With a new year upon us it is time once again for all of us pundits to have predictions for the upcoming year, so here goes my take for the SW Florida commercial real estate scene:
LAND: As we have been experiencing over the past year or two, the availability of commercially zoned land in Naples (Collier County) has gone from severe shortage stage to downright Critical! Depending on what size of land and specific zoning you need, your choices may now be counted on one hand if that. This is not just a real estate guy talking here, but the reality of supply and demand. I think by the end of the year the inventory for the grade A properties is going to be depleted to near zero. So if you looking to buy land to build, lock it in early or wait until the next cycle. If you are a land owner then maybe now is the time to be a seller. There are always locations in the County that are the ‘hot’ areas and that is where most of this will be felt. Other areas that traditionally haven’t been viewed so robustly will be the beneficiaries by default. This shortage will likewise encourage redevelopment also a beneficiary. What this all means is that land prices have likewise increased to surpass pre-recession levels. Lee County isn’t nearly in the same situation as Collier County, except in certain key corridors. The inventory of land is still fairly broad in most categories (retail, office, industrial), but pricing has likewise more than recovered in most cases. Charlotte County continues to lag the rest of SW Florida, as it has for seemingly forever, maybe 2016 will be the year Charlotte finally begins to reawaken!
OFFICE: Conditions are still improving on the office front, with vacancies continue to decline and rates are inching back up. In the overall SW Florida region vacancies have dropped to about 11.1%. Of the three counties, Collier County maintains the lowest overall vacancy. Of the three classes of space (Class A, B, and C), in all regions Class C office space has significantly less vacancy than other classes, with Class A having the highest vacancy. This might suggest that the long lasting recession had forced much of the market to the lower cost categories. There was a continued lack of new construction of office space in 2015 which helped the vacancy factors, with 2016 only having a small uptick in new product. As such 2016 will continue to see lower vacancies and somewhat higher rental rates. The lowered priced properties are showing relatively low vacancies (only 6.8% in Collier County) which may force some office users to higher quality/higher price properties. The Class A statistics for Naples stand at 13.9% which certainly has room for improvement, while Lee and Charlotte Counties still have unhealthy high vacancy levels (Lee County at 18.1% and Charlotte at 27%). One of the few larger Class A buildings planned for 2016 in Naples is being built on the North Trail by the Lutgert Companies.
Office – Vacancy Rates by Class
RETAIL: Vacancy rates continued to decline and rental rates continued to climb in 2015 and will continue to do so in 2016 as new retail construction is still at manageable levels. The overall market had vacancy of 7.0% (with Collier being the lowest at 6.6%). The typical hotspots continue to lead the back with near zero vacancy while perennial laggards were unchanged. While new construction is still far off the pace as compared to pre-recession levels, there are approximately 434,000 square feet currently under construction to be delivered in 2016. Commercially zoned land availability will be the limiting factor to a break away pace.
INDUSTRIAL: 2015 continued to be the star performer in the various asset classes with vacancy rates overall being 6.1% (3.8% in Collier County). Lee County had the highest overall vacancy at 7.4%, but certainly not an unhealthy level. The big story here continues to be the shortage of new product, particularly in Collier County, keeping a lid on supply. This trend will continue in 2016 and beyond so long as the overall economy stays active. Only now are we seeing new construction of flex and warehouse buildings as rental rates are starting to move high enough to justify construction costs.
Industrial – Vacancy Rates by Building Type
INVESTMENT: 2015 saw perhaps the peak in the cap rate cycle with record low cap rates being paid for the recent sale of Mercato, and a downright frothy price paid for a big chunk of Fifth Avenue Naples property. With the gradual rise in interest rates by the Fed, one would traditionally argue that cap rates will also start to rise. There are still plenty of investors in the market looking for better yields than the lackluster stock and bond markets, so couple that with the critical lack of supply of good quality investment properties will result in a continued strong cap rates (high values) during 2016. It is a good market to be a seller in most cases.