The Trends in Commercial Real Estate

Lewis M. Goodkin | 8/1/2007

Rising Rents

With property taxes, insurance premiums and energy costs all on the rise, rental rates are increasing at unprecedented levels throughout central Florida, says Larry Richey, senior managing director of Cushman & Wakefield in Tampa and central Florida.

[Photo: Daniel Portnoy]

“We all have to adjust our thinking,” he says, “because Florida is no longer a low-cost market in terms of office space.”

Clearly, office tenants are basing location decisions on costs.

“Operating expenses have gotten so significant that a certain percentage of businesses will make decisions to relocate their offices and mitigate the costs,” says Edgar Jones, vice president and Florida regional development officer of Rockefeller Group Development in Miami. “That might mean tenants moving from downtown to the suburbs or even relocating to lower-cost regions like northern Florida.”

Lower Return Expectations

Just as Florida school districts have miscalculated future student enrollments based on residential activity because of a high level of speculation, developers may well be overestimating demand for office space because of overly optimistic forecasts of residential and hotel/condo activity.

[Photo: Daniel Portnoy]

Nevertheless, many investors, including pension funds and real estate trusts continue to snap up Florida office properties, pushing up prices and lowering potential return, at least when measured by capitalization rates (an indicator of the current value of a property’s future income stream). Those rates for Florida office properties, traditionally 8% to 10%, have fallen to 5% to 6%, reducing buyers’ return expectations.

However, says Cushman & Wakefield’s Larry Richey, most investors are not basing their purchases on “cap rate” methodology when buying office buildings. “Rather than profit from ownership,” says Richey, “they are now planning to make their profits when they sell. It’s the exit strategy that counts.”

Tags: North Central, Housing/Construction