Adds Stephen Bittel, president of Terranova, a Miami real estate firm: "Money, money, money is driving all the sectors. There is a greater availability of low cost, non-recourse capital for the real estate industry than any time in history."
Unlike the massive overbuilding of the mid 1980s - which was followed by a decade-long period with little new construction - the current building activity is still geared toward meeting market demand for new space. "Employment growth will continue, interest rates are stable, and other economic indicators show that U.S. industry is still doing well," says White. "That translates into a need for space. Now, the markets in Florida are working to accommodate that pent-up demand, especially in suburban locations."
Much of the new office construction is build-to-suit projects or preleased projects, adds William Moss, executive vice president and Florida regional manager, CB Commercial. "We're still seeing very few 100% spec buildings."
But even as demand remains strong throughout Florida, some brokers and leasing agents worry that overbuilding could be just around the corner in some markets - especially as publicly traded real estate investment trusts (REITs) run out of existing properties to buy and enter the development arena. "REITs are creating an enormous appetite for real estate products," says H. William Walker Jr. An attorney and partner in the Miami office of White & Case, Walker has represented parties in several REIT sales. "In addition to pushing up prices of existing properties, the REITs are getting into property development themselves to create new products," he says.
An influx of REIT funds may allow developers to build with fewer constraints than conventional bank financing, says Laura Kessel, senior associate at commercial real estate firm Grubb & Ellis, Miami. "This has the potential to offset the balance between supply and demand. It's definitely something to watch."
The office market
Northeast of Orlando, at Heathrow International Business Center in Lake Mary, The Pizzuti Companies is busily putting up new office buildings for Cincinnati Bell Information Systems, financial software firm Fiserve and other companies. In the past two years, the Ohio-based developer has completed about 700,000 square feet of space with another 500,000 square feet under development. "We're also one of a dozen people planning office buildings in downtown Orlando," says Ken Simback, senior vice president. He is referring to Pizzuti's Orlando City Center, an 800,000-square-foot facility that is scheduled to get off the ground in September. "There's a lot of competition out there and lots of capital available for construction," Simback says.
New construction is unlikely to eliminate the strong upward push on leasing rates throughout the state. It will take at least two or three years for today's proposed new office buildings to open to tenants, while new industrial space is likely to be built on an as-needed basis. "Florida's markets are very strong now, and we believe they will remain this strong for the next two years," says Peter Harrison, Miami-based senior managing director, Cushman & Wakefield, Florida.
Orlando is the hottest office market in Florida, primarily because of strong employment and tourism growth, says Tampa-based Larry Richey, senior managing director, Cushman & Wakefield, Florida. "Anything that gets built is leased quickly at rates that are very justifiable on a statewide or national basis," Richey says.
In Tampa, new suburban office projects are underway at Tampa Oaks and Hidden River Corporate Center, while Beneficial Corp. has announced a new 210,000-square-foot building on Harbor Island near downtown. "Tampa's downtown office market is still weak," says Steve Beauchamp, senior managing director, Landauer Associates, Fort Lauderdale office. "The only real growth has been in the suburbs, primarily in Westshore, the northern corridors and Brandon."
Jacksonville is another market where new construction is justified in the suburbs, but not downtown, Beauchamp says. "Rents downtown are still low and can't justify new buildings. The focus of activity has been the Baymeadows area, which is seeing new back office space under development." However, traffic congestion, especially along Butler Boulevard, is prompting local government discussions about new permitting policies or fees that might slow the rapid growth, according to Collis McGeachy, vice president, retail properties, CB Commercial.
In Pensacola, three major medical centers - Sacred Heart, Baptist and West Florida Regional - have embarked on major expansion projects totaling about $150 million, says Matt Durney, president, Baars Realty, Pensacola.
In Broward County, most new office construction has been smaller buildings along the suburban I-595 corridor. "In the next year, there will be more development in that area, as well as another 250,000-square-foot tower in downtown Fort Lauderdale," says Beauchamp. In Palm Beach County, new office construction is planned in Boca Raton and in Palm Beach Gardens along PGA Boulevard.
Demand for suburban space is also strong in Miami, the state's biggest office market. New buildings are rising in Coral Gables, and a new 210,000-square-foot building at the Waterford complex, south of Miami International Airport, is already more than 90% leased, says Harrison. In the Brickell Avenue market, Millennium Partners of New York City has proposed a 75-story, mixed-use project with more than 1 million square feet of space, including office, retail, hotel and condominiums. Another project is Barclay's Financial Center, a 500,000-square-foot office building anchored by the British bank and tied into a 300-room J.W. Marriott hotel. "Downtown Miami can't see 1.5 million square feet of new construction, but with 500,000 to 1 million, we'll be fine," says Harrison. "There are no large blocks of space in the downtown/Brickell market."
Other markets
Construction activity in Florida's industrial, retail, hospitality and multifamily markets is healthy, but generally below office market levels. In the industrial market, for example, about 4.5 million square feet of new space was under construction at the end of the first quarter 1998, a 13.6% increase over the same period last year, according to the CB Commercial survey. "We're seeing a great deal of industrial construction, but things appear to be healthy," says Richey. "There are no signs that the industrial market has been overbuilt anywhere in the state."
Much of the new industrial construction is occurring in Tampa. "We've gone from nothing to 2 million square feet completed or under construction," says Randy Gunn, industrial and corporate services associate, Grubb & Ellis. "Tampa was a market dominated by good local developers. Last year, the REITs came in and sparked the construction activity," says Gunn.
In south Florida, there is strong demand for warehouse space oriented to smaller users, says Michael Adler, chairman and chief executive officer, Adler Group, Miami, which is building a speculative 150,000-square-foot project in west Broward. "Because most industrial projects have required a significant amount of pre-leasing, this has been an underdeveloped market for the past 10 years," he says. "For this segment of the market, Florida is at the start of the development cycle."
Other industrial development is underway in northern Florida. C&W Foods, for example, is building a new 38,000-square-foot distribution facility at Commonwealth Industrial Park in Tallahassee, according to Francis Rentz, vice president, SouthGroup Properties.
Construction levels are generally lower in Florida's retail markets, as demand for new stores may be slackening. While supermarket-anchored centers appear to be strong, "power centers" anchored by large-scale discounters may face problems. "There is still consolidation pressure in the industry," says Terranova's Bittel, "and that is affecting some big box users and power centers."
On the other hand, numerous entertainment-oriented retail centers, such as the Shops of Sunset in South Miami and City Place in West Palm Beach, are under construction or planned around the state. "Town center" retail complexes in new residential developments like Abacoa in northern Palm Beach County are also growing.
National retailers have discovered the Panhandle, says Durney, who is a partner in Cordova Crossing, a new 102,000-square-foot power center in Pensacola anchored by Barnes & Noble, Sports Authority and Linens 'N Things.
In hotel construction, Orlando and south Florida are statewide leaders. In Orlando, a new 1,200-room Westin is under construction on International Drive, Universal Studios is planning two 1,200-room hotels, and Disney has opened its new Coronado Springs hotel. An 800-room Loew's convention center hotel is underway on Miami Beach, and the proposed new Marriott on Brickell Avenue will be joined by a new Mandarin Oriental hotel on Brickell Key. Ritz Carlton is planning a new hotel in Coconut Grove and another in Siesta Key near Sarasota on the Gulf Coast. A convention hotel has been proposed for downtown Fort Lauderdale and construction has recently begun on one in downtown Tampa. Outside Florida's major cities, limited-service hotels, including extended-stay facilities, are the most common type of development.
"Development in the lodging industry is not like office development," says M. Chase Burritt, partner, Ernst & Young, Miami. "It requires more equity and a longer hold on the part of the investor, making new development more difficult. While there is a lot of buying and selling going on, there is not that much new construction."
Construction of apartment buildings and other multifamily units is continuing fairly vigorously throughout the state, although Beauchamp predicts a slowdown in the next year. "We're saturating all the markets," he says. "The quality land locations may still be there, but the demand can't keep going at the current pace."
Lessons learned?
As construction levels rise in the office and other markets, the big question for the future is whether Florida developers have learned the lesson of the 1980s, or if another cycle of overbuilding lies ahead. "We've gone from lots of speculative development to none at all in the early '90s to a modest amount today," says Adler. "I believe we won't see the unbridled growth of the '80s. Developers and their financial partners are more conservative."
In the next decade, the health of Florida's real estate markets may depend on that conservatism - otherwise, the next economic chill could leave developers, investors and property owners out in the cold.