Spec's Return

Spec's Return

COMMERCIAL REAL ESTATE by Jean Gruss | Editor/Lee-Collier

Developers are building speculative office and industrial buildings along the Gulf Coast as vacancy rates drop and rents rise. Overbuilding isn't a problem so far, brokers say.

Declining vacancy rates and spiking rental rates are spurring developers to build new office and industrial buildings up and down the Gulf Coast from Tampa to Naples.

While no one is forecasting overbuilding that could depress rents, there are certain areas, particularly in Lee and Collier counties, where brokers say excessive development may overwhelm demand.

Despite the new construction on the horizon, tenants shouldn't expect declining rates any time soon. In the Tampa Bay area's suburban office markets, tenants can expect rent increases of 10% to 20% in the next year to 18 months, according to a forecast by commercial brokerage firm Cushman & Wakefield.

"Tenant demand is still full-blown but there's no space to lease," says Rick Siems, senior research director at Cushman & Wakefield. "Everything's going to get gobbled up right away."

There is now 859,154 square feet of speculative office space under development and Siems estimates that will fill up within a year. What's more, over 3.4 million square feet of space is on the drawing board over the next three years.

It's much the same story for industrial buildings, which include warehouses and "flex" space that combines warehouses and offices. Lack of supply has become such a problem in the Tampa Bay area that tenants are leasing distribution space in other cities to serve Southwest Florida.

Tampa Bay demand continues

Any slowdown in activity in the Tampa Bay area is for lack of supply, not demand, brokers say.

New buildings won't spur a significant increase in vacancies. "I don't think you can build yourself into a vacancy problem," says Patrick Duffy, president of brokerage services for commercial brokerage Colliers Arnold.

Few new buildings have been built in recent years, even as tenant demand has surged. That's partly because rents haven't justified the surging construction costs.

Now, rents are starting to catch up with the cost of construction. In areas of the Westshore business district in Tampa, some landlords of newer top-quality office buildings are asking an unheard-of $30 per square foot.

Brokers believe rents will plateau at the $30 mark. "There's only so much people can afford," says Stevens Tombrink, executive vice president and managing director of brokerage firm Grubb & Ellis.

"Unless we have a significant economic downturn, I don't see any negative absorption," says Bradford Johnson, managing director and principal of research firm Integra Realty Resources in Tampa.

Tampa's activity doesn't seem to have spilled over into the Sarasota-Bradenton market in a significant way. The office vacancy rate there is 16%, according to Integra. "When vacancy falls below 7% you'll se more construction," says Carlton Lloyd, Integra's associate director in Sarasota. "I'm not aware of any one major project that will blow the inventory out of the water," he says.

Meanwhile, developers are building 1.3 million square feet of industrial space in the Tampa Bay area with much more on the way, according to Cushman. Siems says the industrial space is easily 70% pre-leased by the time new industrial buildings are completed.

"We've been seeing tenants go to Orlando and up to the Carolinas and Georgia because they can't wait for a new building," Siems says.

Like their office cousins, industrial buildings are now costlier to build. "Industrial land is priced out of sight," says Johnson.

Generally, rents for warehouse and distribution buildings in the Tampa Bay area rose 20% last year to $5.50. "It can't continue to go up," says Grubb's Tombrink. "Crossing six bucks is pretty high."

Duffy says landlords of new industrial space north of Tampa International Airport are asking $10 a square foot, net of tenant expenses. A few years ago, rents were in the $6 range. "Everything is very, very tight," Duffy says.

Cautionary signs

Further south in the Fort Myers-Naples market, brokers are warning that overbuilding could push vacancy rates higher.

In the north Naples submarket, for example, about 450,000 square feet of space in ten buildings are planned for construction but there's only demand for about half of that, says Mike Carr Sr., a broker with Coldwell Banker Commercial NRT in Naples. If developers build that amount of office space, it could send vacancy rates shooting up as high as 20% from about 7% now, he says.

Frank D'Alessandro, partner with Gates D'Alessandro & Woodyard in Fort Myers, says Bonita Springs and Estero in south Lee County are vulnerable to rising vacancies. "We have to watch for more new office construction in those markets," he says.

One worrisome trend is that the Fort Myers-Naples market has shown flat or negative office absorption in the past year. Absorption is the difference between the amounts of space occupied at the beginning of one period versus another. Data from CoStar Group shows 305,113 square feet of negative absorption in 2006 for the Fort Myers-Naples market.

However, because of the cost of construction, rents are going to remain relatively high. What's more, banks are growing more cautious and won't finance risky speculative buildings. "All banks are more cautious today than they were a year ago," says D'Alessandro.

On the industrial front, there may be more flex space built than can be absorbed, particularly on the Alico Road corridor from U.S. 41 to Interstate 75 in south Lee County. "A lot has come on line in the last two years," D'Alessandro says.

In Collier County, the price of land is so prohibitive that little industrial is being built despite low vacancy rates. Like Lee, many industrial tenants are tied to the depressed residential real estate industry and that means leasing commercial industrial space has slowed, making developers more cautious.

REVIEW SUMMARY

Industry. Commercial real estate

Trend. Rising rents and declining vacancies spur development

Key. Tenants should brace for more rent increases.

GULF COAST REAL ESTATE SNAPSHOT

Gulf Coast Office Market Statistics

(Inventory, absorption and construction expressed in square feet)

Average 2006 overall Under

Market Inventory Vacancy rate rental rate absorption construction

Tampa 28.5 million 10.5% $20.56 500,855 914,991

Pinellas County 12.4 million 13.8% $19.30 241,621 293,393

Sarasota-Bradenton 11.9 million 16.0% $20.33 219,000 120,990

Fort Myers-Naples 17.4 million 4.9% $20.08 ?294,555 764,964

Gulf Coast Industrial Market Statistics

(Inventory, absorption and construction expressed in square feet; Rents are net of tenant expenses)

Average 2006 overall Under

Market Inventory Vacancy rate rental rate absorption construction

Tampa 74.8 million 3.9% $7.08 1,600,000 942,449

Pinellas County 49.5 million 3.9% $7.08 991,459 630,000

Sarasota-Bradenton 24.7 million 8.5% $7.50 237,000 130,483

Fort Myers-Naples 42.5 million 3.1% $7.84 ?275,634 939,575

Sources: Cushman & Wakefield, CoStar Group, Integra Realty Services.