Record vacancy increases seen in Tampa Bay office

TAMPA - As of 1Q09, Tampa Bay’s user and investment office market is best defined as “systemic monetary gridlock” as the U.S. economy still searches for its trough. Lending facilities remain stingy as several life insurance companies -normally a major source of liquidity - announced plans to significantly scale back portfolios. Meanwhile, multiple government bailouts (TALF) have shown no positive results in the near-term and will lead to an inflationary period for real estate pricing.

The office vacancy rate rose 510 basis points in 2008, accelerating toward the latter part of the year, an indication that poor economic performance and continued layoffs started to impact property fundamentals. The recent rise in vacancy, landlords offering significant free rent, and other concessions have created a tenant’s market. Although asking rates have remained stable at $22.26 psf, the accelerating bid/ask spread is a “forward press” in today’s leasing market.

Cost-containment and delayed decision making plague the current office environment. This is an opportune time for tenants to review their existing leases, especially if an early renewal will result in lower expenses. Moreover, as financial service firms and manufacturers look to reduce white-collar workers and further cost cutting measures, vacancy rates are still poised to increase. Some boast “location, location, location” - although more appropriate terminology for 2009 would resound “renew, renew, renew.”

Sales activity of office product is 85% off its peak in 2006. Commercial real estate prices dropped by almost 15% in 2008, and is likely to continue this slide throughout 2009. Even though credit markets have improved marginally, investors and lenders still remain sidelined.

Two notable sales transactions took place in 1Q09: Westshore 500, a 129,728sf, Class A office building in Westshore, purchased by Eola Capital from Principal Global Investors for $20,100,000 ($155 psf) and Harbourside, a 153,026sf, Class A office building in Clearwater, purchased by AHC Metro Harbourside LLC from Harbourside Development LLC for $13,435,000 ($88 psf).

Lease rates

Despite a continuation of rising vacancy and negative absorption in 1Q09, the overall Tampa Bay market asking lease rate held steady at $22.26 psf and decreased slightly in some submarkets. With construction and delivery figures 58% and 90% off their 2007 peak, respectively, asking lease rates have stabilized across the board as we begin 2009.

Absorption

The Tampa Bay office market has experienced -726,078sf of overall net absorption this quarter. Hillsborough County represents 70% of this overall absorption figure, or -510,526sf, particularly seen in the Westshore and Northwest Tampa submarkets, which account for -429,693sf or 84% of the total.

Pinellas County had -215,552sf absorption this quarter, with North Pinellas and Mid-Pinellas accounting for the largest negative absorption by submarket, -128,579sf and -42,861sf, respectively. Since 1988, the first year Torto Wheaton Research began tracking the Tampa office market, 2008 and YTD 2009 absorption figures represent the largest increase in vacancy compared to any time previously.

Construction

There are currently four buildings under construction in the Tampa Bay market totaling 418,000sf, with more than 2.15 msf in the planning stages. Construction is taking place in Westshore, East Tampa and Northern outlying submarkets.