Tampa Bay’s Office Market is Evolving with New Spec Construction on the Horizon
Economic growth in Tampa Bay continues at an impressive pace, driven by strong population and employment growth over the past several years. The unemployment rate has steadily declined, dropping 110 basis points from December 2016 to a current 3.4 percent, and the strong pace of job growth continues with a rise in non-farm employment of 35,000 new jobs during the trailing 12-month period ending December 2017. As a result, leasing activity has increased, rental rates continue to show incremental growth and there is a strong likelihood of new speculative office construction in the coming year.
Major corporations continue to reaffirm their confidence in Tampa with significant announcements of planned corporate expansions by MetLife, Pricewaterhouse Coopers (PwC), AAA and USAA during the second half of 2017. In fact, the Tampa Bay metropolitan area ranked as one of the top 20 “U.S. Markets to Watch” for overall real estate prospects in the Emerging Trends in Real Estate 2018 report published by PricewaterhouseCoopers and the Urban Land Institute.
Many investors who in years past were seeking opportunities in gateway markets are now turning their attention to secondary markets like the Tampa Bay area in search of higher yields. There were several significant office transactions in Tampa Bay during 2017, along with a notable absence of activity in the urban core as most of the key product had already traded hands in recent years. Also noteworthy is that many office investment holdings that were purchased by private equity funds during the last economic cycle have begun to sell and liquidity remains sound.
The largest office sale last year involved a seven-building portfolio in the greater Tampa Bay area (five of which were located in Tampa) by The Dilweg Cos., a Durham, N.C.-based real estate investment firm. The firm’s CEO pointed to the strong fundamentals of the Tampa metro area as the chief reason for the acquisition. Dilweg plans to reposition all of the assets.
During the fourth quarter of 2017, Partners Group, a global private markets investment manager, recapitalized Island Center and Waterford Plaza in the Rocky Point area of Tampa’s Westshore district for $112.5 million, or $227 per square foot. The Class A office buildings together comprise 494,813 square feet. Also, Urban Centre I and II in the Westshore submarket are under contract and scheduled to close by the end of the first quarter. The trophy property will trade for a 7 percent cap rate to Starwood Capital Group at $260 per square foot.
Strategic Property Partners (SPP) announced in the summer that the first phase of vertical construction in the massive $3 billion Water Street Tampa development would begin early this year to include University of South Florida’s Morsani College of Medicine, slated for delivery in late 2019. Current plans include 2.4 million square feet of office space, 1 million square feet of retail, 3,500 multifamily units and entertainment components upon completion.
As part of the plan, SPP expects to include an innovation hub within the urban core that is modeled after successful concepts in first-tier U.S. cities, and which could occupy up to 75,000 square feet at Channelside Bay Plaza.
Spec Construction Coming
New speculative office construction is on the horizon for the Westshore business district this year, and with the Class A vacancy rate down 207 basis points since year-end 2016 to a current 5.5 percent, there is considerable demand for large blocks of quality space in the area’s largest office submarket.
While Laser Spine Institute completed its 176,000-square-foot build-to-suit office building during 2016, there has been no new speculative construction in Westshore since MetWest II was completed in 2013. PWC recently reaffirmed its confidence in Tampa by signing a new 12-year lease for 150,000 square feet at the planned MetWest III. The 267,754-square-foot, Class A office building situated across from International Plaza broke ground in February and will deliver in 2019.
Tampa International Airport also has plans for a new 270,000-square-foot, Class A office building as part of the airport’s $1.5 billion expansion, and the planned Gateway development will also include the headquarters of the Hillsborough County Aviation Authority. The project is scheduled for completion in 2020. Corporate Center V, a planned 240,000-square-foot, Class A building will also likely break ground this year with a 2020 delivery.
Demand fundamentals have remained strong market-wide in the absence of speculative construction, with healthy levels of positive net absorption and rent growth expected this year within Tampa’s top submarkets. Although a lack of large blocks of quality Class A space persists, the new speculative construction expected during the year will alleviate some of that pent-up demand. Scarcity of parking in the urban core remains an issue with no near-term solution in sight.
— By Clay Witherspoon, Principal and Managing Director, and Tim Callahan, Principal, Avison Young. This article originally appeared in the April 2018 issue of Southeast Real Estate Business.