SOUTHEAST SNAPSHOT, MAY 2008

Jacksonville Office Market

Jacksonville has experienced slow growth in the office market due to the subprime mortgage crisis, the uncertainty of an election year and high energy prices resulting in a decline in the consumer confidence index to a 5-year low. Like many other areas of the country, these economic forces have served to slow the absorption of office space in Jacksonville. However, the city is still very attractive to many companies and growth is projected to continue, although at a slower rate than recent years. Recent announcements by shipping companies Hanjin Shipping Company and Mitsui & Co. to use the port of Jacksonville have sparked record-breaking absorption and development in the industrial market, and this will have a positive ripple effect on the office sector.

Jacksonville has the largest landmass of any city in the continental United States, boasting 834 square miles. With a consolidated city/county government, regulatory decisions are streamlined, resulting in a favorable business climate for many industries. Duval along with Nassau, Clay and St. Johns counties make up the MSA of Jacksonville with approximately 1.4 million people. The major economic drivers in the city are finance, insurance, back office functions, a large military presence and increasingly our port and shipping facilities.

The office market contains 53 million square feet of office space. The largest office markets are downtown with 15.5 million square feet, the Butler/Baymeadows suburban market is 12 million square feet and the Southside market has more than 9.6 million square feet. The overall vacancy rates average 12.3 percent, up from 11.7 percent last quarter for all markets. Rental rates range from a low average of $14.94 per square foot in Northwest Jacksonville, to a high of $24.94 at the beaches. The average CBD rental rates are $19.02 per square foot for all classes and $18.94 per square foot for all classes in the suburbs. This is a decrease in rental rates of approximately .6 percent from the fourth quarter of last year.

Jacksonville’s growth is primarily in the southeast quadrant of the city, capturing more than 700,000 square feet of the 1.1 million square feet under construction at the year’s end. As of the first quarter, this area continues to account for the majority of new construction. An area of significant growth is Flagler Center, located at Interstate 95 and Old St. Augustine Road. Citigroup has constructed a 750,000-square-foot campus and Baptist Hospital built a satellite hospital in this rapidly growing area. Easy interstate highway access to south Jacksonville and the bedroom communities of St. Johns County and Orange Park has also caused this area to grow. Recently, completed leases in this center include Website Pros’ 112,306-square-foot lease and Kemper, a Unitrin business, which has leased 124,859 square feet. The first speculative building in the Lakeside development at Flagler Center was completed in early 2005 and was 112,000 square feet. Flagler Center has an overall occupancy rate of 93 percent. “This June we will deliver the fifth and final building in the Lakeside phase, bringing the combined total to approximately 600,000 square feet,” says Ross Carrier, senior director of leasing at Flagler Development Group. “We have seen an increased number of companies looking to move further south, closer to where the residential growth has taken place in recent years. We are currently in design on our next phase of development, Colonnade I and II, which will total in excess of 300,000 square feet. In addition to demand for speculative office building, we continue to receive build-to-suit inquiries.” 

Liberty Property Trust is also cautiously optimistic and nearing completion of its 79,955-square-foot Class A building in the Butler/Baymeadows corridor. “It is the first speculative building seeking LEED-Silver certification as a green building,” says Mike Heise, vice president of Liberty Property Trust. Liberty is asking $22.50 full service for space. The project will complete the 240,000-square-foot, three-building complex of Butler Plaza on the corner of J Turner Butler Boulevard and I-95. Several others developers have proposed projects slated for delivery in 2010. However, developers have been cautious and slowed development of new buildings to allow for absorption of existing inventory. The increase of sublease space from the mortgage industry fallout and residential developers and several large blocks of space returned to the market, has caused competition for quality tenants to increase. This has led to landlords offering additional incentives.

With the economy slated to recover next year, Jacksonville will continue to grow at a moderate pace in the suburban markets, and these new projects will be available to coincide with a rebounding economy. Flagler Development is optimistic. The company purchased 54 developable acres in the Town of Nocatee last December. Located in Duval County, the site fronts the Nocatee Parkway and can be developed into 675,000 square feet of office space, which will be comprised of multiple buildings. The first speculative office building is anticipated late 2009 or early 2010. Also, activity in Freedom Commerce Center has increased recently with several prospective tenants looking for 30,000 to 60,000 square feet, according to Victor Hughes, vice president of leasing with Colonial Properties.

— Scott Hanigan is senior director for NAI Commerical Jacksonville in Jacksonville, Florida.

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