Florida Realtor Magazine, May 2008 | by Richard Westlund
Florida’s commercial experts say the industrial sector is expected to lead the state. Find out where else the commercial real estate business is going.
Hobart Joost Jr., a specialist in Jacksonville industrial properties, is taking advantage of a fast-growing market. “There’s been a flurry of developers from other parts of the country trying to buy land here,” says Joost, principal and senior vice president of Colliers Dickinson in Jacksonville. “Land values have jumped and rents are going up as well. Now, it’s tough to find affordable industrial land.”
The impetus is a new wave of investment at the Port of Jacksonville (Jaxport). Tokyo-based Mitsui O.S.K. Lines Ltd. is building a 158-acre facility that will double the port’s container traffic with its 2009 completion. And South Korea’s Hanjin Shipping recently committed to build its own $360 million terminal at Jaxport, due to open in 2011.
“With new Asian carriers establishing terminals here, I’ve never seen the [large] amount of industrial activity that’s now under way,” says Joost, who estimates the two projects will generate demand for 8 million additional square feet of industrial space—nearly 10 percent of the market’s current inventory—adding further depth to the market.
Commercial Still Strong
In the next 12 months, it’s likely that Florida’s main commercial markets—industrial, office, retail and hospitality—will outperform the residential sector. However, the national economic slowdown and sluggish new-home market will limit growth prospects.
“Florida’s retail and office sectors have been the most affected by the downturn in residential,” says analyst Lewis Goodkin, president of Goodkin Consulting in Miami. “Retail is affected because the high level of investor buyers in hot residential markets means that there are no people living under many of the new rooftops.”
Reduced consumer confidence and tighter credit requirements also tend to reduce retail sales and put a crimp in vacation travel plans, impacting the hospitality sector.
Contraction in the building trades, real estate and financial sectors has reduced demand for new office space, Goodkin adds. In markets like Tampa and Orlando, for instance, sublease space is adding to the overall vacancy rate.
For 2008, the brightest prospects appear to be in the industrial market, especially in cities like Jacksonville, Tampa, Miami and Fort Lauderdale, where international trade plays a major role in the economy. The weak U.S. dollar actually helps exporters shipping goods to Europe, Latin America and the Caribbean, while changing patterns of world trade are making Florida more attractive to Asian shippers. (See “Why Jacksonville?” page 32.)
Here’s a closer look at the state’s commercial markets.
Office: New Developments Under Way in Tampa
After several years of high job growth and limited new construction, Tampa Bay developers are now adding to the region’s supply of new office space. “We’re at the beginning of a strong development cycle,” says Larry Richey, senior managing director, Cushman & Wakefield of Florida in Tampa. “It’s been some time since we’ve had exciting new product come into the marketplace.”
Several new projects are under way in the Westshore market and Interstate 75 corridor, including the first tower at the mixed-use MetWest development, the 247,000-square-foot International Plaza Corporate Center IV and the Intellicenter–Tampa Phase I. Overall, Tampa has 1.2 million square feet under construction with another 4.3 million square feet in the planning phase, according to Richey.
On the other hand, Orlando’s office vacancy rate increased more than 3 percent in 2007, largely as a result of slower job growth. “But I think 2008 will be better than last year, when we took the brunt of the residential slowdown,” says Richey.
An increase in Central Florida vacancies will actually help attract new employers, according to Michael Levine, broker and owner of Century 21 World Properties in Clermont. “Occupancy levels had been running to near capacity,” he says, “so there’s no problem with a slight softening of the market.”
In South Florida, the office market fundamentals remain strong, says Scott Sime, Miami-Dade managing director for CB Richard Ellis in Miami: “Vacancy rates are low and one of the challenges is finding quality Class A product for larger users, especially in Miami’s downtown and Brickell Avenue markets.”
Brickell Financial Center in Miami and Atlantic Center in Fort Lauderdale are among the region’s major new office developments.
In the past two years, the state’s office market has shifted back from condominium ownership to traditional leasing, according to Goodkin. “That [office condo] market has slowed markedly,” he says, “because many office condo buyers were investors hoping for quick returns.”
Industrial: High Demand for Sites
Gene Preston believes in Florida. As senior vice president for Higgins Development Partners, he’s guiding the Chicago company’s aggressive expansion in the state’s industrial sector. To date, that includes the 2006 purchase of the ABC Distributing warehouse in Miami, now being redeveloped as Centergate at Gratigny, a 1 million-square-foot project, and Lee Vista Business Commons, a new warehouse-office development in Orlando.
“We invest in economies, and we love Florida,” says Preston.
“While the demand for industrial space is still recovering from the residential market shock, we think Florida will keep growing and outperform the U.S. economy.”
Throughout the state, a limited supply of industrially zoned land coupled with strong demand has kept vacancy rates in single digits in most markets. As Richey says, “Almost every metric—occupancy, rental rates, trends, absorption and leasing activity—is rock solid across the state.”
However, there are regional variations: Orlando, Ocala, Tallahassee and Jacksonville cater to regional shippers and manufacturers seeking relatively inexpensive land. “The Central Florida industrial market is booming,” says Levine. “Many distributors are moving to the center of the state. One of the hot spots is Polk County, which is targeting new industrial growth.”
Tampa’s industrial market is also healthy, and rental rates continue to rise, says Richey.
In contrast, warehouses in Miami and Fort Lauderdale command premium rates from distributors serving Latin America and the Caribbean. Sime says, “Growth is stabilizing, but Miami-Dade still have a very strong market with less than 6 percent vacancy rate.”
Hospitality: Think Mid-Price, Not Luxury
A decade ago, Florida began building new luxury hotels and introduced the hotel condominium suite. Today, those sectors have slowed dramatically, and much of the action has shifted to mid-price hotels serving the business market and budget-conscious leisure travelers.
To take just one example, hotel developer Luckey’s Management Inc. is building a 122-room Hampton Inn & Suites at Miramar Park of Commerce in Broward County, scheduled for completion in early 2009.
“There’s still demand for business hotels, and we’re seeing a new crop of these mainstream hotels around the state,” says consultant Guy Trusty, president, Lodging & Hospitality Realty Inc. in Coral Gables. “Much of this demand will be met by projects already on the books, including some developments that will be repositioned.”
On the other hand, hotel condo development has come to a standstill in Miami, Fort Lauderdale, St. Petersburg, Orlando and other tourist-oriented markets. Many purchasers were investors planning to use their units several times a year, rent them to guests through a hotel pool arrangement and benefit from rapid appreciation.
Now, those market conditions have changed, and many developers are looking at turning their projects back into traditional hotels, says Trusty. “Those developers who picked a good hotel site have a fallback position that may allow them to go forward with their plans,” he says. “But the hotel condo projects planned on secondary sites—particularly those launched toward the end of the boom—will find it very tough going.”
One intriguing trend for real estate professionals active in the resort sector: there appears to be no letup in demand for timeshare units. “Buyers today are more cost conscious,” says Trusty, “and a timeshare is much less expensive than a condo hotel unit. Depending on economic trends, there may be a shift toward timeshares in the future.”
Retail: Scaling Back on New Development
A slowdown in the state’s population growth and concerns about high levels of consumer debt are causing retail developers to scale back their plans for new suburban shopping centers and urban mixed-use projects.
“I think we’ll see some of the retail development planned for less mature markets pushed back awaiting the pickup in residential construction,” says Robert Breslau, president of Stiles Retail Group in Fort Lauderdale. “But, there’s still a large amount of new development coming online in 2008.”
But national and regional retailers are still interested in expanding their presence in Florida, according to David Moret, executive vice president of Continental Real Estate Companies in Coral Gables. “They’re being more selective and revisiting their projections, but are still looking for good locations, and there’s not a lot of new supply.”
In built-out markets, retailers can take advantage of ground-floor space in well-situated mixed-use, office and residential buildings, adds Moret. The key is selecting a location with a high level of foot traffic and nearby residents.
“However, a lot of ground-floor space in condo towers is not accessible or has the wrong dimensions,” he adds. “So a lot of that space won’t do as well.”
Repositioning for the Future
During Florida’s residential boom, developers snapped up vacant tracts of office and industrial land for their condominium and town home projects, bidding up prices in the residential sector as well.
Now that the real estate cycle has changed, some of those rezoned parcels are likely to be repositioned for commercial uses, easing supply constraints and providing better balance in many Florida markets.
As Goodkin says, “Commercial developers should see some good residential land that is appropriate for office, retail or industrial development coming to market at reduced prices, and that’s a positive trend for the state.”
Richard Westlund is a Miami-based freelance writer.