Tourism has finally regained some of its momentum, and Tampa, Florida, is now seeing positive signs that leasing activity is picking up. Household Finance recently announced that it was hiring an additional 1,000 employees in Tampa, and the number of tenants currently looking for space has increased during the previous 2 months. Passenger traffic at Tampa International Airport for 2002 is estimated to be comparable to 2001 -- so why the long faces?

Less than 2 years ago, the markets were enjoying a decade of unprecedented growth, a stock market that had produced more millionaires than ever before and unparalleled consumer confidence. With so many recent announcements of major business failures, it seems there are more questions than answers. Most of these questions focus on "Will it get better and how long will it take?" Within the commercial real estate industry, and more specifically office building owners, the focus is on "How and where will I get my next deal?"

New leasing activity has declined dramatically in the last 18 months. Absorption on a national scale was negative 89 million square feet for 2001 and negative 20 million square feet through June of this year. U.S. job growth was 0.4 percent in 2001 and estimated to be a negative 0.6 percent for 2002. Every major U.S. real estate market continues to feel the effects of September 11, and more recently and perhaps more dramatically, the failures of Enron and a few of the major players in the telecom industry. This bad news comes on the heels of the tech wreck and dot-com failures.

So what should landlords do to weather the storm? The first recommendation is to get back to basics. Efforts should be made to establish relationships with every tenant in the building to better understand the company's goals, objectives and real estate needs, with special focus on their local requirements.

Second, creatively determine a way to accommodate these needs, particularly if the end result includes an early renewal of the lease. The opportunity cost of downtime associated with a lost renewal, in addition to the cost to build out the space for the replacement tenant, can be significant.

Third, treat every tenant as your best customer. "It's all about the high service levels," says Ty Spearing, COO of Florida Office Property Company, a Florida-based real estate investment trust (REIT). "When you focus on tenants' needs, you increase your chances of retaining tenants. In this economy, it is our number one goal to have a tenant never want to leave one of our buildings. When you execute this properly, your building will generally maintain its value, creating a win-win situation for the landlord and tenant."

Yogi Berra once said, "It's d?jà vu all over again," a quote that is very apropos to the real estate industry and its ever-fluctuating cycles. Industry veterans have become familiar with down cycles and overbuilt markets. In retrospect, the good news is that the Tampa Bay market was slower to respond to the economic recovery in the 1990s and only delivered 2.6 million square feet of new product during the last 5 years, a 6.6 percent increase from existing inventories. The Tampa market is not so much overbuilt as it is oversupplied based on current demand. While vacancies are not as steep as they were in the mid- to late-1980s, there is a noticeable absence of new tenants in the market, at least until a few months ago, and minimal expansion of existing tenants. This combination has negatively impacted the market and shaken confidence.

Currently, the Bay Area's direct office vacancy rate is 13.5 percent, and 16.2 percent including space available for sublease. In fact, over 20 percent of the available space is classified as sublease space, representing 1.1 million square feet. Within Tampa's central business district (CBD), the vacancy rate has increased 11 percent from 12.2 percent at the end of last year to the current rate of 13.5 percent. This has caused a slight reduction in average quoted rents to $20.07 per square foot.

For the first time in several years, landlords are offering free rent and/or increased tenant improvement allowances to both new tenants and renewals, in addition to offering higher real estate commissions to the tenants' brokers. Returning to a normal economic environment with average annual absorption of approximately 75,000 square feet, the CBD market may take 3 to 4 years to reach equilibrium. However, landlords can take comfort in knowing that the cost for a tenant to relocate can range from $5 to $6 per square foot, a cost most tenants are not willing to incur during these uncertain times.

The suburban office market somewhat parallels the CBD market. The Tampa Bay area's suburban vacancy rate for direct space is 13.8 percent, and 16.7 percent including sublease space. The sublease space represents 21 percent of the total available space, or 940,000 square feet. The suburban vacancy rate has increased by almost 11 percent from the end of last year. This has also caused a slight reduction in average quoted rents to $17.41 per square foot. Returning to previous levels of average annual absorption rates in the 750,000-square-foot range, the suburban markets may take 2 years to reach equilibrium.

Westshore, the Bay area's largest suburban office market, saw its vacancy rate increase to 14.8 percent, a 35 percent increase from the end of 2001. The vacancy rate including sublease space is now 20.5 percent, representing 28 percent of the total available space. With the increase in vacancy rates, the average quoted rate dropped to $19.93 per square foot, a 2 percent reduction from last year. Some landlords are also offering as much as 6 months of free rent to reduce effective rates and/or increased tenant improvement allowances to both new tenants and renewals, in addition to offering higher real estate commissions to the tenants' brokers.

Despite weakening market conditions in the office sector, forecasts call for continued job growth, albeit small (less than 2 percent). The Federal Reserve Bank of Atlanta anticipates that the outlook for 2003 is for "a reasonably quick improvement in Florida's service industry" -- the largest user of office space. Tampa's residential sector is solid with the residential mortgage market now one of the fastest-growing industries and an increasing user of office space. As the state grows -- Florida now ranks third in population -- Tampa's population is also expected to make impressive gains. Tampa is projected to rank 2't nationally in population by 2004 and 15th in total households during the same period. This growth in population will continue to generate more deal activity and positive absorption.

Doug Bartley is senior vice president of Jones Lang LaSalle.


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