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COMMERCIAL REAL ESTATE by Dave Szymanski | Tampa Bay Editor

A softer economy and new buildings have some tenants hoping for incentives and better office leasing rates.

After seeing office rental rates rise steadily in recent years on the Gulf Coast, keeping commercial landlords happy, some tenants are hoping the pendulum will swing their way in 2008.

They pin that hope on two trends: New office space that has been built on the Gulf Coast, and a slower economy. More product plus softer demand should mean lower office rental rates, they reason.

They are expecting things like a free month's rent and discounts on build-outs.

"There's no question, it will be better for tenants in the next 12 months," says Mark Alexander, senior medical office advisor for Sperry Van Ness in Fort Myers.

Bob Dikman, CEO of The Dikman Co., a commercial real estate services firm in Tampa, agreed. Dikman is trying to find space on the Gulf Coast for a Fortune 100 firm.

"Landlords are paying attention," he says.

"They're more aggressive. It's definitely going to favor the tenants," Dikman adds. "More than a million square feet of sublease space is available."

Unfortunately for tenants, it can be more difficult to find sublease space.

Glen Peak, CEO of Tampa advertising agency PeakBiety, is hoping he can use market conditions to save money on office leasing costs.

The agency subleases 3,500 square feet in the Rocky Point area, which sits between Tampa's Westshore area and Clearwater. It is in a year-to-year lease. October marked the end of its first year in its current space.

"As more space becomes available, that has to compete with sublet space," Peak says. "When we moved a year ago, we were looking and figures were high then. Now we'd be looking for more favorable rates and terms."

But the changes may not come immediately.

Randy Mercer, partner at CB Richard Ellis in Fort Myers, recently completed a year-end office update for Lee County that included 171 multi-tenant office buildings, both Class A and B. There were 17 more Class A buildings in 2007 and 39 more Class B buildings.

He found a less than one half of 1% decrease in base rent, or an average of $16.78 per square foot, a 7-cent decrease from 2006.

What does Mercer see happening this year? "There's been no change in the last 30 days," he says. "Maybe they'll be movement by mid-year."

The first movement will be in the older, lower-quality buildings, Mercer says.

"Where I think you may see some adjustments will be in Class C space, buildings with little to no data or Internet capabilities," he says.

A lot of developers tried to beat the increased impact fees in southwest Florida and there was a tremendous office absorption in 2007. In Lee in 2007, tenants drove a 38% increase in absorption.

"It hasn't become a tenants' market yet," Mercer says. "It may not be. It hasn't been in the last 30 days."

Slowing demand

In late 2007 in the Tampa Bay area, leasing activity began to slow and that is expected to continue, says office broker Jane Dizona, with CB Richard Ellis in Tampa. In the next 18 months, new office space will open in the Tampa area, including the new Crescent and Metlife projects in Westshore.

"We will be seeing some concessions from some landlords," Dizona says. "There may be free rent. Every building has different circumstances. If they have smaller space available, there will be less discounting."

As always, well-located, well-marketed properties should do better, she says.

Brad Johnson, managing director of Integra Realty Resources Tampa Bay, says the trend will depend on the office submarket.

When Integra started its current, five-year, 5,000-square-foot lease in 2005, it started paying $17.50 a square foot. But as expenses rose, so did rent.

"The pass-throughs have been killing me," Johnson says.

Still, he does not think it's a tenants market yet.

"I don't think we're there yet," Johnson says. "I know that if everything on the drawing board gets built, we'll have overbuilding. But lenders learned their lesson from the 1990s."

Office vacancy in the Tampa market is about 14.1%, about the same as the national average.

"I think Tampa is at the top of the curve," he says. "The next phase were entering is hyper-supply."

Parking costs

Suzie Boland, CEO of RFB Communications in Tampa, says she encountered no concessions from landlords as she sought to move within a few miles of downtown Tampa.

RFB was paying $25 a square foot in the Channelside area. Under a new lease, it is paying less than that in Hyde Park. It is moving into the new space in the next two weeks, doubling total space.

One of the things that iced the deal: Free parking. In downtown and on Harbour Island, RFB would've paid $75 to $135 per parking space. One location couldn't promise her spaces.

Kevin Hourigan, CEO of Bayshore Solutions in Tampa, says he recently went out with a broker to look at sublease office space to expand his Web development company. He was encouraged by what he sees so far in Tampa.

"We are looking at expansion opportunities in sublease space to grow the company in a more cost-effective way," Hourigan says. "We are optimistic and excited about the possibilities."

Al Austin, CEO of Tampa-based A.S. Austin Co., a landlord in Westshore who enjoys 95% to 96% occupancy rates, notes that new buildings are going to have to maintain a strong market rate to cover their costs.

Office rates in other office buildings will depend on office space demand, Austin says. Rising costs may limit movement.

"With insurance and operating costs, there isn't a lot of wiggle room," Austin says. "However, the population is not shrinking. People are not leaving Florida."

Developer all-out with incentives

Chris Deveso is a perfect case study in how the commercial real estate market is leaning to the tenant side. The Venice-based developer is going the residential real estate route by offering extraordinary incentives for his mixed-use office and retail project, the Galleria on Venice Avenue.

Deveso says he will pay the first year mortgage or lease for a business that signs a contract for space in the project by Feb. 15. The incentive could put Deveso, head of Venice-based TC Group, on the hook for as much as $500,000.

The risk is worth it, though, as Deveso says he has spoken with about 10 small business owners that can go either way. "They just need to be jostled a little bit," he says.

For more than the past year, Gulf Coast homebuilders and Realtors have been using all sorts of incentives, from massive price cuts to Cadillacs, to jostle buyers. But incentives as deep as that have yet to find their way to the Gulf Coast commercial market, says Stan Rutstein, a Bradenton-based commercial broker who specializes in office and retail space.

"We're surely not at the condo level," Rutstein says. "I think people are looking for more standard incentives, like rent decreases."

By taking rent cuts to the annual level, Deveso seems to be the exception.

Deveso spoke with a few commercial developer friends in the northeast, who said incentives in commercial real estate have been a developing trend there in the past few months, as that market is in a more severe slump. For his project, about a mile outside of downtown Venice, Deveso was worried that the perception of a bad market, reality or not, would become too high a hurdle.

"I've talked to a lot of businesses that have the fear factor," says Deveso. "They like the concept, they like the project and they like the location."

The business that have bought into the project are helping Deveso put what he says is a Main Street-like feel to it, which is planned as 50,000 square feet of retail space, 18,000 square feet of office space and 15,000 square feet of medical office space.

"It's not at all a strip plaza," Deveso says, adding that a nail salon, a real estate office and a bistro-style restaurant are among the businesses that have already signed on. "It's more of a business community."

Deveso says construction of the project's first component, an Orion Bank, is scheduled to begin March 1. Other stores and offices could be ready by the end of 2008. Prices, for units ranging in size from 805 square feet to 15,000-plus square feet start at $175,000 or $19 a square-foot for leasing.

REVIEW SUMMARY

Industry: Commercial real estate

Key: Changing market conditions are offering opportunities for tenants to negotiate betters deals on office space.