Tampa office market sees 5% growth in vacancies

TAMPA - 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.

This dramatic increase in unemployment is a result of the Tampa Bay MSA losing 53,900 jobs from May 2008 through 2009. In addition to the job losses, personal income growth has continued to fall and is projected to close the year down 3.6% from 2008, which has caused a significant deterioration in consumer expenditures, further weakening the local economy.

On a positive note in these dismal economic times, existing home prices in Tampa Bay have declined by 28.3% over the last 12 months, returning the MSA to the historically affordable area that attracted both companies and employees to the market prior to the housing price boom and the economic downturn.

Job losses, coupled with corporate anxiety from the national recession, have caused demand for office space to remain well below the historical levels experience prior to the downturn in the economy. As a result, the market recorded negative absorption during the last six months, and overall vacancy is at its highest point since 2002. Additionally, sales activity has been nearly non-existent due to the dip in prices buyers are currently willing to pay and their difficulty in obtaining financing.

During the second quarter of 2009, market fundamentals continued to deteriorate, further reflecting the negative influence the sustained downturn in the economy has had on Tampa’s office market.

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 marketwide 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.

As can be expected with such a dramatic increase in vacancy, overall absorption remained negative for the fourth straight quarter, bringing the year-to-date total to negative 726,214sf.

In addition to the increase in vacancy and negative absorption, asking rental rates, construction activity, leasing activity and absorption levels have all decreased significantly since this time last year. Diluted tenant demand has continued to cause landlords to decrease their asking rents in order to aggressively compete for the limited number of deals actively looking for space within the market.

Marketwide, the direct asking rental rate averaged $23.10 psf at quarter-end, a decrease of $0.24 psf since last quarter, though this average increased $0.59 psf from the second quarter of 2008. This increase is primarily due to the completion of nearly 1.1 msf of high-priced new space over the last 12 months, which was 80.7% vacant at the close of the second quarter of 2009.

Forecast

When economic conditions begin to strengthen, which many economists are predicting will occur over the next six to 12 months, a rise in inward migration and employment growth is expected to follow. In the meantime, with tenant demand remaining well below normal levels, opportunities for lease concessions, such as free rent, are being utilized as landlords try to entice tenants away from favorably priced sublet space or new product.

And while Cushman & Wakefield does not expect market fundamentals to improve in the near future, they should become more stabilized during the second half of 2009.