Market Shift

Market Shift

The office-space pendulum has shifted in favor of tenants as weak demand and oversupply hit Gulf Coast landlords. Tenants can now receive concessions such as free rent and more money for interior build-outs.

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

How quickly the tables have turned.

Just two years ago, office-space landlords had their way with tenants. Vacancies were low, demand was strong and supply was just a developer's dream.

Today, job losses, cautious companies, a growing amount of sublease space and an abundant supply of new space are combining to give tenants the upper hand in office space markets from Tampa to Sarasota, Fort Myers and Naples. In Florida, the supply and demand for commercial real estate never stays in balance for very long.

"It's not a pretty picture from a landlord's perspective right now," says Larry Richey, managing director with commercial brokerage Cushman & Wakefield in Tampa. "The market statistics on the demand side are as ugly as we've every seen."

Economic contraction, new construction and sublease space rented for below-market rates are conspiring against landlords. "The office market has crested and we're on the downside of the cyclical slope," says Brad Johnson, managing director with Integra Realty Resources in Tampa.

There's a direct correlation between job creation and the demand for office space, so it's not surprising that type of commercial property is slow. For example, the Tampa Bay region has lost 25,000 jobs over the past year.

The speed with which the market has changed surprised some veterans. "The startling thing to me is not so much where we are, it's how fast we got to where we are versus a year ago," Richey says. "I've seen it five or six times, but the real news to me was how fast it has been reflected in the office market."

In Fort Myers, landlords started seeing late rent payments starting in the fourth quarter of last year, says Randal Mercer, founding partner with CB Richard Ellis in Fort Myers. "A lot of people shut down at the end of the year, which is what expanded the vacancy," he says.

Bad news for landlords is good news for tenants and investors looking for bargains. Free rent and money for interior build-outs are commonplace. In Sarasota, one landlord is advertising a trip for two to Cancun, Mexico, if they sign a lease now, says Sarasota commercial broker Ian Black.

But many landlords are holding out hope that they can maintain rents high enough to make their numbers work. That's going to be tough as vacancies rise, less space is absorbed and tenants who move out before their leases are due sublease their space at below-market rents. Rents in areas such as Sarasota are down 25% from their peaks and sublease space is 40% off, Black reports.

But in Tampa, landlords are holding off lowering rents. "The only thing I've seen is a little bit of free rent," says Claire Calzon, principal and managing director of office services with Colliers Arnold in Tampa. Asking rents in new buildings in the large Westshore market as still in the low $30 per-square-foot range, she says.

For now, landlords are focusing on retaining the tenants they have. "In the end, the landlord steps up and offers them a deal they can't refuse," says Calzon. After all, moving is a hassle. "You don't get fired for renewing a lease, but if you pick up and move..."

Surprisingly, sellers of office buildings haven't dramatically lowered their asking prices. "There's a disconnect between buyers and sellers," says Integra's Johnson. "That has caused a slowdown in the deal flow," he says.

A few property types are still holding their own, however. For example, medical-office space has seen the overbuilding because it's so expensive to build. "No one goes out and builds medical on spec," says Mark Alexander, senior medical-office advisor with Sperry Van Ness in Fort Myers.

Mercer agrees. "It may be one of the few growth markets that we have," he says.

Health care is still a thriving business relative to industries such as financial services and real estate. Still, it's not completely immune. Private insurance and government reimbursements haven't kept up with expenses such as rising malpractice insurance and property taxes.

"Their margins keep getting squeezed," says Alexander. Vacancies are rising in older medical buildings that doctors left behind in favor of new space in the last few years, he says.

Some geographic areas are holding up better than others, too. For example, the Naples area did not see as much overbuilding because of the county's anti-growth stance and average asking rents there are the highest on the Gulf Coast. "There's not a lot of product that's coming out of the ground that's not already planned," says Craig Timmins with Investment Properties Corp. in Naples.

Timmins says it's hard to make generalizations about the Naples market. "The office-rental market in some areas has softened and in other areas has held up pretty well," he says. "Buildings that are in stronger locations, have good ownership and management, they're always going to fare better."

Naples is likely to be among the first areas of the Gulf Coast to recover. "Demand is better than I would have expected," Timmins says. Surprisingly, he's seen financial-service companies expand recently.

Meanwhile, the Tampa market could recover as early as the fourth quarter of this year, says Johnson. Office landlords will price their space more moderately as the year wears on. "The housing market will begin to correct and economic conditions should improve," Johnson says. "There's a lot of money out there available for acquisitions of these properties," he adds.

More reasonable home prices for employees are a big factor for companies looking to relocate to Florida. "Corporate America is looking at Florida in earnest again," says Richey, who also chairs the Committee of 100, the recruiting arm of the Greater Tampa Chamber of Commerce.

In Tampa alone, Richey says there are five prospects looking for space that would bring 1,000 new jobs each. Prospects come from industries ranging from financial services to technology and something called "shared services," a trend in which Fortune 500 companies consolidate functions such as human resources and accounting in one place.

Job growth is the key to recovery in the office-market sector. Richey says we must not lose sight of the fact that the Tampa area has seen 40,000 net new jobs created over the last five years. "We've fared amazingly well," he says.

REVIEW SUMMARY

Trend. Declining demand and rising supply push down office-space rents.

Industry. Commercial real estate

Key. Tenants now have the upper hand to negotiate less expensive leases.

BY THE NUMBERS

More space

Vacancy rates are rising and rents for office space are falling in many areas of the Gulf Coast as demand slows and supply rises. Tenants now have the advantage when they're renegotiating existing leases or signing new ones. Here are the statistics for the Gulf Coast's metro areas courtesy of data provider CoStar Group (rents are annual $ per square foot; absorption in square feet).

% Total vacant Avg. asking YTD net

Area 2Q07 2Q08 rent ($ p.s.f.) absorption (s.f.)

Cape Coral-Fort Myers 5.7% 12% $18.06 ‑448,293

Naples 6.4% 11% $22.85 ‑138,115

Sarasota-Bradenton 4.5% 7% $21.91 ‑354,557

Tampa-St. Petersburg-Clearwater 10% 13% $20.79 ‑649,255

Source: CoStar Group