Pinellas office rents hit 4-year low

ST. PETERSBURG - During the second quarter of 2010, the Tampa Bay metropolitan statistical area's economy continued to improve from the extreme downturn that has plagued the area for more than two years. Employment increased by 1,400 new jobs from March 2010 through May 2010. Federal government employment increased by 5,900 over the last three months, though this is primarily due to the temporary workers hired for the 2010 U.S. Census. Professional and business services, the industry most closely correlated with the health of the office market, experienced a minimal gain of 300 new positions during this time.

Furthermore, the area's unemployment rate declined from 12.7% in March 2010 to 11.7% by May 2010. Despite the improvement in the local economy and employment market, during the second quarter, the Pinellas County office market saw a decrease in tenant demand, a jump in the overall vacancy rate and a continued decline in asking rental rates.

Overview

The overall vacancy rate increased two-tenths of a percentage point to 23.2% from the first quarter of 2010 and is up half of a percentage point from the vacancy posted this time last year. There was only one submarket where the vacancy rate actually fell over the last year - the Mid-Pinellas/Gateway submarket, where the vacancy rate declined 1.7% to a still above-average 23.2%.

As a result of the escalation in vacancy and the minimal demand throughout the market, the direct average asking rental rate fell $1.60 psf over the last year, to $18.95 psf at the close of the second quarter of 2010. This the lowest marketwide average asking rental rate recorded in the Pinellas County office market since the third quarter of 2006.

Following the first quarter of 2010 when tenant demand took a positive turn, activity in the second quarter fell significantly. Over the past three months, new and expansion leasing activity totaled just 157,095sf, down 46.6% from the initial quarter of the year and 28.7% from the activity recorded in the second quarter of 2009. As can be expected with such an anemic quarterly leasing total, overall absorption in the second quarter was negative 57,002sf as move-outs outweighed move-ins during this time frame. Despite the negative overall absorption recorded in the second quarter, year-to-date absorption for the Pinellas County market remained positive, with the year-to-date absorption totaling positive 81,906sf.

Office sales in the second quarter of 2010 picked up considerably from the sales activity recorded during the first three months of the year. The area saw 135,000sf of product change hands during the past three months, a 100% increase from sales activity recorded in both the first quarter of 2010 and the second quarter of 2009.

A trend that recently developed over the second quarter is tenants purchasing their office space instead of leasing. A prime example of this trend is Universal Healthcare's purchase of the 64.7% vacant, 135,000sf 100 Bay Central building in the St. Petersburg Downtown submarket for approximately $67 psf.

Forecast

While it is a good sign that hiring is increasing in some industries in the Tampa Bay MSA, Pinellas County's office market fundamentals will not improve until employment growth increases more substantially. Overall vacancy will remain high through 2010, but is expected gradually decrease later in the year and into 2011 as fewer tenants consolidate or vacate space.