COVER STORY, MARCH 2011

TAMPA CITY HIGHLIGHTS
Jeff Dupell, Paul W. Carr, Dale Peterson, Brian P. Rettig, Patrick Dufour

Tampa Retail Market

Take a market that already has an abundant supply of retail space, add four Borders that were recently announced as closing, and you have a situation where, at least for the short term, there is a surplus of retail real estate. Such is the case along the southwest coast of Florida. The result of this accumulation of space is a slowdown in new construction until demand catches up with supply, a trend that will likely continue for at least another year.  At the present time, only 350,000 square feet of retail space is under construction within the metro area.

The good news is that if history repeats itself, there should be no problem filling these empty Borders spaces. Approximately one year ago, Circuit City and Linens ‘n Things announced their bankruptcies and subsequent store closures. Retailers that were either desirous of entering markets that were formerly unavailable or relocating from their existing stores into superior locations within the same market were quick to seize these new opportunities.

Borders plans to close 200 stores across the country, 16 of which are in Florida. Four of these stores are located in metropolitan Tampa Bay in prominent locations within the hearts of their trade areas. As such, a flurry of activity is expected among retailers interested in these highly coveted boxes.

South Tampa is the most densely populated, highest income area in the Tampa Bay MSA. The Borders location serving this market is located just south of the intersection of Dale Mabry and Interstate 275, corridors carrying traffic counts of 66,000 and 150,000 vehicles per day, respectively. The affluent customers traveling north to upscale shopping destinations such as Westshore Plaza and International Mall pass this soon-to-be vacated Borders store, making it an extremely desirable location for many retailers.

Opportunities such as these are welcome news to the retail real estate industry as it makes its way out of the very difficult economic conditions of the past few years. Tenants looking to expand in the Tampa area include Performance Bikes, hhgregg, Academy Sports, Hobby Lobby, buybuy BABY, Ross Dress For Less, Dick’s Sporting Goods and the full spectrum of grocery retailers from discount to high-end.

The Tampa Bay market appears to be stabilizing with vacancy rates holding firm at approximately 9.5 percent and a positive net absorption of 322,000 square feet in the fourth quarter of 2011. Meanwhile, average asking net rents, which in 2008 were $16.50 per square foot, are now at $14.71 per square foot, down by 12.5 percent, with negotiated rents falling between 10 to 20 percent below asking rates.

Single-tenant buildings with strong credit leases along with well located, grocery store-anchored neighborhood centers remain the investment sales assets of choice. Publix-anchored shopping centers in good locations are typically trading at approximately 8 percent cap rates, down about 50 basis points from this time last year.  As the CMBS market continues to recover, the volume of investment sales is predicted to double in 2011, another positive sign of recovery.

—  Jack Dupell is with The Shopping Center Group in Tampa, Florida.

Tampa Office Market

The health of the Tampa Bay office market has been predominantly tied to its strength, demand and growth in services, particularly in the financial, retail and real estate industries. Like most of Florida, Tampa’s recent heavy reliance on the real estate and construction industries caused it to be substantially impacted by the global housing slump and economic downturn.

While there have been positive strides made in the healthcare, government and technology sectors of the office market, the overall success of Tampa’s office market hinges on employment growth in those industries that have been hit the hardest in recent years. Without meaningful job growth, the office market will not be able to record the positive space absorption necessary to decrease the existing supply of vacant space, which currently stands at just over 22 percent as of the end of 2010. There are several positive trends that started to take place in Tampa’s office market during 2010, despite the fact that market fundamentals continued to deteriorate slightly.

Sixteen office sales in excess of $3 million (a total of approximately $277.17 million) occurred during the year in the Tampa Bay area. Fountain Square I & III, two Class A office buildings in Westshore that were 100-percent leased to JPMorgan Chase on a long-term, net-lease basis, were acquired by W.P. Carey & Company for $57.2 million, or approximately $183 per square foot, resulting in a cap rate of approximately 7 percent. City Center, a 242,115-square-foot, Class A office building in downtown St. Petersburg, was acquired by a private equity fund led by Feldman Equities and Tower Realty for $16.5 million. Independence Park, a 43.81-acre, multi-building development site in Westshore, which included an existing 116,723-square-foot Class A office building, was sold by Wells Fargo to Highwoods Properties for $12 million.

While 2010 sales activity was not considered robust and was still substantially down from the peak in 2007, the number of office sales during 2010 more than doubled, with total sales volume up approximately 159 percent over 2009 levels. A key difference from 2009 was that the previously frozen credit markets started to thaw, and lenders that had previously been out of the market all together or on the sidelines returned with money for select commercial properties. Coming off record-low sales volume in 2009, there was mounting frustration and pressure to deploy equity capital. This sizeable increase over 2009 levels confirms that a recovery is under way, providing good positive momentum for 2011. This investment momentum is built on investors and sellers bridging the pricing gap, a low interest rate environment, an appreciable improvement in credit availability and the hope for near-term improvement in property fundamentals.

The outlook for Tampa’s office market in 2011 is we will likely see a slight improvement in office market fundamentals, as job growth slowly begins to return to the region. Investment sales volume, particularly in the suburban office markets, will continue to increase as investors remain attracted to healthy risk-adjusted returns that can be further juiced through positive leverage

— Paul W. Carr is a senior associate and a member of the Tampa Investment Properties Group of CB Richard Ellis. Dale Peterson is a senior vice president with CB Ricahrd Ellis.

Tampa Industrial Market

Tampa Bay’s industrial market started 2010 with two unique user purchases, saw leasing activity that was fairly flat throughout the year, experienced a lesser amount of negative net absorption than the prior 2 years, and finished off the year with several high profile investment sales. All in all, 2010 marked a year where Tampa Bay’s industrial market began a slow climb out from the bottom of the cycle. In retrospect, we have shaken off the effects of the body blows taken during 2008 and 2009, and our legs are less wobbly.

The region’s industrial market consists of 221.3 million square feet and includes Tampa, St. Petersburg, Clearwater, Lakeland, Plant City, Bradenton and Sarasota. The population base of the region exceeds 3 million people when these communities are taken into account. Plant City experienced two unique sales in January. The first was Albertson’s sale of its 1.01 million-square-foot warehouse to Gordon Food Service (GFS). The  more than $30 million purchase allowed GFS to expand its footprint in Florida while Albertson’s leased back space in the facility to serve its remaining Florida grocery stores. Based on square footage, it was the largest sale of a single-user industrial building in Florida in the past decade. The second unique sale was Wells Fargo’s REO disposition of the 333,000-square-foot GAE Extrusions building in Plant City for $5.86 per square foot. This represented one of the few distressed sales seen in the market in 2010. Tampa Bay is similar to the national industrial property market in that there are a limited number of troubled assets. According to Real Capital Analytics, the industrial sector is the smallest piece of the pie, representing only 5.7 percent of troubled assets.

Last year was not robust with new leasing activity, but landlords made a concerted effort to retain existing tenants. Renewals were the name of the game. Activity in this segment along with users not shedding space and some select growth resulted in year-end negative net absorption of 329,055 square feet. This was an improvement from 2009’s negative 2.5 million and 2008’s negative 3 million square feet. Vacancy in the region finished off the year at 12 percent, though the Lakeland and East Tampa submarkets were two of the tightest at 8.5 percent and 9.7 percent, respectively. One of the more notable lease transactions during 2010 was steel distributor TA Chen’s 140,000-square-foot, 10-year deal in Lakeland’s First Park @ Bridgewater. This marked the first lease signed since the 400,000-square-foot, state-of-the art warehouse was delivered in 2007. Another new lease was Dealer Tire’s takedown of 87,500 square feet for 3 years at ING’s Madison Industrial Park in East Tampa.

There has traditionally been strong demand for income-producing industrial property in Tampa Bay. The challenge for buyers has been the limited amount of supply that has come to market. A partial reason for the limited supply is that much of the institutional-grade product has been controlled by REITs that had a long-term hold mentality. Therefore, it was a unique opportunity for Blackstone Real Estate Advisors when it was able to pick up 1.49 million square feet of space locally from ProLogis as part of a larger 23.2 million-square-foot portfolio acquisition. Public records show a November 29  purchase price of $63.84 million ($42.82 per square foot) for assets located in the East Tampa, Airport and Lakeland submarkets. Blackstone further added to their presence with a 4 million-square-foot  portfolio purchase from Exeter in December that included the 291,560-square-foot Region Center in Lakeland, which was acquired for $48.36 per square foot. Another year-end investment sale was Trident Capital Group’s $7.5 million purchase of a 175,000-square-foot East Tampa bottling facility occupied by Cott Beverage that has a long-term lease in place.

This year has seen a continuation of investment sale activity as evidenced by Dividend Capital/Industrial Income Trust’s February 1 purchase of a 147,000-square-foot warehouse from IDI. The East Tampa building at Madison Business Park has a long-term, full-building lease in place with American Tire Distributors and sold for $10.65 million ($72.45  per square foot), which represented an 8.2 percent cap rate.

On the leasing side of the equation, we do not foresee a major recovery in 2011 but do anticipate an uptick in activity towards the second half of 2011. As the existing supply of larger corporate-grade warehouse spaces gets leased, options will become more limited for those users needing 200,000 square feet or more of high quality space. Therefore, we anticipate that build-to-suit activity will gain momentum in later 2011 and heading into 2012.

— Brian P. Rettig, SIOR, is a first vice president with CB Richard Ellis in Tampa.

Tampa Multifamily Market

Recovery is under way for the multifamily market in Tampa. Market fundamentals are improving and significant capital sources are returning to the market to take advantage of historically low interest rates and near-term anticipated rent increases. With the sharp increase in buyer demand and the shoring up of property performance, cap rates have compressed dramatically and asset values have appreciated.

 After bottoming out in late 2009, Tampa’s apartment market rebounded in 2010. Occupancy increased nearly 300 basis points over the past year and the market has experienced four consecutive quarters of effective rent growth. Effective rents increased almost 2.5 percent in 2010 with even stronger rent growth of 4.6 percent projected for 2011. As a result of this positive trend, buyer underwriting has fundamentally changed from trailing income to anticipated revenue increases reflected in pro forma underwriting.

 With the market recovery under way, we are seeing an increasing number of capital sources returning to the market. The substantial amount of capital allocated for multifamily today is creating significant buyer competition for well-located, quality assets. We are seeing an increase in the number of qualified offers on our recent listings and have been successful in pushing pricing upwards of 10 percent by creating a very competitive environment through our best and final bid process.

Although deal flow increased through the second half of 2010, the amount of product available for sale is not keeping up with the sharp increase in buyer demand. Furthermore, we have not seen the increase in product at the first of the year that many buyers were counting on. Subsequently, cap rates have remained low despite moderate increases in interest rates.

Interest rates remain at historically low levels. A leveraged buyer can obtain 7-year, fixed rate financing at approximately 5.25 percent with up to 80 percent leverage from the agencies. Life insurance companies are beginning to lend again with rates as low as 4.5 percent for quality, stabilized assets with leverage in the 60-percent range. Although rates have begun to increase over the past few months, historically low interest rates continue to motivate buyers to lock in long-term financing before near-term anticipated rate increases take effect.

The current tone throughout the multifamily industry is one of strong optimism over near-term performance increases. New supply is down to one-third of historical levels throughout most major markets including Tampa. Renter demand is beginning to increase dramatically through decreases in the homeownership rate, echo boomers are entering prime renting years at a pace of approximately four million college graduates per year, and moderate job growth is occurring, continuing the economic recovery.

Continued investment from institutional capital sources and increased allocation to multifamily, relative to other product types, should continue to provide significant demand for multifamily investment product over the near term. With property performance already on the rise, improving economic conditions, demographic shifts towards rentals, and limited new supply, the Tampa multifamily market is poised for a strong recovery.

— Patrick Dufour is a vice president with the Tampa office of ARA.

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