COVER STORY, JUNE 2010

CBD OFFICE ACTIVITY
The dust is settling and players are cautiously re-entering the game across the Southeast CBD office markets.
Jon Ross and Coleman Wood

Central business districts (CBD) around the Southeast don’t conform to a specific set of criteria  — after all, every market is different — but there are a few certainties around the region. Landlords everywhere have had a tough time keeping tenants in office buildings. Also, office development in some of the bigger districts is virtually unheard regardless of the recession for the simple fact that most CBDs have already built out. 

While this may paint a bleak tableau, brokers in a few key cities around the region have seen increased activity and other signs of life. It could be wishful thinking, but we could actually be seeing the recessionary clouds clearing. 

ORLANDO

For the Orlando CBD to experience a turnaround, the submarket’s 20 percent vacancy rate needs to fall down to a manageable level. Transaction velocity is increasing, says Paul Partyka of NAI Realvest, but rental rates are still at least half of what they were at the high point.

“You have a lot of vacancies that you have to suck up. It’s not going to turn itself around tomorrow or 3 months or 6 months from now,” he says. “It’s got to be sucked up gradually over the next year or two until we’re back to normal. And then, it’s not really normal; it just starts coming back. Coming back to normal might be 3 or 4 years from now.”

To accomplish this feat, landlords have been aggressively attacking tenant deals in order to gain more clients and keep existing residents in buildings. These landlord concessions, when added to a large amount of office vacancies, add up to good deals for tenants.

“You will not see another time like this for, who knows, maybe a generation after this,” he says. “This will last for another year or two.”

Landlords will certainly get some help with the addition of a new basketball arena — also the host of the NBA All Star Game in 2012 —  that has renewed interest in the CBD, especially since the old area was located in the city’s periphery. The mass transportation system also is expanding, and the addition of new rail lines will have a profound effect on the district.  

Even with all this movement, business is still slow. Development, of course, hasn’t been a factor in a while, and tenants are waiting until the last moment to make deals.

“It’s a critical time over the next year,” Partyka says, “and everyone needs to hang in there.”

LOUISVILLE

Phil Sheer of Commercial Kentucky compares the area’s CBD to a 10-year locust. In 1972, developers brought three Class A office buildings to the downtown area; 10 years later, construction wrapped on the city’s two Galleria office buildings. Finally, in 1992, the ribbon was cut on the 1.6-million-square-foot Agon Center, which was developed with a bit of Class B space. In the ‘70s and ‘80s, the vacancy brought on with the construction was absorbed, but Agon Center took longer to fill.

“[W]e’ve been slowly but surely whittling away at that overall vacancy since 1992,” Scheer says of Agon Center, but quickly points out that the city’s overall vacancy rate is down in the 12 percent range. “ I find that extraordinary compared to other cities. We enjoy one of the lowest rates in the country.”

That vacancy rate has Scheer and other brokers feeling good about Louisville’s CBD. Financing is stable enough and, if not for the capital markets meltdown, development in Louisville might actually be moving along. However, no amount of good commercial real estate feelings can make up for a lack of lender confidence, especially when talking about speculative properties.

“It’s very difficult to encourage a lender to finance a speculative project in this kind of environment, so the projects that had been tossed around here may have some difficulty getting out of the ground,” he says. “That can change, but it’s going to require a sea change in lender attitude toward speculative construction.”

As reported in the May issue of Southeast Real Estate Business, a lot of hype in Louisville is surrounding the new basketball arena, which sits within the CBD. Just like the Orlando market, Louisville will benefit from having this showpiece, which will attract new tenants to downtown. 

“The arena has created an awful lot of hype and has redirected a lot of attention to the energy and vitality of our downtown,” he says. “The activity that the arena will bring and the opportunities for entertainment venues probably suggests that if financing improves, we’ll see some further renovation of some of the historic properties along Main Street.”

If new tenants are encouraged by this activity to make a downtown move, they’ll most likely find an area that’s vacancy-wise a little tight, Scheer says. There aren’t many distressed properties in the area, and the amount of rundown properties is negligible.  

“By and large, we’re doing very well,” Scheer says, “and I think most of our landlords are happy to be where they are today.”

TAMPA

A big trend in Tampa is lease restructuring. Activity in the first quarter of 2010 is busier than it was last year, mainly due to tenants seeking renewals. “They’re getting concessions and extending terms,” says Russ Sampson of Studley’s Tampa office. “You have some musical chairs going on — Tenant A moving to Building B because Building B is a lot more aggressive.”

Sampson believes that the market has hit bottom, and now some tenants are testing the waters. There is still some hesitancy to make long-term decisions overall, but some tenants are taking advantage of the favorable market to do just that.

“The last time I saw this type of aggressiveness was obviously in the early ‘90s,” Sampson says. “They would just give the space away back then.”

 The eventual recovery of Tampa’s CBD is going to depend on a variety of factors. The first one, the high cost of doing business downtown, has been alleviated, in part, , by the recession, which has hit the state of Florida relatively hard.

“Tampa is now a low-cost alternative again. Whereas, back in 2006 and 2007, we lost that title,” Sampson says. “We [were] an expensive place to do business: housing was expensive, labor became more expensive, and real estate became more expensive.”

Another factor is that office users need to be lured back downtown—a market that hasn’t seen a new office building constructed since 1993.  “There’s been a lot of construction down there, but it’s been convention centers, arenas and multifamily condos,” Sampson says.

Many tenants prefer to stay out of downtown unless they absolutely have to be located there. A place like Westshore Business District, located 5 miles away, is able to lure these tenants due to things like free parking, which is rare in the CBD.

In the next 12 months, Sampson predicts marginal job growth, which will help steer the market in the right direction. The tenant’s market will also continue, and absorption will creep into positive territory.

WASHINGTON, D.C.

The general sense in Washington, D.C.’s office market, much like the other markets looked at, is that the dust is settling and people are emerging back onto the field.

“Velocity, in terms of sales, has definitely picked up,” says Josh Feldman, and office and retail investment specialist with Marcus & Millichap’s D.C. office. “We’re on pace, at this point in 2010, to see an increase in the number of transactions of approximately 33 percent more than we saw last year. People are definitely getting off the sidelines.”

Those back in the game, however, are taking a conservative approach. “It’s a back-to-fundamentals market,” says David Feldman, regional manager for Marcus & Millichap’s D.C. office.

The leasing market is also starting to pick up. “We are seeing a pretty decent number of new leases being signed now—substantially more than we were seeing last year,” Josh says. “That trend will continue to increase as employers are more comfortable with the environment and feel more comfortable spending money.” It also helps that D.C.’s stable tenant base of government agencies has kept the recession from hitting the market too hard.

While there is still a debt issue that will be resolved, the D.C. market’s increased transaction velocity is a positive sign. While opinions about when the market will completely rebound vary, there is consensus agreement that the worst is behind of us.

“Everyone is being cautious, which is not necessarily a bad thing,” Josh says.

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