Roundtable: Commercial real

®oundtable:

Commercial real estate

The future of the office remains a hotly debated topic. Here, market leaders provide their view along with other factors that are impacting the sector.

David Bradley

Regional Manager – Tampa Marcus & Millichap

How strong was the commercial real estate market in Tampa before the pandemic? Whenever we look at the health of a market and its longterm prospects, it really boils down to one metric, and that’s job growth. Whenever jobs are being created, it has a positive effect across all the product types that we service. We work with all the main commercial products: multifamily, office, industrial, retail, and some more niche areas like self-storage, hotel and senior housing. If you look at those markets that are healthy and growing, it all ties back to whether or not companies are choosing to invest and put people to work in that local marketplace. Or, is there a natural outflow of population and stagnant job growth? One of the most appealing things about Tampa is the plain and simple fact that it offers a lot of opportunities for a variety of businesses.

What might office space look like going forward? I think that office assets are primed for the reimagining of what to do with the space. Throughout this disruption and these changes, creative people, smart people are going to put their heads together and find new ways to utilize the buildings we have. I think we will see office space itself be reconfigured in a way to make it more pleasing and inviting. The overall floor plate and space that people will occupy will probably see some downsizing. That trend could continue for the immediate future. Long term, I think that there will be a reshuffling in terms of how to organize the space but that can ultimately result in higher net dollars per square foot and rent, with commercial landlords being able to come out in a similar or better position than where they are now.

Mike Griffin

Senior Vice President & Market Leader Savills – Tampa

How did the pandemic accelerate change? Savills globally does virtually everything. It’s a Top 6 firm. Structurally, we are financially sound and have no meaningful debt compared to our competitors. It gives us significant opportunity to go after talent, whether it be businesses or individuals. From our position, our focus is primarily on the office and industrial sides. Since offices and commerce shut down in March, rolling back to the offices has been highly gradual. We also have certainly seen a change in how people are working and going back to work. Statistically, C-suite executives and the lion’s share of business leaders are anticipating that roughly 30% of their workforce is not coming back to the office. The implication for physical workplaces is going from dense, efficient layouts toward a space planning and design of office spaces that takes into account more distancing.

How would you assess Florida’s industrial market? It’s just incredible, transformative, when you look at even the retail space getting more involved in the supply chain aspect of how they’re using their vacant big boxes for supply chain work. COVID-19 brought about a perfect storm in a good way in the sense that for the past 20-plus years there was a strong emphasis on investing heavily in the I-4 Corridor. We had all the pieces in place to support this, whether it was truck, rail or air cargo. The one thing that worked even better was our availability and cost of land. That is all changing. Deals are getting done, land is trading hands and that is creating a value proposition. We are similar to other Southeastern markets that have a port facility. We cannot build the logistics and distribution facilities fast enough.

Danny Rice

Managing Director & Market Leader – Central Florida Colliers International

How has Colliers managed the different conditions imposed by the pandemic? There was a great deal of momentum in the Tampa Bay market coming out of 2019 in all assets: industrial, office and retail, and even in our specialty groups such as student housing, senior housing and leisure properties. When the entire economy went into halt mode, all asset types and decision-making paused. By October, almost all asset types had begun their rebound. I wouldn’t say everything is back to normal, but industrial is nearly back to where it was, if not above pre-COVID conditions. E-commerce obviously is driving a lot of that story. As confidence in the market returns, our clients are looking at this as an opportunistic time to secure “A” locations that may not have been available when the market was really coming on strong. Retail has bounced back. Office space has definitely seen some activity coming back.

What is your view of the I-4 Corridor? Nearly 5 million square feet of new industrial product has been delivered to the Tampa Bay market this year. A significant amount of the new development and activity has happened in the East Tampa area and in the Polk County and I-4 corridors. Deal-wise, the number of transactions, especially on the industrial side, is slightly up as compared to previous quarters. The total industrial square footage being leased per quarter is greater than before the pandemic. When you think about the Tampa and the I-4 Corridor markets, a large deal five to 10 years ago was 300,000 to 400,000 square feet. Today, we’re experiencing speculative development on buildings of a million square feet. What changing trends regarding the future of office space are you observing? Cushman & Wakefield has been somewhat of a thought leader on the question of office space. What began as a required work from home situation for most companies could end up doubling the people working permanently from home, from an estimate of around 5-6% today to 10-12% in the long term. But there will still be a large population in offices and clients going to the office every day. When we ultimately put COVID-19 behind us, we think that there will be a large number of people who will go back to work at the office full time. Others might split that. But we don’t think that it will necessarily reduce the square footage of office space occupied because there’ll be greater distancing. We believe that the net result of that is that over the next few years, we’ll get back to where we were and beyond in terms of occupancy before COVID.

How do expect rent levels to develop? We’ve seen companies that have decided to work more from home on a more permanent basis, shedding office space by not renewing their leases. There is short-term pressure for office rates to decline. We think it’s temporary but we’ve seen declines of 10-15% in many projects. The problem is not as much the price as it is the uncertainty of when the pandemic is going to allow higher occupancies and safe desk-sharing, which is all having an impact on demand. If we look at the office market, over 95% of tenants in the U.S. office market are paying their rent. So, even though that’s less than 100%, we don’t think that we will see many defaults on mortgages as a result of that.

Larry Richey

Florida Managing Principal Cushman & Wakefield

( ) go east to where there is land and be more of a pioneer waiting for demand to come out to you. The I-4 Corridor is going to win from that because you are connecting two major cities in Tampa and Orlando and some great communities in between,” he added.

Whether for industrial purposes or commercial development opportunities, the I-4 Corridor is a modernday Fertile Crescent for industry leaders. “When you think about Tampa and the I-4 Corridor, a large deal five to 10 years ago was maybe 300,000-400,000 square feet. Today, we’re doing speculative development on buildings of a million square feet,” Colliers International Executive Managing Director for Central Florida Danny Rice told Invest:. “There’s a night and day difference in terms of the growth around the I-4 Corridor, especially around industrial, and it has everything to do with the population growth that we are seeing, the accessibility of the I-4 and its connections to the I-25, the turnpike and over the I-95 means all the major markets in Florida can be connected pretty quickly. That has not slowed,” he said.

Looking ahead After more than a year under the pandemic landscape, the Tampa Bay market is positioning itself to be among the top destinations for living, working and leisure in the state, rivaling Florida heavy hitters such as South Florida, Orlando and Jacksonville. Construction and development activity are slated to be major tailwinds as the market continues its recovery process. The dynamic housing market is expected to stay vibrant in 2021, challenged by an inventory crunch and rise in prices.

Major commercial development projects such as Water Street Tampa are still a few quarters from completion but such a massive Downtown development further cements Tampa Bay’s place as a top business destination. “We are feeling confident about the state of affairs for real estate in general,” said Bob Gries, founder and managing partner at Gries Investment Funds. “Low interest rates in the 3% range make projects a lot easier to finance. Second, always focus on keeping debt reasonable. If you can be properly capitalized and interest rates remain low, we should be able to weather just about any type of cycle. Historically, people have gotten in trouble by borrowing too much and did not have enough cash on hand when they were hit with a curveball. We will remain highly selective regarding the opportunities and deals we’re looking at, with a goal of purchasing six to eight properties a year.”

COVID-19 forced businesses, corporations, industry leaders, individuals and families alike to rethink their use of real estate space, accelerating nascent trends in the process. The adoption of remote work will further change the dynamics of the office and corporate settings while influencing designs of new dwellings and apartments well after the coronavirus is contained.

The eastern growth of the Tampa Bay market, specifically along the I-4 Corridor, creates excitement for industry leaders. As Andrew Wright, founder of Franklin Street, told Invest: “I would say that if the United States is the best country in the world, and within the United States the Southeast, and within the Southeast, the I-4 Corridor could literally be the best investment corridor in the entire world. I really, strongly believe that.”

Construction & Infrastructure:

Housing and industrial constitute the tide that lifts all boats in the Tampa Bay region’s construction sector, despite a slowdown in the office segment. Even in that space, however, there is optimism that the pandemic hype calling into question the very existence of the office has been overdone. Overall, the question is, can the sector stay apace of demand?