Pain continuing in Pinellas office market

With consumer and business confidence showing improvement, several economic indicators in the Tampa Bay market have begun to imply the force of the current economic slowdown has begun to lose velocity within the market. The rate of both job loss and unemployment has slowed, and the residential housing market has begun to improve.

Notwithstanding these positive trends, the Tampa Bay region has still shed 56,000 jobs during the past 12 months. With the area job market so closely joined to the office real estate market, job losses in the professional and business services sector (-18,700), information technologies (-2,900) and financial services (-1,500) over the past year have resulted in a further deterioration of the Pinellas office market’s health in the third quarter of 2009.

Overview

At the close of the third quarter, Pinellas County’s office market fundamentals continued to grow weaker, following a trend that began over a year and a half ago when the national and local economy both took negative turns. For the fifth quarter in a row, overall vacancy has been above 19% in the market, and in the third quarter of 2009 vacancy spiked upwards once again. The marketwide overall vacancy rate of 23.9% at the close of the third quarter of 2009 increased 1.2% from the mid-year 2009 and is up an astounding 4.8% from the vacancy documented in the third quarter of 2008.

With tenant demand remaining well below historic levels, leasing activity during the third quarter totaled just 135,806sf, down 38.3% from the second quarter of 2009 and 44.7% from the activity recorded in the third quarter of 2008. Overall absorption, another testament to the health of tenant demand, also continued to fall over the past three months.

As can be expected with such a dramatic quarter-over-quarter decrease in leasing activity and increase in vacant space throughout the market, Pinellas County recorded 305,502sf of negative overall absorption during the quarter, bringing the year-to-date absorption total to negative 651,604sf. And while the year-to-date 2009 absorption figure is dramatic, when compared to the absorption total at the close of the third quarter of 2008, overall absorption has improved 10.8% in 2009.

Pinellas County’s marketwide average asking rental rate fell for the fourth quarter in a row, declining by 4.3% from the third quarter of 2008 to a current marketwide average of $20.11 psf. Additionally, the combination of minimal tenant demand and the increase in available space has caused many building owners to increase lease concessions offered to tenants in order to secure deals, which has contributed to much lower negotiated effective rents when compared to leases signed in 2008.

Forecast

While much of the fallout in the Pinellas County market can be traced to a few large companies who recently moved out of the area completely, Cushman & Wakefield believes that the detrimental affects of these move-outs is behind us. Though the effects of the prolonged slump in the economy will continue to have a negative impact on the market well into 2010, current market fundamentals definitely favor tenants willing to make leasing commitments in the market.