CITY HIGHLIGHT, DECEMBER 2008

JACKSONVILLE CITY HIGHLIGHTS
Jeff Graham, James F. Morgan, Brian Moulder and Gary A. Wenzel

Jacksonville Industrial Market

During the third quarter, the Jacksonville industrial market was impacted by the slowing economy and the financial crisis. Deal count, total activity and net absorption were all down, and available space reached a new high. But the real story is in the details.

The Jacksonville distribution market grew to almost 94 million square feet this year; 14.9 million square feet is currently on the market, equating to a 15.8 percent availability rate, the highest level recorded for the Jacksonville industrial market. Only 86 transactions and a net absorption of  25,202 square feet were recorded in the third quarter. Once again, the average size transaction, about 14,580 square feet, far exceeded that of past quarters.

The first, second and third quarters of 2008 all contained several very large deals that saved the overall numbers. In the first quarter, Bridgestone Firestone’s 1 million-square-foot transaction accounted for 86.7 percent of the total net absorption. In the second quarter, Ozburn-Hessey Logistics’ 240,000-square-foot lease came out to 147.9 percent of the total net absorption. Dr. Pepper/Snapple’s third quarter deal for a 600,000-square-foot development by Hillwood accounted for an astonishing 2,385 percent of the net absorption.

Without these transactions, the overall quarter-by-quarter results would have been very different. Without the Dr. Pepper/Snapple deal, the market would have realized a negative net absorption of almost 576,000 square feet in the third quarter, and the overall net absorption for the year would stand at 152,000 square feet in the red. Shockingly, six out of 11 of Jacksonville’s core industrial submarkets recorded negative net absorption during the third quarter.

New development in the market is mostly still in the planning stages. ING Clarion/Trammell Crow Development, ProLogis, Oakmont, Cabot Partners, Hillwood, Liberty Property Trust, Republic Properties and Group IV Development all have projects that have either just gotten underway or are still on the drawing board. The total size of these projects alone comprises about 5 million square feet. Projects that have finished construction include the Majestic International Tradeport and Jackson Shaw’s Creekside project. Taken together, the two projects encompass approximately 800,000 square feet.

Availability in the market is up dramatically, and new construction continues, albeit at a slower pace. The sale of existing industrial product is suffering due to the inability to get financing. These signs all point toward downward pressure on lease rates and sale prices in the times to come.

— Jeff Graham is president of Jacksonville-based King Industrial Realty of Florida/CORFAC International.

Jacksonville Multifamily Market

The city of Jacksonville is driven by a convergence of factors. Its broad and diverse economy and its affordability has made it a top choice for expanding or relocating corporations. However, the recent housing and lending crises has affected the area. Increasing vacancy rates, decreasing employment and fewer property sales indicate a slowdown in the third quarter for the Jacksonville multifamily market. But a few positive indicators have investors taking a closer look.

Volatility in the financial markets has depressed multifamily sales nationwide, and Jacksonville is no exception. According to data provided by Real Capital Analytics, property sales in the first three quarters of 2008 have dropped in volume by more than half compared to the same period in 2007. The average price per unit has fallen from $63,988 to $49,173. Buyers and sellers have yet to agree on a new price level, with bids and offering prices still showing a 15 percent discrepancy. With the lack of financing keeping some buyers out of the market, the level of sellers’ distress is rising. Prices are forecast to continue this downward trend in the near term, as sellers become increasingly motivated, creating opportunities for cash buyers.

Decreased home sales activity began to positively affect net absorption in mid-2008, after six consecutive quarters of negative absorption. Faster supply growth caused vacancy rates to rise to an 11 percent average, and that trend is forecast to continue in 2009. The recent spike in foreclosure activity is driving former homeowners to multifamily communities, but the demand is outpaced by the addition of their foreclosed homes to the rental inventory.

Unemployment in Jacksonville is experiencing an increase. The most affected industries are construction and business services. The financial services sector can be expected to realize increased job losses in the coming year as the consequences of the financial crisis begin to unfold. However, education and health services continue to expand at healthy rates.

The economic impact stemming from the expansion of Jacksonville’s ports has been eagerly anticipated and gives the city an advantage over other suffering markets. The new cargo terminal built by Mitsui O.S.K. Lines is nearing completion. Operations are scheduled to begin in early 2009. In addition, an agreement with Hanjin Shipping Co. has been reached, and is scheduled to be signed this month. Together, the deals are expected to help triple container cargo traffic by 2011. Within the next decade, these expansions could result in 100,000 regional jobs and $6 billion in economic impact. Other Jacksonville growth includes a planned Deutsche Bank operations center that will create 1,000 high-wage jobs, and the commercial development of Cecil Field, which is already attracting new aerospace employers.

Buyers that have been sitting on the sidelines waiting for prices to hit bottom are starting to re-emerge. Creative financing and cash deals are bridging the gap left between buyer needs and seller expectations. As more of these deals close, the bottom of the market appears to get closer. Jacksonville still possesses the unique characteristics that have attracted investors in recent years, and its large, young and transient population still fuels demand for multifamily product.

 — Brian Moulder is an investment advisor with Southeast Apartment Partners’ Jacksonville office.

Jacksonville Office Market

The current state of the Jacksonville office market is full of significant moving parts in ultra slow motion. For the market’s sake, the old adage that time kills deals should be revised to “time provides deal life support.” Current trends in development are cautious new projects favoring redevelopment in favor of new development and maybe a touch of environmentalism.

Vacancy rates have increased to 13.2 percent, which is slightly higher than the second quarter rate of 12.9 percent, and it’s nearly a point and a half higher than the fourth quarter 2007 total. The stage is set for significant blocks of space to be vacated and put back on the market. Vacancies are expected to increase to more than 15 percent. All is not gloom and doom, as the third quarter numbers featured positive absorption of 53,360 square feet. Rental rates are holding firm.

Demonstrating the continued desire for  new Class A product, two developments were  successfully leased in the third quarter. Liberty Property Trust leased 72,000 square feet in the LEED-certified Butler Plaza III to Options One. Flagler Development’s Lakeside Five was delivered at just more than 88 percent occupied. This 142,000-square-foot building is the latest in Flagler’s 601,910-square-foot corporate park. But the market gives and takes away. As Liberty filled Butler Plaza III, multiple Flager sites suffered, resulting in no positive absorption.

The Rockefeller Group Corporate Center at Bartram Park.

One could conclude that speculative office developments have taken a time out. Rockefeller Group Corporate Center at Bartram Park is a Proposed Class A green office park near Race Track Road and Interstate 95. The fundamentals of both Jacksonville and Bartram Springs are excellent, and national interest in the site is encouraging. However, as bullish as we are on the site, it would be premature to suggest that ground will be broken soon.

Jacksonville’s office market and employment will suffer as a result of the recent financial services sector meltdown and consolidations. Citigroup has vacated its 224,000-square-foot corporate campus located in Jacksonville’s Deerwood Center. This property is owned, leased and managed by Colonial Property Trust. Two additional Colonial properties, totaling 258,000 square feet, will be coming back on line when Blue Cross vacates the Nassau and Osborn buildings in Freedom Commerce Center. Blue Cross will occupy its own newly developed properties.

Unannounced but probable job losses and office space reductions exist with the newly formed entities of Merrill Lynch and Bank America, Washington Mutual and J. P. Morgan and Wachovia and Wells Fargo.

The office market’s future may include adaptive reuses of space. When Petrofirm vacated their 30,000-square-foot headquarters building in Fernandina Beach, Nueterra Real Estate converted the office building to a surgical center featuring two fully functional operating rooms with expansion for one more. Currently, a fitness center is being added to the building to complement the surgical and a rehab clinic. The stage may also be set to attract new corporate consolidations to Jacksonville. The city has the space, affordability and favorable tax structures. Talented human resources combined with quality lifestyle make Jacksonville appealing. This fits well with Jacksonville’s economic structure.

— Gary A. Wenzel, is a director with NAI Commercial Jacksonville.

Jacksonville Retail Market

In spite of the economic slowdown and the waves of negative news that have daunted the market, Jacksonville continues to generate new activity in its retail sectors. The Interstate 95 corridor from north Jacksonville to Daytona Beach continues to be a corridor of retail development activity. Several new projects are in the works. River City Marketplace in the Jacksonville Airport development node to the Avenues Walk recently opened, and additional development of Avenues Walk is underway. A Lions Gate center development has been proposed at the intersection of World Golf Village Parkway and Interstate 95. Development on State Route 100 includes Weingarten’s Palm Coast Landing, Kings Pointe and the Wal-Mart Center at Old Kings Road and a Publix center developed by North American Properties.

The notable exception to these Interstate 95 corridor developments is in the Fernandina area, where State Route 200, the primary access point to Amelia Island Plantation and Fernandina Beach, is seeing a lot of retail development. It continues to be the critical travel corridor as well as the spine for expanding residential corridor for growth.

On the investment side, there continues to be gap expectation. While there are rumors of terrific deals in the commercial marketplace, those deal have been hard to find. The expectation from most buyers is that they will find such a deal. Most sellers have equity, have the ability to hold and have fundamentals which they believe are sound enough to ride through the economic storm. This has created a gap in transactional pricing, a gap between expected cap rates versus actual cap rates. Qualified financing is available, but borrowers must show the ability to have solid performance by tenants, have a reliable net worth and have ability to pay what they borrow.

Checking economic fundamentals, the investment volume has clearly declined dramatically. In the first, second and third quarters, pricing per square foot has dropped from in the $180 per square foot range down into the $140 to $150 per square foot range. In addition, newly offered centers are coming on the market for less, and cap rates have risen. It is a time when careful evaluation needs to be given as to the reasons for selling. Are equity, value fundamentals, tax action and performance appropriate so that the gap between the buyer and sellers expectations can be minimized?

On the leasing side, reduction of consumer spending is impacting small businesses and tenants as they consider limiting expansion. Contraction is felt by consumers who have overleveraged via home mortgages, but also from a much larger group of consumers who are cutting back. People who do not yet feel this contraction directly are hearing so much bad news that they have begun to tighten their budgets in anticipation of these troubled times.

Even in the current economic crunch, a few new tenants are entering the Jacksonville area. Fresh Market is currently expanding in Mandarin, and Whole Foods has entered the Mandarin market at the intersection of Old Street and Augustine Road. The Capital Grille, Mitchell’s Fish Market and Cantina Laredo have gone into the second phase of the St. Johns Town Center Expansion. Other stores opening up include True Religion clothing apparel, Luis Vuitton, Michael Kors, Juicy Couture, Coach and Lacoste.

The Jackson Square residential reuse development at Phillips Highway will bring 750 multifamily units, 200,000 square feet of office and 150,000 square feet of retail to the area. Jackson Square has the ability to provide additional retail services and centrally located offices, but there is concern about traffic. Additionally, the Port Authority’s approval of the Hanjin development marks two major international shippers moving into the Jacksonville community. Port expansions bring an exciting level of activity to the entire Jacksonville market area, particularly JAXPORT, the airport and the Interstates 295 and 95 corridors.

In 2008, community centers and neighborhood centers saw a decline in absorption and a rise in vacancy rate. Lease rates appear to have peaked in the second quarter of 2007, and since then, there has been a slight decline of about $0.30 per square foot in the overall market rates. Community centers are averaging just less than $16 per square foot, and neighborhood centers go for $15.25 per square foot.

In Florida, Jacksonville is traditionally one of the last places to be affected by recessions and one of the first to regain economic stability. The city has many areas for development, a solid base of business, recreational rivers, the ocean and a lifestyle sought by many, assets that will ensure the retail market does well in the future.

— James F. Morgan is managing director of Jacksonville-based Sperry Van Ness – Investec Services.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.