More declines expected in SW FL markets

The economic situation for the Fort Myers/Naples area continues to be plagued by high unemployment and foreclosures. The residential foreclosure rate is slowing, but the commercial default rate is increasing.

The Cape Coral-Fort Myers MSA posted the third highest unemployment rate in Florida at 13.7%. The Naples MSA fared slightly better at 12.4%, but both MSAs are above Florida’s 11.2% rate. From the third quarter of 2008 to the third quarter of 2009, the Cape Coral-Fort Myers and Naples MSAs combined for a total loss of 10,603 positions. The Professional and Business Services industry, which is the main driver of the office market, lost 3,900 jobs over the last year.

The Fort Myers/Naples economy is being bolstered by a more active residential housing market. Lee County saw an increase in single-family resales from 833 transactions in September of 2008 to 1,370 transactions a year later, a 39% increase. Median pricing fell 33% over the same timeframe, but this has increased 6% since the second quarter.

Collier County saw an increase in single-family resales from 273 transactions in September of 2008 to 362 transactions a year later, a 32% increase. Median pricing fell 28% over the same timeframe, but this has increased 8% since the second quarter.

New home sales in both counties have remained flat, averaging 24 sales in Lee County and 14 in Collier. This abysmal activity has stagnated the employment in real estate-related industries ranging from roofing contractors and carpet installers to mortgage brokers and real estate agents.

The slowdown in job creation is having a negative effect on occupancy in the retail sector. Tenant demand is down, and vacancies continue to escalate - which may further exacerbate the increase in commercial loan defaults.

Office

In the third quarter of 2009, office leasing activity for Southwest Florida - the Cape Coral-Fort Myers and Naples MSAs combined - totaled negative 25,466sf, down 12% over the second quarter of 2009. The largest medical office lease of the quarter was the Hope Hospice & Community Services Inc. 12,800sf lease at 12751 Westlinks Drive. While the office leases were minimal, the largest was the Brainchild lease of 7,198sf of space in the 3050 Horseshoe Drive in East Naples. Brainchild is an educational enhancement learning center in Naples.

Overall vacancy for the Fort Myers/Naples office market decreased 1% from the second quarter 2009 to close out the third quarter of 2009 at 19%. The Airport Gateway submarket posted the highest vacancy at 26.7%. The increasing vacancy trend led to a decline in rental rates over the past year. The marketwide direct average asking rental rate fell $0.35 psf, from $15.99 psf in the second quarter of 2009 to $15.64 psf at the close of the quarter of 2009.

Throughout the remainder of 2009, Commercial Property Southwest Florida anticipates that demand will continue to decline in comparison to 2008 due to the economic troubles in the housing and job markets. Additionally, asking rental rates should continue to decline due to lack of demand and increased vacancy rates, giving tenants willing to make leasing commitments the opportunity to negotiate very favorable lease terms.

Industrial

The overall vacancy rate in the Fort Myers/Naples industrial market rose to 17.5% during the quarter, up 1.7% from the second quarter of 2009. This increase in vacant space can be attributed to companies reducing their occupancy needs or moving out of the market.

Overall demand remains at historically low levels, with leasing activity during the third quarter totaling a negative 254,000sf. This decrease in lease volume is related to the continued slowdown of the general economy and, in particular, limited construction-related employment.

Overall absorption, another testament to the decline in tenant demand, also fell significantly through the third quarter. As can be expected with such a dramatic quarter-over-quarter increase in vacancy, the market recorded 156,881sf of negative absorption.

Looking forward, Commercial Property Southwest Florida expects the Fort Myers/Naples industrial market will continue to experience below-average tenant demand, along with a downward trend in asking rental rates. With most of the tenants affected by the general economy and lack of construction of any kind, the fourth quarter is not expected to produce any better results.

As the residential market slowly recovers, the demand for industrial space will follow. This recovery is expected to be slow and is likely to impact the other commercial uses.

Gary Tasman (gtasman@cpswfl.com) is executive director and principal of Commercial Property Southwest Florida LLC in Fort Myers, a Cushman & Wakefield Alliance Member.