,062,767 29,481 4.7% 58,626 $19.72 / 5.2%

2006 9,621,691 558,924 5.4% 462,250 $22.83 / 15.7%

Source: Integra Realty Resources

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