The return of spec

Although the Gulf Coast's office market hasn't fully recovered from a recessionary glut of the past decade, at least one Collier County developer is poised to take advantage of incremental improvement.

Fresh from its $239 million sale of the mixed-use Mercato development in Naples, Lutgert Cos. is planning to construct a 38,000-square-foot office building there on Tamiami Trail, just south of Pine Ridge Road.

And while the size of the three-story project isn't necessarily extraordinary, it stands out because Lutgert intends to move forward without tenants. That makes it the first speculative office development in Naples in roughly a decade.

“With the improved economy and the office market here on the upswing, they felt it was time to take advantage of increasing demand,” says Dougall McCorkle, a commercial real estate agent with Lutgert subsidiary Premier Commercial who will pre-lease the project. “We think there's great potential for it.”

Lutgert's project, around $14 million, comes as office vacancy rates throughout the Gulf Coast have shrunk — especially for large blocks of square feet — but also as technological improvements have compressed users' need for space.

In Tampa, for instance, office vacancy fell at the end of the second quarter of this year to 15%, down from 15.3% in the comparable period of 2014, according to research by real estate services firm CBRE Group Inc.

Those trends have led some experts to conclude new office development could occur, especially at Jeff Vinik's Channelside property in Tampa, within the next three years.

In Sarasota, newer, Class A office vacancy has held steady in excess of 13% for the past several years. John Harshman, president of Harshman & Co. Inc., a Sarasota commercial brokerage firm, says that figure remains high. “So I would not expect any speculative development here anytime soon,” he says.

Even so, adds Harshman, large blocks of quality office space in Sarasota and Manatee counties are not readily available.

Naples' 1.3 million-square-foot office market likewise has a double-digit vacancy of between 10% and 12%, McCorkle says, but it also lacks large blocks of space. Just as significant, many older buildings lack amenities and features that tenants today consider valuable -- or essential.

“The problem with a lot of the inventory out there is it's not functional relative to how business today operates,” says Gary Tasman, CEO of Commercial Property Southwest Florida LLC, an affiliate of brokerage giant Cushman & Wakefield Inc.

“Businesses want increased parking as a result of mobile technology, because they can fit more people into smaller spaces, and that's an obsolescence that in most cases can't be cured,” Tasman adds.

Lutgert, too, notes “the continued shift in office user tastes” in going forward with its new offices, which could be completed in the latter half of 2016. While the risks are clear in building office on spec, Lutgert isn't the only landlord that looks to capture increased demand in Collier County.

Miami-based Steelbridge Capital, which bought the Offices at Pelican Bay last year at 5801-5811 Pelican Bay Blvd., has begun to remarket the pair of six-story buildings after a series of capital improvements. The project is currently 30% vacant.

“We love the dynamics of the Naples market, especially because we don't see any significant new Class A office supply coming online in the next several years,” says Jay Caplin, a Steelbridge principal.

- K.L. McQuaid