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It looks like the worst may be over for the Tampa Bay office market, and 2013 is shaping up to be the best year for investment sales and leasing activity since before the start of the recession.
The health of the local office market is directly tied to job growth, and professional and business services employment has increased over the past few years. With additional job growth forecast in 2013, tenant expansions could develop as the year progresses. Many tenants weighing moves to larger spaces in the near term will monitor available spaces and advance timetables in the event vacancy in their target locations falls rapidly.
For owners of Tampa Bay office properties, the news comes at a great time, as they should see some relief from high vacancies in 2013. That said, additional tenant demand will be needed to make a significant dent in the overall vacancy rate and support more substantive rent growth.
Overall, the Tampa/St Petersburg office market ended the fourth quarter of 2012 with a vacancy rate of 13.6 percent, which was down from the previous quarter. Net absorption totaled 356,991 square feet, which was a vast improvement over the negative 390,098 square feet recorded in the third quarter of 2012. At the same time, vacant sublease space decreased to 548,949 square feet.
The recovery in property operations since the recession’s end has featured tenants taking advantage of reduced rents and expanded availability of quality spaces to upgrade to Class A space. Generally in these upgrades, tenants have moved to downtown St. Petersburg, downtown Tampa, Gateway/Mid-Pinellas and Westshore from outlying areas, and insufficient new demand has materialized to backfill vacated layouts.
Rental rates ended the fourth quarter of 2012 at $18.09 per square foot, a decrease over the previous quarter. But construction has remained under control, with a total of six buildings delivered to the market in the fourth quarter totaling 169,607 square feet, while another 297,223 square feet was still under construction.
On the leasing front, 2013 started off on the right foot. Local law firm Hill Ward Henderson signed a 12-year renewal in February for its 71,000-square-foot lease at Bank of America Plaza downtown, following a formal RFP process.
In the investment sale market, low interest rates and an expanding universe of lenders will sustain considerable interest in Tampa Bay office properties throughout 2013. After slowing during the most severe phases and immediate aftermath of the recession, a normal pace of transaction activity has resumed. Activity in the Tampa market during the last six months has dramatically increased as investors find financing is more readily available. Though the financing is still driven by the credit quality of the sponsor, property, and tenant, lenders are considering many assets that they would have passed on in the previous five years.
Investors in medical office properties remain active and this asset class will remain popular with more risk-averse investors, especially as additional residents find jobs and regain healthcare coverage. A good example is last year’s sale of a former Fresenius Dialysis Center near Tampa General Hospital.
The overall medical office market remains strong, with investors moving from on-campus only investment criteria to considering off-campus properties, as the competition in the medical office niche is increasing. One important trend is that many traditional owner-users are considering sale-leaseback transactions to capitalize on the extremely lucrative medical office market.
In terms of overall investment trends, pricing values in the submarket and core markets of the MSA are narrowing, cap rates are stabilizing and investors’ risk appetite is increasing. Investors continue to target well-occupied assets in the metro’s primary in-demand submarkets in central Hillsborough and Pinellas counties. Prices generally remain lower than at any time since the market’s peak, providing an opportunity for investors to reposition portfolios in advance of a more vigorous recovery in tenant demand while development is minimal.
The pace of major office sales has been humming this year, and the local market has attracted a great deal of interest from national investors. A good example is Starwood Capital Group’s purchase of Tampa Commons, a 13-story, 255,000-square-foot office building in Westshore for $43.25 million, or about $170 per square foot.
Recent noteworty events include, Highwoods Properties acquired the Colonial Place I and II office buildings for $56 million. And a joint venture of Feldman Equities, Inc. and Tower Realty Partners Inc. acquired the Wells Fargo Center in downtown Tampa from USAA Real Estate Company for $44.8 million, or about $116 per square foot.
Given these market movements, it’s clear this office market is recovering nicely and can expect continued improvement over the course of 2013 and beyond.
— Justin West, associate in the Tampa Bay/St. Petersburg office of Marcus & Millichap Real Estate Investment Services