Another great year.
So say Michael and Drayton Saunders. And Ben Bakker. And Janet Robinson.
The reviews are in. It’s a great time for the region’s commercial real estate market.
Maybe not rating an A+, but the market descriptions belie the letter grades from these industry insiders.
“Overall, 2017 was another great year for the commercial real estate market in the Sarasota/Manatee/Charlotte County area. B rating overall.” — Michael Saunders, founder and CEO of Michael Saunders & Company, and Drayton Saunders, president.
“A solid B. Fantastic year-over-year returns.” — Ben Bakker, lifelong Bradenton resident, vice president of the family-owned HJB Properties and a commercial Realtor with MS&C.
“I would give it a B or C as the last three years have been really hot in the primary and secondary markets.” — Janet K. Robinson, the commercial director for the Tampa Bay region of Coldwell Banker Commercial NRT. She has worked in this commercial real estate market since 1996.
Saunders, whose Sarasota-born-and-based commercial real estate division continues to lead the region in contracts, specifically cited three reasons for the B grade:
- “Office vacancy rates have stabilized, but rents continue to have room to increase.”
- “Downtown Sarasota Class A rental rates increased 6.4 percent from a year ago. Landlords are taking full advantage of the strong market conditions and continue to aggressively push asking rates upwards, especially in Class B properties.”
(Class A buildings are the most prominent in location, construction, accessibility, desirability and professional management with highest rents. Class B buildings are a little older with average rents and construction finishes but still good quality management.)
- “Industrial: Rents have remained constant and for the fifth straight quarter, vacancy rates continue their low numbers, reaching 2.7 percent, and the metro has posted nine consecutive quarters of positive absorption.”
In specifically describing Manatee County and Bradenton, Bakker said vacancy rates are dropping.
Robinson also points out the bright spots: “The prices have risen in all portions of our market, including land, office, industrial, retail and multifamily. The vacancies have gone down considerably in all of these sectors.”
Both Saunders and Bakker hold similar views. “Even with the tight office/industrial market and rising rents that could support new construction,” Saunders said, “new office/industrial development without preleasing will be limited by funding constraints and competition from multifamily developers for the same sites.
“Downtown’s residential construction explosion will be a great positive to the downtown commercial and retail submarket. The growing live-work-play environment in downtown will remain a draw for people from all over the region.”
Bakker described the industrial sector as performing “extraordinarily well” with vacancies getting snatched up and thus putting upward pressure on the prices of vacant land in Manatee County as sites for new construction.
“We’re probably due for a leveling off in a new years,” he said.
Brian Alford, a Tampa-based commercial real estate market economist at CoStar Group, a research and data firm with offices across the United States and Europe, regularly issues detailed reports on key commercial real estate sectors: retail, office, apartment and light industrial.
Alford’s take on retail, supported by charts and statistics, credits the Sarasota-Manatee’s flourishing tourist industry and rising population for the strong demand since 2012. “This has combined with muted new construction over this same period to gradually compress vacancies to a level below the historical average,” he writes in a 2017 analysis.
At the same time, investment activity in retail space has been “extremely robust,” averaging more than $210 million annually since 2014 — “well above the historical average,” Alford notes. Yet new construction has been way down since 2010, “averaging less than half of the metro’s historical norm,” he said.
“In addition to having one of the higher population growth rates in the nation, Sarasota’s retail/wholesale trade has been one of the fastest growth sectors, with job increases of approximately 18 percent since 2015,” Alford said. “These have combined to fuel a steady retail demand, which is likely to continue into the foreseeable future.”
The apartment market appears to be contradictory. In the midst of a supply boom, formerly sound rent growth has been squeezed to a level below the historical average even though demand has been potent enough to keep vacancies below the historical average, Alford said. More than 3,500 units have been created since 2014, and 1,100 units are under construction.
“As typical for most Florida markets and despite the construction boom, Sarasota remains undersupplied,” he said. “Since 2010, household growth has outpaced housing starts and apartment growth combined.”
Jon Mast sees a growing market. The chief executive officer of the Manatee-Sarasota Building Industry Association said demand is high for multi-family housing with the supply increasing because of several condominium and apartment complexes being developed in both Manatee and Sarasota counties. “Multi-family housing, both condominium and apartments, are considered commercial and a strong part of my members portfolios,” he said.
Saunders sums up the market’s bright position. “In 2017, the Sarasota/Manatee/Charlotte County condominium and apartment project market remained very strong and healthy, especially in downtown Sarasota. Downtown Sarasota saw a boom in development along with multiple new proposed projects. With land becoming less available throughout the area, land prices continued to increase each quarter.”
Investors poured tens of millions into apartment complex purchases in 2017, apparently bullish on rates of return. Four sales alone amounted to $223 million.
“The office sector is the most interesting to watch,” Bakker said.
Technology and mobile communications have inalterably changed how the work world works, especially on large-scale employers. “Nobody needs these giant footprints anymore,” he said, citing Bank of America’s departure of a Bradenton high-rise because more and more customers have turned to online banking. “People can get more work done on the run,” Bakker added.
Still, Alford said, “Sarasota office demand has been exceptionally strong.”
Surprisingly, this is the region’s largest employment sector. Office workers represent 20 percent of the entire workforce, Alford said. The education and health services sectors are the prime drivers, he said. One reason: The abundance of medical offices to serve seniors since some 40 percent of the population is age 65 and above.
“Office construction has been significantly down during this cycle, averaging less than 10 percent of the metro’s historical annual construction levels since 2010,” Alford has found. “The lack of new supply and strong demand has seen net absorption greatly outpace deliveries in recent years, markedly compressing vacancies to levels approaching historic lows.
“In addition, the tightening fundamentals allowed landlords to push rents throughout much of the recovery, hitting a cyclic and historical peak in 2015. Investment activity has significantly increased in both volume and price since 2011, averaging over 30 percent higher annually than the metro’s historical average sales volume.”
CoStar reports that as of mid-December, there was only one office property currently under construction, the 40,000-square-foot Sabal Palm Plaza in downtown Sarasota. The building was 75 percent preleased to Sabal Palm Bank and Gilbane Building Company.
The current vacancy rate stands at 5.7 percent with the year’s rent growth at 2.3 percent, according to CoStar. The company predicts the 2018 vacancy rate will drop to 5 percent and rent will rise 2.1 percent.
A future gem
Perhaps Sarasota County’s crown jewel in commercial real estate in 2017 only caters to the imagination at this point. But as blueprints and renderings go — and the promising future economic wallop — the imagination runs wild.
The Atlanta Braves broke ground on a planned $100 million stadium complex in the West Villages in September, intending to open the major league baseball team’s spring training headquarters in February 2019.
The West Villages Improvement District estimates this commercial development’s 30-year economic impact on the region at more than $1.7 billion.