CITY HIGHLIGHT, MARCH 2006

TAMPA CITY HIGHLIGHTS
Gregory L. Morgan, Marnie Connor, J. Patrick Duffy, Clay Witherspoon

Office Market

Tampa's impressive job growth and expanding population, along with improving office fundamentals, are compelling both private and institutional investors to make big plays in the office market. The volume of investment sales of office properties more than doubled in 2005 to $1.1 billion from roughly $475 million in 2004, according to Real Capital Analytics Inc.

On average, office properties sold for $124 per square foot and traded at a cap rate of 7 percent, according to Real Capital Analytics. These numbers represent a 3-year high price per square foot and an all-time low cap rate. Investor activity was evenly split between private and institutional buyers. TIAA-CREF, for example, purchased Urban Centre I & II for $105.6 million or $192 per square foot, while Carter & Associates dropped nearly $70 million on Corporate Center One.

Although Moody's Investors Service shows Tampa as tied for Number 6 in the top 10 commercial real estate markets in the Unites States, it's unlikely that the investment velocity can continue at this frenzied pace. However, strong absorption and solid rental rate growth can tempt even the most reluctant investors.  

Unlike other Florida markets, Tampa boasts an affordable office inventory that attracts call centers and back-office operations rather than major corporate headquarters. Many existing corporate users are expanding in the metro area. Met Life Inc., for example, leased 60,800 square feet at Highwoods Preserve in addition to acquiring two buildings totaling 240,000 square feet on the campus for $24.5 million. The company wants to tear down the older buildings in Westshore where it is currently located and redevelop the site with new offices, residential space and retail stores.

As companies grow, Tampa has enjoyed strong employment gains. Last year, the city achieved job growth of 1.6 percent, and is expected to add more than 66,000 jobs this year, a whopping 5 percent gain, according to Economy.com.

Tampa's office market was 11.8 percent vacant at the end of 2005, a 4.6 percent improvement over the 16.4 percent vacancy at the end of 2004, according to REIS Inc. The research firm expects vacancy to dip to 10.5 percent at the end of this year after absorbing roughly 760,000 square feet.

During 2005, the office market absorbed 1.1 million square feet of office space, the largest takedown since 2001, according to REIS. During the same period, rental rates increased 3 percent to an average of $17.78 per square foot — an improvement over the miniscule 0.3 percent gain in 2004. REIS expects rental rates to increase 3.3 percent this year.

The North Tampa and Westshore submarkets are the healthiest in the metro area. North Tampa, for example, had a vacancy rate of 6.7 percent at the end of 2005 and experienced 3.8 percent rental growth for the year, according to REIS. Westshore had a vacancy rate of 9.1 percent at year-end 2005, and REIS expects that rate to drop to 7.8 percent by the end of this year.

The tight office market has convinced office developers to start moving dirt again. Although just 295,000 square feet of office product came online in 2005, another 800,000 square feet is proposed and in the pipeline, according to REIS. One of the biggest projects is Highwoods Properties' Bay Center, comprising two seven-story office buildings totaling 205,000 square feet. The buildings will sit right on the mainland near Howard Franklin Bridge and will offer water views of Tampa Bay.

— Gregory L. Morgan is president of Tampa-based Morgan Realty Advisors.

Multifamily Market

With the promise of increasing occupancy and robust rental rate growth, the Tampa apartment market definitely favors landlords rather than renters. Even after almost 2 years of improving market fundamentals, the Tampa apartment market will likely become even tighter this year as condo converters circle the existing apartment inventory like vultures and little, if any, new apartment product is brought online.

Apartment developers can't compete with the prices that condo and townhome developers are willing to pay for land, and apartment investors can't match condo converters' prices. CKT Development, for example, nabbed the last piece of undeveloped land on Harbour Island and is developing ParkCrest at Harbour Island, an eight-story, 336-unit condominium project.

Some apartment complexes are even being demolished to make way for new single-family and condo residences. The 624-unit Georgetown Apartments, for example, was acquired by Fort Lauderdale, Florida-based Motta Group for $125 million or $219,000 per unit. The new owner plans to replace the complex with a master-planned community.  

More than 85 percent of the apartment deals that closed in Tampa in 2005 were sold to private investors, according to Real Capital Analytics Inc., and most of the buyers were condo converters. Even large apartment REITs are selling off their properties to condo converters — at very high prices. Garden-style properties in Tampa traded at an average cap rate of 5.3 percent for $119,000 per unit, while high-rise complexes traded at an average cap rate of 5.6 percent for $142,000 per unit, according to Real Capital Analytics.

Last year, more than 7 percent of Tampa's existing apartment stock was purchased for condo conversion — roughly 10,000 units — and just 859 apartment units were added to the market, significantly less than the 2,600 units added in 2004, according to REIS Inc. Most of the condo conversions have occurred in Harbour Island and downtown Tampa, but other parts of the metro area are beginning to show signs of increased conversion activity.

Moreover, downtown Tampa has several condo projects under development, even though the city's core has never been a top place to live. Donald Trump is building a 52-story, 190-unit luxury condominium tower overlooking downtown and the bay. Dubbed Trump Tower Tampa, the project will be downtown's tallest building.

The condo craze, which started in 2003, isn't expected to slow down either — regardless of rising interest rates. As single-family homes prices have increased 70 percent over the past 5 years to a median price of $234,000, condo living has become increasingly attractive to Tampa residents — most of which are employed in lower paying sectors such as services, trade and tourism. The average household income for Tampa is $79,321, according to Economy.com.

Tampa residents who can't afford home ownership or who prefer to rent don't have as many housing options as they did previously. The city's market-wide vacancy rate was 5.1 percent at the end of 2005, down from 6.2 percent in 2004, according to REIS. Rental rates increased 3.1 percent during 2005, slightly less than 2004's 3.7 percent increase.

Industry experts are predicting that continued conversions, coupled with high construction costs and a dearth of developable land, will keep Tampa's apartment inventory full. Vacancies are expected to drop below 5 percent with rental rates growing more than 4 percent this year.

— Marnie Connor is a senior advisor with Maitland, Florida-based Sperry Van Ness – IRG/Commercial.

Retail Market

The retail activity in Tampa Bay is driven in large part by population increases of more than 36,000 residents per year. Residential developers are opening new markets and retailers are eager to establish their position in these new markets.   For the shopping center market, rising construction will result in the delivery of more than 900,000 square feet of new space between late 2005 and the second quarter of 2006; this is the second-largest single-year total delivered since 1991. Projects that have been announced will more than double this amount by year's end.

Net absorption has been strong. Well-anchored, well-located centers are operating at or near 100 percent in most submarkets with only minimal turnover vacancy. The bulk of the vacancy is predominantly located in second- and third-tier locations or with failed anchors (including Kmart, Winn-Dixie, Albertsons) or in new projects that have not completed their initial lease-up. Retailer interest is extremely high and we expect vacancies in the better product to remain in the 2 to 3 percent range.

Price growth has been consistently positive for more than a decade. As of fourth quarter 2005, average rates in Tampa Bay were reported at $14.40 per square foot. Rental rates for new inline and street-front retail range from $25 to $32 per square foot, and triple net. CAM charges range from $4 to $8 per square foot.

Land prices for larger scale retail development range from $3 per square foot to $12 per square foot depending on positioning and size of the land. Low cap rates have driven the development community toward a strong preference for ground leases on outparcels with lease costs ranging from $70,000 to upwards of $210,000 per year depending on the size and synergy of the shopping center development.

The “New Tampa” market, located near Wesley Chapel, has approximately 6 million square feet of retail planned.

The Clearwater/St. Petersburg market remains tight as Pinellas County has little raw land available. Pinellas County lays claim to the highest population density (per square mile) in the state of Florida. Redevelopments dominate the new retail projects coming online. The Shoppes of Park Place, a recently completed redevelopment of the Parkside Mall in Pinellas County, has opened with a new Target and other national retailers.

— J. Patrick Duffy, MCR, is president of Colliers Arnold.

Industrial Market

The boom in residential real estate across the Tampa Bay area has had a serious impact on the region's industrial market. Land that might have helped meet rising demand for bulk warehouse space instead is being snapped up for residential communities. Consequently, net industrial absorption, which hit a record level of more than 4 million square feet in 2005, will fall dramatically this year due to a lack of available product and land for new development.

Conversely, demand for existing product should strengthen significantly, especially in the already tight Interstate 75 corridor (East Tampa) and Airport submarkets, the region's hottest industrial areas. The current vacancy rates in these submarkets are about 6 percent but likely will drop throughout 2006. In the I-75 corridor, current rental rates for existing Class A and B bulk warehouse product are $3.50 to $4 per square foot but are expected to climb 50 cents to $1 in the second quarter of 2006 and beyond. Rates for new product could rise to between $5 and $5.50 from $4.25 to $4.50, due to higher land and construction costs. The Airport submarket has Class A and B warehouse rates of $6 to $6.75 per square foot, with new construction looking for $6.75 to $7.50.

Few substantial spec industrial development projects are underway in the Tampa market, suggesting demand will continue strengthening. New industrial space in the near term will be contingent upon five major projects — two in the Airport submarket and three within the I-75 corridor — totaling approximately 1.3 million square feet. Duke Realty is building 250,000 square feet of warehouse space in the Airport area. Pembroke, a private developer from New York, is readying 75,000 square feet of new warehouse space in the Airport area. East Group's Oak Creek project will deliver 100,000 square feet in the I-75 corridor.

Trammell Crow Company expects to bring more than 850,000 square feet of industrial spec space to the East Tampa market by early 2007 with its 156,000-square-foot Port Ybor Building II and Phase One at Madison Industrial Park, both of which will launch this year. The company recently closed on 68 acres and plans to deliver 700,000 square feet of bulk distribution space in two Madison Industrial Park buildings.

Expect demand for industrial space to remain incredibly strong throughout 2006. However, with virtually no place to go in the short term, net absorption will struggle during the remainder of the year and most likely will drop to roughly half of 2005's record level. With new industrial space at a premium, several major national developers, including Panattoni and IDI, have taken land positions in East Tampa and are expected to unveil projects in the near future, which may ease market pressures somewhat.

— Clay Witherspoon is a vice president with the Tampa office of Trammell Crow Company.

©2006 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.