Despite the rumored demise of the residential real estate market, the commercial real estate market in Tampa Bay has been very strong over the past three years and will continue that trend.
According to Patrick Duffy, president of Colliers Arnold Tampa Bay, commercial vacancy levels are very low by historic benchmarks across the board. Slow deliveries of new space, combined with robust economic growth have created what is clearly a “landlord’s” market here.
“If you are looking for a new location for your business in 2007 or early 2008, it will be more important than ever to start your search early and value-engineer the space as much as possible to get the most out of the space you have,” Duffy says.
Smart Business talked to Duffy about Tampa Bay’s real estate outlook for 2007 in all three commercial property types (office, retail, industrial).
How would you rate the market for office space in the Tampa area?
Office space, particularly Class A office space, is tight by historic measurements (9.7 percent vacant). The cost to deliver new, finished space has risen to more than $250 per square foot, which is driving up lease rates.
The average asking rent for Class A space in Tampa Bay at the end of 2006 was just under $22 per square foot. To justify a new Class A office building, developers must expect to generate lease rates in excess of $27 per square foot including taxes, common-area expenses and insurance. In most markets, rents in excess of $30 per square foot will be necessary for the construction of a new office property.
Expect Class B and C space to follow the trend set by Class A space. If your lease is up for renewal in 2007 or early 2008, examining your alternatives now would be prudent. Expect fewer quality options and a higher cost of occupancy in the next 18 months. Whether you are planning on leasing or buying office space in 2007, we do not expect to see a softening in values this year.
Will the industrial real estate market continue to be tight?
This market, which is generally tighter than the office market, is more than 94 percent occupied. It will remain very tight for the long term, as much of the industrial land that was in place in Tampa Bay has been converted to single-family use during the past eight years.
Industrial space has the same cost-increase issues as office space and a more constrained supply of available vacant land on which to build. This is especially true in Pinellas and East Tampa. Most larger industrial projects will be delivered along the I-4 corridor toward Lakeland and potentially up I-75 into Pasco County. Pasco is considering significant increases to its impact fees for all property types, which will inhibit growth, if passed.
We expect industrial lease rates and sale values to continue to rise in 2007 for both warehouse and flex (office/warehouse) product.
What is driving the market for retail space?
The retail market in Tampa Bay has had a steady delivery of new space over the years. New product is coming on-line every month, driven by grocery store expansion as well as ‘big-box’ retailers like Wal-Mart, Target, Home Depot and Lowes.
Despite this steady delivery of space, most well-anchored, well-located shopping centers have very little vacancy for retailers. The demand by retailers especially the national and regional chains for multiple locations has kept space in short supply. Most new centers open with 90 percent or more of the space leased.
Like office and industrial, the cost of delivering new retail space has increased substantially over the past five years. To justify a new center, it is not uncommon to see asking rents in the high $20s to low $30s per square foot. The impact fee discussion in Pasco County may add as much as $10 per square foot to the rent requirement just to pay increased impact fees.
We have already seen a few retailers scale back their expansion plans based on the cost of retail space in Tampa Bay. Some smaller retailers have retooled their merchandise plan to allow them to sell the same quantity of items from less space. Insurance and tax charges for retail space have increased the add-on charges by as much as $2 to $3 per square foot in the past six months, which is putting pressure on landlords to hold the line on rent increases. Either way, the end result for the retail user is higher occupancy costs.
PATRICK DUFFY, MCR, is president of Colliers Arnold. Reach him at (813) 221-2290 or firstname.lastname@example.org.