On the upswing Featured

8:00pm EDT June 29, 2006
Florida’s red-hot real estate market, which has sizzled for so long, could soon have a big impact on commercial lease rates and properties. Due to the residential boom, available commercial space is shrinking and rates are ready to begin climbing.

“The last 24 months have been as hot of a real estate market as I’ve ever seen,” says Russ Sampson, executive vice president and director of brokerage services for Colliers Arnold in Tampa. Sampson has been in Florida for the last 20 years. “It’s absolutely overheated.”

Sampson says studies show that over 1,000 people move into Florida every day. Within the next seven years, up to 9 million people are expected to join them. To create room for everyone, zones have been redrawn to make commercial land residential. The lasting effect means fewer commercial properties, which could soon send lease rates soaring.

Smart Business spoke with Sampson about the forecast for Florida’s real estate market and what companies can do to lock in lower lease rates.

How is the real estate market currently changing?
Investors and people living in the state of Florida have interest-only adjustable rate loans. Now, interest rates are starting to inch up, and they’re getting back to the point where they are a lot higher.

People jumped in at 3 percent, and now the interest rates are at 5 or 6 percent. All of a sudden, their cheap mortgage payment has doubled.

The bottom line is that there is going to be a correction and those adjustable rate mortgages will come back and put some people in a financial bind. That’s a trend I see coming down the pike.

How does this affect businesses?
From a commercial real estate perspective, costs have gone up substantially all across the board. Land doubled in value and sometimes went even higher.

For the first time ever, developers were getting changes in zoning to make commercial land residential. Consequently, you have a growing shortage in commercial property because it has all been switched over to residential.

The cost of construction has risen 20 percent to 40 percent over the last three years. In order to build a commercial project, a developer has to plug in all the costs and expect a reasonable return. Today the rate for an office building, which would give the developer a reasonable return, is more than $30 a square foot for new construction.

The dynamic here is that you have all-time low vacancy rates — in the single digits, which means there is very little space available in the existing product type. It should be fueling this incredible real estate boom, but the lease rates have yet to catch up with the rising costs of new construction. In order for new construction to occur, there will need to be significant pre-leasing activity.

We have strong demand, low vacancy rates and high construction costs. It’s an interesting time because the lease rates are going to go significantly higher. Recently, they have gone up by 20 percent in the last 12 months, and I fully expect them to go up another 10 to 20 percent in the next 12 months.

Because lease rates are going higher, existing commercial buildings are becoming substantially more valuable. When those rates rise and get up to the middle to higher $20-per-square-foot range, that’s when you’ll see new construction in office and industrial buildings.

What advice would you give a company in its current lease?
Even if you have a couple of years left on your lease, I’d encourage you to go back and renegotiate deals and extend the lease out as long as you can. Or if you need to move for whatever reason, do it now rather than later. Lock in the longest term you can at the lowest rates, because I believe lease rates are going up substantially over the next few years.

There are very few vacancies, and retailers are doing pretty darn well with all of these baby boomers moving into Florida. Sign longer-term leases and lock in the lower rates, because that’s not going to be the case three years from now.

RUSS SAMPSON is the executive vice president and director of brokerage services for Colliers Arnold. Reach him at (813) 221-2290 or rsampson@colliersarnold.com.