Commercial Real Estate: An 'amazing year'

The year 2015 will be remembered as not only the most robust since the last decade's prolonged and pronounced economic recession, but as perhaps the best across all sectors and geographic regions along Florida's Gulf Coast since the end of World War II.

From central business district office space to modern distribution centers and hotels to apartment complexes, commercial real estate was ablaze in the past year, as increased demand collided with institutional investors' desire to park capital in bricks and mortar over other types of investment vehicles.

“In sum, 2015 has been simply an amazing year,” says Larry Richey, who directs commercial real estate services firm Cushman & Wakefield's business across Florida.

“By any measure, broken down by sector or by location in the state, what we've seen is largely unprecedented,” Richey adds.

And while some areas throughout the region have fared better than others — industrial distribution leasing and development have surged in the Interstate 4 corridor between Tampa and Orlando, while lagging elsewhere — the Gulf Coast has benefitted from population influx, increased consumer confidence and macro-demographics.

Among the most active sectors in the region in 2015, for instance, were senior housing, multifamily complexes and medical office space. Each benefitted from demographic shifts in Florida's population that have been occurring for the past several years, bringing older residents to the state and younger people to urban centers such as St. Petersburg and Tampa.

Hotels, too, took advantage of tourism gains statewide to boost room rates which, in turn, resulted in higher sale prices for sellers and anticipated future yields for investors from Tampa to Naples.

Perhaps the biggest surprise of 2015, however, came from the resurgence of interest in urban office buildings, especially in Tampa and Naples, spurred on by climbing rental rates and tightening occupancies.

As a result, a few Class A properties garnered top prices, including the Wells Fargo Center in Tampa and the SunTrust Financial Centre, also in downtown Tampa, for $78.3 million and $124 million, respectively.

Tampa, for instance, has seen rental rates edge up to about $30 per square foot for Class A office space both downtown and in the Westshore area for the first time in a decade.
Analysts predict that as rents consistently remain above $30 a foot, new construction will follow.

In Naples, shrinking vacancy rates have prompted at least one developer to ponder speculative development for the first time since 2006.

No sector showed as much strength regionwide in the past year as multifamily complexes, however. Spurred on by housing formations tied to the improving economy, residual damage from last decade's foreclosure crisis and a desire by millennials aged 18 to 37 for increased mobility, apartment sales and developments shattered records in 2015 all along the Gulf Coast.

In total, apartment complexes collectively fetched in excess of $1 billion throughout the Gulf Coast in 2015, according to an analysis of property records.

Jonathan Richards, a multifamily expert with commercial brokerage firm CRE Consultants, contends the sector is stronger now than at any point in at least the past decade.

That assertion is backed up by announced developments throughout 2015 that will add thousands of new units to the market in downtown Tampa, Sarasota and in suburban Fort Myers, among other sites.

Though it lagged other sectors, retail also grew significantly in the past year. Restaurants and alternative retail like Wawa stores continued to sprout, as consumers spent more of their discretionary income on dining out and convenience than perhaps ever before.

The sector was marked by a few impressive sales, however, led by the nearly $240 million deal that saw the Mercato office and retail complex, in Naples, snapped up by Prudential Real Estate Investors.

Like the Mercato purchase, abundant capital fueled the surging interest in commercial properties over the past year. As institutional and individual investors alike fled fluctuating stock markets and commodities, many turned to commercial real estate as a relatively safe haven for returns.

“There's a tremendous amount of cash — as much as $3 trillion, by some estimates — sitting out there, looking to be invested,” says John Harshman, president of Sarasota-based commercial brokerage and property management firm Harshman & Co. Inc. “Investors are looking at places to put capital, and they don't have as much confidence in the stock market or other traditional investment vehicles, so they're turning to real estate.

Unlike many past growth cycles, though, most of the capital flowing into commercial real estate over the past year has come not from banks or insurers, but from publicly traded real estate investment trusts, private equity and hedge funds, wealthy individuals and pension fund advisers.

“A lot of it comes from the residual effects of the recession,” Harshman says. “Some of the properties that were purchased during or shortly after the recession in Southwest Florida were at discounted prices, and most have since been leased up, which has helped boost net operating income and led to them being re-sold.”