New money

Like other New York Stock Exchange-listed companies, City Office REIT could select any of a number of U.S. markets to invest its capital.But rather than go into so-called “gateway” markets like New York, Chicago, Los Angeles or even Miami, the real estate investment trust has intentionally chosen Tampa and St. Petersburg as one of just a handful of places nationwide to target.

“We're huge believers in Florida and, within the state, in particular, Tampa and Orlando,” says Jamie Farrar, City Office's CEO.

Drawn by steady job and population growth since last decade's economic recession ended in 2011, companies like City Office REIT are bypassing traditional investment markets and flocking to the region to take advantage of higher yields and upside potential on area commercial real estate.

Although relative newcomers are buying into a variety of asset classes, such as apartments and hotels, many of the investments in the past two years, in particular, have focused on office product.

In all, investors making significant first-time purchases in the Tampa and St. Petersburg areas have spent nearly $700 million in the second half of 2016 alone to purchase such assets as the 520-room Tampa Hilton hotel, at 211 N. Tampa St.; Amazon's 1 million-square-foot fulfillment center in Ruskin; and the three-building Hidden River Corporate Center, in Tampa's Westshore business district.

“Some investment firms consider Tampa to Sarasota to be a third-tier market, but I think over the next five to 10 years, Tampa and the areas around it will look much more like a tier two market, which would favor current investment,” says John Power, a principal with Boston-based Farley White Interests, which earlier this year acquired the three-building Hidden Ridden River Corporate Center, in the Westshore area.

“And over the next 20 years, I think Tampa and Orlando will grow together even more, becoming a sort of mega-market mirroring many Tier One markets.”
Investing now, others say, also has its advantages.

Roger Thomas, president and COO of Workspace Property Trust, which last month acquired 34 buildings totaling 1.8 million square feet in the Tampa area from Liberty Property Trust for $174 million, says Gulf Coast properties represent value plays.

“You can still buy properties at below replacement costs,” Thomas says of Tampa-area acquisitions. “So it's much more cost effective to buy right now than to build, given the economics.”

Farrar and City Office REIT are so bullish on the market in Hillsborough and Pinellas counties that the real estate investment trust has concentrated its portfolio there.

City Office owns 4 million square feet in all, but 25% of its portfolio is contained in four Tampa and St. Petersburg office assets: Park Tower, Carillon Point in St. Petersburg's Carillon Office Park, Intellicenter in the Tampa Telecom Park, and City Center, a 12-story building in downtown St. Petersburg.

The company owns both City Center and Park Tower in a joint venture with Tampa's Feldman Equities and the Orlando-based Tower Realty Partners.

When Orlando is factored in, some 40% of City Office's 34-building portfolio is clustered in and around the Interstate 4 corridor, according to the company's website.

The company's other holdings are in Denver; Portland, Ore.; Boise, Idaho; and Dallas.

Its biggest local play to date came earlier this month, when City Office, Feldman and Tower Realty teamed up to acquire Park Tower, a 475,000-square-foot skyscraper built in the early 1970s.

The building, occupied by BB&T, the U.S. Department of Justice, Level 3 Communications and Lykes Insurance, among others, is 86% leased.

The new owners also are expected to embark on a comprehensive, multimillion dollar upgrade to the tower, which they bought for $79.75 million. Feldman says the group is formulating a capital campaign now that could include new windows or an entire new skin for the building.

Farrar says the market dynamics also are ripe for future acquisitions, too.

“Tampa and the surrounding area are great places to live, there's a quality lifestyle, and you can still buy a home at a relatively attractive price, especially as compared to various other parts of the country,” he says.

“And from an investment perspective, Tampa sets up well for long-term ownership because there's been a lack of new development, especially of office product. Added to that, there are good restaurants and vibrant retail, and a lifestyle that's favorable -- on top of all the job and population growth the area has sustained.”

Farrar, Power and others also note that Tampa and St. Petersburg remain attractive because properties continue to trade at higher yields than similar assets in so-called Tier One cities like Los Angeles or Boston — where a plethora of investor-led deals have compressed capitalization rates for commercial properties during the past three years.

“When you look at the amount of capital chasing deals in gateway markets, that tends to hike prices and affect yield,” Farrar says. “That's not been the case in Florida for the most part. It's another reason why Tampa is a special place.”

New Players, Big Investments
Workspace Property Trust, Horsham, Pa.: $174 million for 1.8 million square feet in Tampa area.

Farley White Interests, Boston: $73 million for the three-building Hidden River Corporate Center, Tampa Westshore.

Vision Properties, New Jersey: $108 million for the five-building Renaissance Center, Tampa West-shore.
CrossHarbor Capital Partners, Boston: $101 million, Tampa Hilton, downtown Tampa.

Cole Office & Industrial REIT, Phoenix: $103.6 million for 1 million-square-foot Amazon warehouse, Ruskin

City Office REIT: About $150 million for four Tampa-St. Petersburg office buildings.