Commercial Crocuses

Here's a sign that commercial real estate is finally starting to recover.

Dick's Sporting Goods, the giant sports retailer, recently signed a lease for 50,000 square feet at Page Field Commons, a shopping center in the heart of Fort Myers. That's nearly the size of a football field.

“For a while, none of that was happening,” says Matt Yaniglos, managing director with LandQwest Commercial, a brokerage firm with offices in Fort Myers and Tampa. “We're seeing other big boxes,” he adds.

Like the crocus in spring, retail leasing is the first sign that commercial real estate is awakening from the economic winter of the last few years. Retailers follow consumers, and consumers are buying stuff again.

What's more, industry observers say commercial real estate follows residential real estate. Population and employment growth means retailers will lease more shopping space, construction trades will rent more warehouses and real estate and financial firms will absorb more office space.

“We're as busy now as we've been in the last three to four years,” says Tom McGeachy, managing principal of Ciminelli Real Estate Services, which manages or leases about 3 million square feet of space, mostly in the Tampa Bay area.

The improvement so far is most pronounced in shopping centers and other retail locations. In the Tampa Bay region, the overall retail vacancy rate dropped to 6.9% in the fourth quarter from 7.7% two years ago. In the three-county area of Charlotte, Collier and Lee counties, the retail vacancy rate stood at 7.7% in the fourth quarter, down from 8.8% two years ago.

“Retail is leading the way and that's because the homes that are being sold now are existing homes,” says Barry Seidel, president of American Property Group in Sarasota. “Once construction starts, then you'll see the warehouses fill up and the offices fill up.”

Retailers expand
Retailers tend to start in the Tampa Bay region and work their way south, says Yaniglos. “Tampa is kind of the keystone to the west coast of Florida,” he says.

“You're starting to see some different national brands coming into the market,” says Yaniglos. These include casual restaurant chains such as Zaxby's, Cheddar's and Culver's.

Starbucks has resumed its expansion, too, and is scouting four or five additional locations in the Fort Myers-Naples area. “It seems like the switch has turned back on,” says Yaniglos.

“We're looking at 10 consecutive quarters of positive absorption in the Tampa Bay market,” says J. Benjamin McLeish, director of retail services with Colliers International Tampa Bay.

“I'm seeing that in the best areas rental rates have rebounded to near-record levels,” says McLeish. These include South Tampa, Brandon, Countryside and Clearwater, he says. “Smaller end-cap restaurants are quoting north of $30 a square foot in some locations.” That's nearly double the average shopping-center rate in the area.

Gas stations and convenience stores are making a big push into Southwest Florida. Companies such as Wawa, Rally and Thorntons are competing for high-traffic locations.

For example, Wawa recently acquired a 2-acre parcel in Pinellas Park for $2.6 million and will tear down an old motel on the site. “Two years ago that was still a hotel struggling in that area. All of a sudden, it's got value,” says Paula Clair Smith, commercial specialist with Commercial Asset Realty Partners in St. Petersburg.

A rent recovery could lead to new development. McLeish says new shopping-center projects are on the drawing boards and could start appearing in 2014 and 2015. “The infill is really hot right now because the demographics are there,” he says. Developers refer to “infill” as those areas already surrounded by existing housing.

But new development may not be coming soon enough. “There's not a whole lot of new supply coming into the market, so it's getting tighter,” says Dougall McCorkle, commercial associate with Premier Commercial in Naples.

“The Naples market in particular is on the verge of having a new wave of activity and development,” McCorkle says. “Once that starts you've got the construction trades starting up again, and that helps industrial.”

Warehouses filling
As retailers expand and homebuilders restart operations, warehouse space is starting to be absorbed. Tenants absorbed more than 1.7 million square feet of industrial space from Tampa to Naples in the fourth quarter, according to CoStar.

“What's being absorbed is the modern buildings,” says Jan Boltres, managing director of industrial services for Colliers International Tampa Bay. “We're fast approaching a shortage of modern, high-quality warehouse space.”

Boltres points to what's happening east of Tampa in Lakeland as a possible sign of what's to come in the rest of the region. Lakeland's industrial vacancy rate is hovering at around 4% because of its central location between Tampa and Orlando on Interstate 4. As a result, speculative construction has already begun there.

“We are getting ready to break ground shortly on some spec space in Pasco County,” says Heidi Tuttle-Beisner, broker-owner of Commercial Asset Realty Partners.

Tuttle-Beisner says Pasco County's economic development arm is targeting light manufacturers to relocate there from the Midwest and Northeast. “Our most recent deal has been with a light manufacturer coming out of Michigan,” she says.

The key for any new development is that rents must rise so buildings can be profitable for their owners. Rents have stayed low generally from Tampa to Naples, CoStar data shows.

What's more, tenants are going to be careful about expanding too rapidly because no one wants to tie up precious capital in too much inventory. “The market doesn't have the velocity that it had in 2005,” says Boltres.

Office last to recover
While office brokers say the worst market conditions are now behind, it will take more space absorption to drive rents higher. The Tampa Bay area's office vacancy rate ended the year flat at 13.6%, and the three-county region of Charlotte, Lee and Collier counties saw the vacancy drop to 15.5% in the fourth quarter from 16.1% a year ago.

“Office is the laggard,” says Gary Tasman, broker with Cushman & Wakefield Commercial Property Southwest Florida. “If we see employment growth this year, we'll see vacancies decline.”

Employer surveys in the Fort Myers area show they plan to hire additional staff early this year, but the latest employment data doesn't show that yet. The Cape Coral-Fort Myers area added just 700 jobs in 2012, according to the latest employment estimates from the state.

By contrast, the Tampa-St. Petersburg-Clearwater area's employment grew by 21,000 jobs, one of the strongest employment centers of the state.

McGeachy says he's been fielding calls from health care companies, law firms, financial and insurance firms. “It's a fairly broad cross-section of firms,” he says.

The Westshore area of Tampa, the state's largest office market, has seen a significant amount of activity, McGeachy says. “We've had enough sustained activity there that you'll see rates coming up,” he says.