Richard Tambone is among those seeing signs that the office market is rejuvenating. "For the past two years, less than 20% of our work has been in the office market," says the president of Tambone Real Estate Development, a Palm Beach Gardens firm that built 1.5 million square feet of office, industrial and retail space in 1997. "I've seen a significant turnaround, and in 1998, office build-to-suits will probably be closer to 40% of our total."
Much of the construction is build-to-suit for individual tenant/owners, but speculative multi tenant office space is once again being built. "Rapidly improving market conditions, stronger occupancies and higher rentalrates are justifying new office construction," says William S. Moss, executive vice president and Florida regional manager, CB Commercial, Orlando. "The capital markets that finance new development are very active right now, but I don't think they will push for new construction beyond the market needs."
A major factor in how things proceed may be NationsBank's acquisition of Barnett Bank, which will be dumping large amounts of office space on the market, pushing up vacancy rates. "South Florida, Tampa Bay and Jacksonville could be the most affected, but the acquisition will have a potential negative impact in every market in which the banks have a significant joint occupancy," says Moss.
About 4.1 million square feet of new office space was under construction in Florida at the end of September - a sharp increase from the 2.5 million square feet earlier in the year, according to a CB Commercial survey. Most of the new space is in Orlando and Tampa, which account for more than 2.7 million square feet. "Even with the supply of speculative office space increasing statewide in the next 12 to 18 months, demand is expected to keep pace," Moss says.
In many healthy markets, leasing rates for office space are expected to increase up to 10% in the coming year. However, there is a growing gap between new Class A space - which remains in high demand - and older Class B and C space, which is unwanted even at bargain rates.
Most new office development in 1998 will take place in suburban markets, where vacancy rates are well below downtown levels. "While all Florida suburban markets are enjoying new development and leasing activity, the hot points around the state will be western Fort Lauderdale, eastern Tampa, northern Orlando and southern Jacksonville," says Moss. "I think we have allthe compass headings covered."
Orlando's lake Mary/Heathrow market is probably the strongest office market in the state. New arrivals include Bell South (150,000 square feet), First USA (125,000 square feet), Seagate Technologies (104,000 square feet), HTE (87,000 square feet) and Harvest life (80,000 square feet).
Four new office buildings totaling 350,000 square feet are expected to come on line in suburban Jacksonville in the first half of 1998. "We are just beginning the office development cycle for Jacksonville," says Oliver Barakat, office building specialist, CB Commercialin Jacksonville. "We'll still see more activity in 1998 than any other year in the '90s. leasing activity will also be picking up."
In the Tampa Bay suburbs, a wave of build-to-suit construction is underway, including a 650,000-square-foot project for Citicorp. Hidden River, a 132,300-square-foot office building by Crescent Properties, is under construction, and a second building is planned, says David Schaughency, senior vice president, Grubb & Ellis. Another speculative Class A building with 145,000 square feet is planned for the Gateway area of Pinellas County. "In 1998, we'llsee more spec building, largely funded by the realestate investment trusts (REITs)," Schaughency says. "The REITs are willing to assume a higher risk, as long as interest rates stay where they are."
The outlook for Florida's downtown markets is generally less optimistic. New office buildings are planned for Orlando and Fort Lauderdale, but high vacancy rates make new construction unlikely in downtown Miami, Tampa and Jacksonville. "No longer are most tenants will ing to pay a premium for being downtown," Moss says. "Downtown locations may offer prestige, but the suburbs are closer to employees' homes, and parking is generally not a problem. But as rents rise in the suburbs, we might see downtown space becoming a lower-cost option."
In downtown Miami, class A space remains in demand, according to Edgar Jones Jr., senior vice president, Terranova Corp., Miami. "But many older buildings in the Miami central business district are 15-plus years old and need a renovation to be competitive," he says.
The story is similar in downtown Tampa. "A lot of our B and C space is obsolete," says Tom Lepry, a senior vice president, Grubb & Ellis. "The only use might be ancillary services for the federal courthouse downtown." In addition, the NationsBank acquisition could put 200,000 square feet or more back on the market. "Downtown had been gobbling up space, but now people who were going to break ground will be standing back to see what happens," lepry says.
Downtown Jacksonville will be faced with the loss of Barnett Bank. Even though NationsBank plans to move its statewide headquarters to Jacksonville, the result is likely to be a net loss of space. On the other hand, Humana's pending purchase of 380,000-square-foot Jacksonville Center would reduce downtown's double-digit vacancy rate. "That building was symbolic of downtown's inability to compete with the suburbs," says Barakat. "This is an attractive, fairly new riverfront property that lacked the ability to compete with suburbia."
While office construction is picking up throughout Florida, the levelof activity will remain well below the overbuilding of the mid 1980s. "Today, it's a new building here and there," says Jones. "That's a much more reasonable and rational approach than in the past."
Industrial and office parks
Industrial development activity is expected to moderate in many Florida markets in 1998, following a strong year of growth. "The reason for a potential slowdown is the large amount of new product built in the last 12 months," says Moss. "Because industrialbuildings can go up much faster than office buildings, increases to supply can happen more quickly - and that's what we've seen in 1997."
Florida's strongest industrial markets in 1998 are likely to be Airport West in Miami, Gateway in Tampa Bay, CentralPark in Orlando and Butler Corridor in Jacksonville, according to Moss. But with industrial vacancy rates in the 5% to 7% range statewide, a limited amount of new build-to-suit and speculative construction is likely in most markets.
Miami's industrial market remains one of the strongest in the nation, says Michael Pappas, president of the Keyes Company in Miami. One of the big differences in the past year has been an increase in demand for larger warehouse-distribution facilities. "In the past, a 50,000-square-foot unit was the exception," Pappas says. "Now, we're seeing the 100,000-square-foot user become more common."
In October, FederalExpress chose a 31-acre site at Miami International Airport for a new $50 million regional hub. "FedEx selected Miami because of its strategic location at the crossroads of Asian, European and Latin American trade routes," said Joseph C. McCarty, FedEx senior vice president for Latin America and the Caribbean at a news conference.
Demand for industrial space continues to move northward from Miami into Broward County, where leasing and build-to-suit construction remains strong on the I-595 corridor. But there is little sign of a pickup in demand for industrial space south of Miami International Airport in Kendallor Homestead. "That's not a bright spot because the demand for space just isn't there," Pappas says. "Miami's industrial market is being pulled to the north, not the south."
Tampa Bay's industrial market is on an upswing, according to Jeff Bardin, vice president, Grubb & Ellis, Tampa. "Our activity is almost at a dizzy pace compared to last year when we had absorption of about 500,000 square feet. This year, it's about 1.5 million square feet after three quarters. There are many construction projects underway in Pinellas and Hillsborough. It's largely pent-up demand." Call centers and customer service centers are an important factor in the Tampa market, as wellas in Orlando and Jacksonville.
On the other hand, Jacksonville had a big building boom last year, says Gary Marcy, senior associate, CB Commercial. "I think we're through the building cycle now. We had lots of construction last year, and people will be in a wait-and-see mode now."
Retail
Florida's retail realestate market explosion of the mid 1990s is over. While population growth and the need for retailgoods and services is continuing, the construction peak has passed. "Big box" retailcenters, traditional shopping malls and retail-entertainment centers are most likely to experience a slowdown.
"Much of the expansion today is occurring when existing retailers seek to fill in market holes," says Stephen Bittel, president, Terranova Corp., Miami. "The power center remains a viable concept, but the number of quality tenants is diminishing."
Drug store chains like Walgreens and Eckerd's have been aggressively building new free-standing stores in major Florida markets, but frequently leaving behind vacancies in strip shopping centers. Supermarket chains like Publix, Winn-Dixie and Harris-Teeter (a new entry in the Jacksonville market) are also building new stores. "Owners and lenders like centers with a supermarket anchor," Bittel says.
On the downside, the demise of luria's and the departure of Mervyn's from the market have left vacancies in many centers, and the pending disappearance of Barnett Bank will leave many locations available. Smaller strip malls in secondary markets also face a difficult future competing with newer centers filled with national retailers.
Entertainment remains an important factor in retailing - as evidenced by the large numbers of movie theaters now under construction and the construction of new specialty centers like BrickellStation in Fort Lauderdale, the planned Dolphin Center in west Dade and the Shops at Sunset in South Miami.
Another major development is Main Street of the First Coast, a 1-million-square-foot, value-oriented project being developed by the Oliver Group on I-95 north of Jacksonville. "That center, when completed in early '99, will be wellpositioned to capture traffic coming into Florida, as wellas the localJacksonville market," says Collis McGeachy, vice president, CB Commercial.
luxury condominiums
On Key Biscayne, internationalbuyers are flocking to the Ocean Club, a luxury condominium development where average prices are $600,000 and climbing. "In the past two years, we've sold more than $200 million of realestate, about 330 of 800 apartments," says Chris Blackman, vice president, sales and marketing. "Seventy percent of our sales are international, and we have more than 30 nationalities represented. I think it will be a better market next year."
Throughout south Florida, luxury condo projects like the Ocean Club and l'Hermitage in Fort Lauderdale enjoyed a banner 1997. But with more developers focusing on the waterfront condo market, overbuilding could be on the horizon. "We see a softening in that market, and there may even be a shakeout," says Pappas. "It's the old law of supply and demand."
Dade has almost a three-year supply of new condos, not counting current construction, according to Craig Werley, director, realestate advisory services, Price Waterhouse, Miami.
Strong regionaland internationaleconomies - especially those in Latin America - are expected to keep the luxury condo market going in 1998, even in the face of oversupply. But demand is unlikely to sustain much longer the high levelof new construction, second-cycle "teardown" development and renovation of older apartment buildings.
Elsewhere in Florida, high-rise and mid-rise condominiums priced from less than $100,000 to much more than $1 million are under construction in most markets.
Major realestate brokerages
Housing sales statewide likely will register a smalldecline in 1998, primarily in single-family housing. Multifamily units and apartment rentals will play a greater role in the market.
Residentialsales reflect Florida's economy, and most metropolitan areas are likely to experience a slowdown in employment and population growth. On the other hand, the new federalincome tax code is a positive factor for the industry, as it provides for lower capitalgains and wider tax exemptions on the sale of personaland investment property.
Florida's major realestate brokerages expect 1998 to be similar to 1997 for residentialsales. "There seems to be a good balance between growth and employment, supply and demand," says William A. Watson Jr., president, Watson Realty Corp., Jacksonville.
One key factor affecting residentialsales - mortgage rates - looks positive for 1998, according to MichaelPappas with the Keyes Company in Miami. "But I'm not sure we'llsee any growth in the residentialmarket, as there is little pent-up demand."
Demand for waterfront, golf course and other high-end homes is likely to increase in 1998, according to Richard Cope, CEO and president of PrudentialFlorida Realty in Clearwater.
Internationalbuyers are likely to keep buying primary and second homes in Florida, propelled by the state's strong internationaltourism and its business ties with the Caribbean and Latin America. "We have relative stability in Florida, which is very appealing to overseas residentialbuyers," Cope says.
land sales
land sales are slowing in most markets, and will continue to decline in 1998. Residentialdevelopers and builders have been on a land-buying spree in the past few years, picking up bargain-priced tracts under distressed financialconditions and properties with developmentalapprovals in hot residentialgrowth areas like southwestern Broward and southeast Orlando.
Most parcels that could begin development relatively quickly are gone, and it is much more difficult for developers to find suitable land without incurring higher purchase and development costs - or having to purchase tracts in the hinterlands far from urban centers.
The land development process itself is fullof uncertainties: will schoolcrowding issues delay the application? Can blasting be used? will impact fees suddenly be raised?
As a result of these uncertainties, higher costs and tighter margins, Florida has fewer land developers today than in past decades. One exception is the recent marriage between St. Joe's Paper, the state's largest landowner, and Arvida Corp., one of the nation's premier community developers. However, many large-scale developers have left the business or are focusing on building homes, while traditionalbuilders are also becoming developers in an effort to improve profitability.
Because of the long lag time between land purchase and development, the statewide slowdown in land sales will not affect housing starts in 1998. But other factors - such as rising prices and slightly lower demand - signala modest decline in housing starts from 1997 levels. Single-family homes, which are more expensive than attached housing or condominium apartments, will be more affected by the downturn.
Multifamily homes are likely to increase their market share in 1998. In Palm Beach County, for instance, more than 3,500 new apartment units are expected to come on line in 1998, according to CarolMacKinnon, executive vice president, Harbour Realty Advisors, Bay Harbor Islands. "It's a hot market out there for multifamily projects," she says. "Hopefully, things will continue to go well."