SOUTHEAST SNAPSHOT, JUNE 2007

Tampa, Florida Office Market

Tampa’s office market took a bit of a breather in the first quarter of 2007, but overall performance continued to move in a positive direction. The strong upward pressure on rental rates showed no signs of diminishing. The overall average asking rate jumped 3.7 percent in the first 3 months of 2007 and is up 9.5 percent from the same period last year. Strong demand for Class A space led the market in the first quarter with 147,398 square feet of net absorption. New supplies of Class A office product in the coming quarter will provide an additional boost to the market this year.

Restrained new construction kept the direct vacancy rate for Class A buildings in single digits for the third straight quarter. The Class A vacancy level has declined 110 basis points during the past 12 months, ending the first quarter at 9.5 percent. Rental rate growth continues to be steady across the Tampa market, but Class A properties are clearly leading the way. The escalation of rates for premium space in the overall market reached 12 percent over the past 4 quarters, ending this period at $23.96 per square foot. However, the unique fundamentals in each of Tampa’s submarkets have created a varying pattern of Class A rental rate growth. Tampa’s robust Westshore submarket has seen a 12.5 percent annual appreciation in Class A rents which ended this quarter at $28.07 per square foot. The central business district, with Tampa’s largest inventory of Class A space, has sustained more modest yearly growth at 6.2 percent and finished the first quarter averaging $21.43 per square foot. Asking rates are approaching new construction levels in some submarkets, which will temper future increases this year.

The landlord’s reign in Tampa’s Westshore submarket continued in the opening quarter of 2007. With its fourth straight quarter of single-digit vacancy, market rents for Westshore office space moved higher across the board and tenant options, especially for larger blocks, were few. With no major speculative office buildings completed in Westshore in almost 3 years, conditions have tightened considerably and rents have increased to historic highs.

The pent-up demand for Class A space in Westshore bodes well for the new Bay Center office project which is scheduled to deliver its first building this month. Developer Highwoods Properties is finishing this 208,606-square foot speculative office building and, when leasing goals are reached, will start a twin building to complete the project. Westshore’s Class A rental rate average, which leads the Tampa market, took another jump in the first quarter, up 3.1 percent to $28.07 per square foot.

East Tampa’s I-75 corridor submarket has been a magnet for new office development and this quarter its inventory expanded with the completion of two projects. Highwoods Properties delivered a four-story 115,000-square foot build-to-suit office for MetLife at the Highwoods Preserve office park in northeast Tampa. MetLife relocated operations from the Westshore business district and now occupies about 420,000 square feet at Highwoods Preserve. Elsewhere, Duke Realty completed a new three-story 98,597-square foot speculative building at Highland Oaks office park. Building V is 22 percent leased to Countrywide Home Loans and KCI Technologies. Also at Highland Oaks, Duke has completed Building III, a 99,738-square foot speculative building which is 85 percent pre-leased.

New construction is gaining steam in the I-75 corridor this year, but most of the impact will not reach the market until 2008. Liberty Property Trust, Crescent Resources, Duke Realty and Opus South will all start various-sized speculative office projects later this year. The pipeline currently totals almost 450,000 square feet for 2008 with about one-half of this amount scheduled for delivery in the first quarter.

The main growth drivers for the Tampa office market are professional and business services along with education and health services, and their long-term outlook is bright. The latest US Census Bureau projections for Hillsborough County through the year 2014 estimates employment growth of 2.24 percent overall and professional services at a robust 4.12 percent annually. In April, Coca-Cola Enterprises Inc. announced plans to add 200 financial service jobs to its Shared Services complex in east Tampa by the end of 2007. The employment expansion will require $2 million in local capital investment and will increase employment in the office facility to 1,000 workers.

Additional new construction deliveries are on the horizon for Tampa, but the supply gains appear modest for this year. For 2007, approximately 900,000 square feet of new office product is projected to deliver in Tampa, with 42 percent of the space already committed. Absorption will outpace new supply this year, but the fall off in vacancy will be more moderate, in contrast to the dramatic declines of the past 2 years. Rental rate growth will continue its upward trend, but gains will fail to match the strong pace of 2006.

— Randy Smith is director of research for GVA Advantis in Tampa, Florida.


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