Tampa Commercial Real Estate | Florida Commercial Property

I attended the Tampa Distressed Real Estate Summit in Tampa yesterday.  Although, my commercial real estate activity has picked up in the last few months and I seem to be eternally “busy,” it is always good to break away and hear what some of my peers are working on these days.

“Distressed assets” is the buzz term used for all properties that would probably not be underwritten if they were brought to the market today.  Ground Zero of the distressed assets crisis was in the residential, residential securities (i.e. Residential Mortgage Backed Securities – RMBS) and Sub-Prime markets in 2008.  The commercial real estate market always seems to lag the residential markets and this downturn is no exception.  Unless you are Rip Van Winkle and just awoke from a great slumber, it would be hard for you to escape the avalanche of negative media about commercial real estate becoming the next financial Armageddon.  I personally, see the stress cracks in the market and anecdotally see individual assets implode, one after another, but I am far from sitting in the Armageddon camp.  I do think it is different this time.  I have expressed these views in other articles, if you are interested, but I won’t bore you with repetition of my personal views.

Almost every time I attend these industry events, I am able to take away nuggets here and there that will help me help my clients.  The Summit was broken in to four parts.  I will try to give you a few of my own personal highlights of each section, as I saw them:

1.  Evaluating Commercial Properties and Partially Complete Construction: Land, Office, Retail and Industrial

Panelists: Bill Eshenbaugh, Eshenbaugh Land Company

Ed Kobel, DeBartolo Development

Chet Little, Foley & Laudner, LP

Doug Dieck, Ryan Companies US, Inc

Kobel’s Comments on demographics:

• Infill and Urban migration will be keys to the next commercial real estate development trends
• Boomers prefer a walking lifestyle and want to experience their golden years socializing with other people.  They want less stress in maintaining properties. That means they will largely exit residential suburbs and exurbs in favor of urban living arrangements.
• Generation Y, Z, Echo’s etc. will be forced to move in to Urban areas as gas prices will push through $5/gallon within the next decade.
• Light rail and public transportation will be keys and infill development will offer investment opportunities around station outlets
• Believes that “gap in equity” over the next 3-5 years with maturing CMBS debt will mean the brakes will be applied to real estate for the next 3-5 years, which he believes is the minimum time necessary to work through most of the distressed assets currently on or coming to market.

2.  Adding Value to Distressed Assets

Panelists: Ron Weaver,  Stearns, Weaver, Miller, Weissler, Alhadeff and Sitterson, PA

Todd Pressman, Chairman of the SWFWMD Governing Board

William Stanton, BB&T

Stanton on the banks’ position on handling troubled assets:

• If the borrower is paying insurance, taxes, some interest on the property, and the bank is upside down, the bank is much more apt to work with the borrower, than foreclose.
• In the past, the bank ordered an appraisal and if necessary, required the borrower to add equity or risk having the bank force the loan out of the bank or worse yet, face foreclosure.Transparency has become the key word for banks now.  If the borrowers are willing to disclose and be forthright with the bank, the bank will be much more willing to avoid aggressive adverse action against the borrower and property.
• The banks realize the problem is so large that they can not possibly handle all the problem loans if the situation is handled in the similar fashion in which they were handled back in the early 90’s.
• The RTC is not coming back.  The vibe is completely different this time around.  The Loss Share Agreement with BBT/Colonial has more years left and the FDIC does not have appetite to attack the problem loans like they have in the past, as it is still reeling from other losses and bank closures.

Pressman, on the topic of government budget cuts:

• If you think the delay for permits is bad now, just wait.  With all the financial cut backs recently, government has cut bone.  There will be serious log jams in permitting when the economy starts to turn around.

3.  Legal Strategies for Distressed and Foreclosed Projects

Panelists: Leigh Kellet Fletcher – Stearns, Weaver, Miller, Weissler, Alhadeff and Sitterson

Stephen Cunningham – LandQwest Commercial, LLC

Kristopher Fernandez, Attorney

Kellet-Fletcher:

• Changes in Storm water rules make entitlement on infill or reworked properties particularly risky
• On Community Development District Bonds (CDD’s)
  • Banks are hesitating on foreclosing. Why should they take foreclosure action when the CDD will follow them shortly to foreclose on the bank?
  • CDD’s have superior positions to all debt except IRS debt
  • “Oppenheimer (large owners of CDD’s) is going to own A LOT of Florida real estate”

4.  Transportation’s Impact on Future Development Opportunities

Panelists: Mayor Pam Iorio

Hills Co. Commissioner Mark Sharpe

Sharp & Iorio on light rail:

• Passionately spoke about the fact that Tampa loses business to other cities because it has one of the worst public transportation systems in the country
• Cited the example of TIA-CREF, the large financial services firm, that moved its operations to Charlotte, because Tampa had limited transportation infrastructure
• Sharpe feels like he is fighting an unwinnable fight in the world of economic development without a public transportation system.
• Is proposing a Sales Tax referendum to increase sales tax 1 penny to pay for light rail system
• The first leg of rail will run from downtown to USF, followed by downtown to Westshore, TIA and Westchase in that order
• Was asked if a sales tax is the best way to raise funds, because it is a regressive tax, hurts retailers most, and is punitive to property owners, and is counter-intuitive to building an environment of pro-business.  His response was that we could not achieve light rail without a new source of funding.  Cutting waste in government is not an option and would not generate enough funds to achieve their goals.
• Recognizes it is not a good time to be asking for money, but passionately believes that light rail will make us more efficient stewards of business, education and the environment
• They were asked why we should invest in light rail if less than 2% of population would use it on any given day.  Sharpe’s response was that there are few roads in Hillsborough County that carry 2% of the county’s population, and there are no tolls to pay for these roads, yet we build and maintain the roads for the good of the entire county. Light rail is no different, except there is fee to use the system and light rail can carry many times more people, much more efficiently than the current car and road system.

“We are going to see distress continue to mount this year,” Bach said.

Leasing rates for all sectors, including multifamily, retail, industrial and office, will continue to rise at least through the first six months, he said.

Grubb & Ellis’ Chief economist Robert Bach was in Tampa today to speak with Florida Gulf Coast Association of Realtors (FGCAR) and West Coast CCIM’s to discuss the outlook for commercial real estate.  (Complete story at the Tampa Bay Business  Journal)

The U.S. average apartment vacancy rate was 8 percent and the asking rental rate was $1,026.

Of the other major Florida markets, Miami had the lowest vacancy rate at 5.8 percent as well as the highest asking rental rate at $1,063. Tampa-St. Petersburg had a 10.7 percent vacancy rate and an $827 asking rent and Orlando had a 11.2 percent vacancy rate and an $869 asking rent.

New York-based Reis (Nasdaq: REIS) is a commercial real estate performance information and analysis company.

Copyright 2010 bizjournals.com

Full Article

601 Ashley - Office Space in Downtown Tampa

I just learned that  601 N. Ashley sold last month. Besides the fact that the building is immediately next to our office, I find the sale interesting as I believe it is a microcosm of what is going on in the Tampa market. Novare Development and partners purchased the building in 2005 with the intent  to convert the building to condos.

Well, life happened in the wake of what seemed like a great plan and the market downturn torpedoed any opportunity to break the building down and sell it.  The purchase price in 2005 was $7,000,000 or $114.27/sq ft.  The price on last month’s sale was $4.1 million, or  $67/sq foot, a 41% decrease.   While the Tampa Downtown Sub market hovers around 20% vacancy, it will be interesting to see what the new owners have in store for the property.

Unfortunately, the Tampa Area unemployment rate continues to climb. Until the unemployment rate increases reverses its negative trend, the area commercial real estate vacancy rates will continue to be under pressure.

The Tampa Bay area’s jobless rate jumped half a percentage point to 12.3 percent, making it the most job-challenged major metropolitan area in Florida. The region’s most sluggish county remained Hernando, which saw its unemployment rate rocket to 14.7 percent, up from 14.0 percent the prior month….from the St Pete Times (for complete article)

Excerpt from the Tampa Bay Business Journal:

Vacancy rates are continuing to rise in the Tampa Bay area’s office market as regional employment is expected to decline by 54,600 jobs by year’s end, states a fourth-quarter report by Marcus & Millichap.

About 2,100 office jobs have been eliminated monthly throughout 2009, dropping overall office employment to a level last seen in 2003, states the report. A resumption of hiring is still several months away.

That means vacancy rates will continue to climb while rental rates decline. (Complete Story)

Commentary:  We continue to see sprouts of green on the barren economic landscape right now, but unfortunately, employment and subsequently vacancy is going to continue to be an issue in to the first quarter of 2010, if not further.  As has been stated many times in this blog, Tampa, Hillsborough County and the State of Florida have been entirely too reliant on construction and growth with limited thought or planning as to what would happen when the music stopped.

For those interested, we have started a LinkedIn group to discuss the issues at hand.  (Click here for the LinkedIn Group)

If you are like me, your friends clutter your mailbox with jokes, chain mail and “must read” inspirational messages.  Frankly, I have neither the time nor the energy to read these emails that have no relevance to the business that I need to conduct throughout the day.  The emails will end up rolling quickly in to the “Delete” folder unread.  There is, however, the rare exception in which I am tricked in to reading one of these messages and sometimes, they are actually worth the read.  I had to chuckle when I read one such message yesterday.  This is a moral dilemna that was presented to job applicants that recently interviewed for a new position.  Here it goes:

You are driving down the road in your car on a wild, stormy night, when you pass by a bus stop and you see three people waiting for the bus:

1. An old lady who looks as if she is about to die.

2. An old friend that once saved your life

3. The perfect partner you have been dreaming about.

Which one would you choose to offer a ride to, knowing that there could only be one passenger in your car?

You could pick up the old lady, because she is going to die, and thus you should save her first. Or you could take the old friend because he once saved your life, and this would be the perfect chance to pay him back. However, you may never be able to find your perfect mate again.

There is no right or wrong answer, but who got the job based on their answer?

The candidate who was hired (out of 200 applicants) had no trouble  coming up with his answer.  He simply answered:

‘I would give the car keys to my old friend and let him take the lady to the hospital. I would stay behind and wait for the bus with the partner of my dreams.’

Sometimes, we gain more if we are able to give up our stubborn thought limitations.

I couldn’t help but think about commercial real estate when I read this tale, not so much as a moral dilemna, but more because these are times in which we have to think creatively.  As vacancy rises in the Tampa Area, brokers, landlords and tenants are going to have to be on the their toes to find opportunity and fill vacant spaces.

• Can that Mall become a warehouse?
• Can you rent space for wind turbines on your roof?
• What about advertising space on the side of the building?
• Are there non-profits that can use the space?  There are special tax considerations beneficial for landlords that donate space.
• How about churches?  Some churches will gladly pay to use the space one or two days a week.
• If you are trying to lease the space on your own, is your property getting the attention needed to find tenants in a market with high vacancy?

The bottom-line is NEVER forget to think outside of the box!

Florida Real Estate: Tales of Its Death Have Been Greatly Exaggerated

Comment:  In a recent interview, Steve Hagenbuckle, Managing Director of TerraCap Partners states that Florida real estate, one of the hardest hit markets in the country will be one of the first to emerge.  Foreign buyers from Germany, Canada, UK and China, among a host of others are beginning to descend on Florida to scoff up deals on real estate that have not been seen in years.  While residential real estate is probably going to be the most significant beneficiary of the activity, commercial properties are also attractive, because of the weak US dollar against much of the world’s currencies.  I would expect that most of the international buying activity in our area will be centered on coastal residential real estate in Sarasota, Manatee and Pinellas Counties, but there are increasingly compelling arguments for international buyers to consider commercial real estate, as well.  Net lease properties with credit rated tenants are at their highest CAP rates in years and could offer outstanding value.

Excerpts:

(3:25 min mark)

Steve HagenBuckle (SH): “ …as we talked before, the southeast, right now as far as in the last 12 months,  has seen 47% of all international investing has been in the southeast on the residential side.  The State of Florida has taken on 26% of all international investing on the residential home side.  So, Over 1 out of every 4 homes bought by international investors (in the US) is bought in the State of Florida. “

Bloomberg TV (BT) :  “Where is the money coming from ,  you mention Canada, …we talked a little bit about China, what about for example the UK?  Are these people actually coming to use the property?”

SH:  Yes, they are vacation homes as well as investments….mostly vacation homes.  They are seeing that there is so much affordability that they may not see this opportunity for a long, long time.  So, they are viewing it as “now is the time.” We have a currency that is strong than the dollar currency. And, we feel that if the dollar is weakening or has the chance to do so, now is the time to move.  We are seeing a lot of interest from Latin American countries.  54% of Germans, when they buy real estate in the US, they buy in Florida. And 37% of the folks from Canada when they buy real estate in the US, they buy real estate in Florida.

Summary: Commercial construction starts fell 22.9% for the second quarter of 2009 to 84 from 109 in the same quarter 2008.  Value of permits plummeted 58.5% to $68,122,000.  Of the top 10 permits pulled by value, 3 were medical facilities, 2 were churches, and the remainder a mixed assortment of other property types, including an electrical and upgraded lift station for the City of Tampa.

Source:  Hillsborough County Planning Commission, Florida

Resid Comm Permits Activity – 2009q2_copy

Source: Florida Real Estate Journal and Cushman Wakefield

“The economy on both the national and the local Tampa Bay fronts has been nothing short of bleak during the first half of 2009. The area unemployment rate continued on a steep incline, jumping to 10.6%, up by 4.7% from the unemployment rate recorded at this point in 2008.”

“….The market continues to struggle with increased vacancy and rising sublet availability. Both the Central Business District (CBD) and non-CBD vacancies continue to climb, with the market-wide overall vacancy rate reaching 18.6% by the close of the second quarter of 2009. This is a slight seven-tenths of a percentage point increase over the first quarter, but a much more significant 5.0 percentage point spike from the same time last year.”

Comments: If you are a tenant searching for property, this is a great time.  Keep in mind, Landlords are much more willing to negotiate free rent as opposed to lower rent.  Lowering the base sets an adverse precedent in future negotiations with you and other tenants.  Most landlords will have to renegotiate their mortgages in the next few years and it is much easier to explain free rent than reduced rent.  Reduced rents can make a forward looking income statement look pretty ugly to a banker.

We have found deals as good as 6 to 12 months of free rent, for medium term leases (3-5 years).