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Real Estate
Jax Daily Record Friday, Mar. 13, 202005:20 AM EST

Commercial development outlook: Facing uncertainty

Elections, the economic cycle and the virus raise questions.

Jacksonville’s record-low unemployment rate and ongoing job and population growth continue to engender confidence among area commercial real estate brokers.

“Business development and an already sound economic environment are anticipated to strengthen,” said CBRE.

National conditions raise questions.

“Forecasts for 2020 anticipate moderate but steady growth, with focus on the 2020 Presidential election,” said NAI Hallmark.

The area’s major commercial brokerage firms reported fourth-quarter market conditions that indicate confidence in Jacksonville’s long-term growth but also the expectation of some slowing in 2020.

“Most likely, an election year coupled with a cooling economic cycle is likely to have some impact on leasing and investment activity though the precise extent is undetermined,” reported JLL.

Still, the economic cycle is historic.

“After closing with a record 126 straight months of economic expansion, the 2010s marked the first time in modern American history an entire decade was void of recession,” wrote NAI Hallmark Managing Partners Christian Harden and Keith Goldfaden.

The reports preceded before the coronavirus outbreak, which has been roiling the stock market.

“It’s too early to determine the impact on demand,” Harden said March 10.

“While we haven’t seen any ‘irrational exuberance’ in decision-making over the past year, a public health crisis is sure to slow down growth.”

Jacksonville’s job and population growth and low unemployment rate are keeping commercial and multifamily real estate developers and brokers busy. Here is what Avison Young, CBRE, Colliers International, Cushman & Wakefield, JLL and NAI Hallmark are saying:

Industrial: Construction boom boosts vacancy rate

Industrial vacancy rates rose during the year as rental rates varied depending on the quality of the warehouse space.

Brokers reported that almost 4.1 million square feet of new industrial space opened in the market during 2019. Of that almost 70% is occupied.

“Vacancy rebounded from the historically low levels reached in 2018 amid prolific construction,” JLL reported.

More is on the way. JLL said another 1.9 million square feet of space will be completed and available in 2020, although it could face depressed leasing as the market softens “amid trade uncertainty and an expanding inventory.”

Cushman & Wakefield reported that large tenants drove demand in the prominent industrial markets in North Jacksonville and West Jacksonville, where tenants leased 3 million square feet of space.

“This area was a magnet for development due to its logistical connections to all three of Jacksonville’s port facilities and interstate highway systems,” it said.

CBRE reports industrial inventory totals almost 108 million square feet, with 45.4 million square feet, or 42%, in West Jacksonville and 33.6 million, or 31%, in North Jacksonville.

Large tenant leases during 2019 included GE Appliances, Winsupply, Cra-Z-Art, W.W. Grainger Inc. and BMW of North America LLC.

Wayfair prepared to occupy a 1 million-square-foot distribution center in AllianceFlorida at Cecil Commerce Center, although the online retailer reported a delay in occupancy early this year.

CBRE reported positive signs for the industrial sector. “Cold storage and e-commerce occupiers are becoming much more prevalent within the market, to meet consumer demand,” it said.

Office: Rents up while vacancy remains low

While 2019 started slowly, “the year did not disappoint,” said Avison Young in its year-end office-market report.

Downtown is seeing a resurgence, evidenced by Fidelity National Information Services Inc.’s announced headquarters plans in the Riverside area and VyStar Credit Union’s acquisition and redevelopment of buildings at Bay and Laura streets.

Overall, rents throughout Jacksonville are up while vacancy rates remain stable to higher.

New construction remained build-to-suit projects for tenants, including McKesson, and its subtenant, SoFi, and that was in the suburbs.

Colliers International calculated that the office vacancy rate increased since early 2018 to about 9%, reflecting “the most significant construction in the office market since before 2008.”

“While construction is strong by recent historical standards, it is still half of what it was pre-crisis,” Colliers said.

That limited volume suggests “the balance of power will remain in landlords’ favor for the foreseeable future,” Colliers said.

It also predicts an increase in market rents.

As tenants moved into new space, they left older offices. Colliers encourages landlords to update their stock, which means higher rents.

“The market is rewarding landlords who are willing to take calculated risks with high-quality renovations,” it said.

Cushman & Wakefield forecasts growth in office occupancy on strengthening tenant demand.

“The market is expected to trend positive into 2020,” it said.

CBRE said low occupancy costs along with “a highly regarded workforce and well-funded infrastructure should also bolster the demand for budget-conscious companies looking to enter this well-positioned Southeast market.”

Retail: Vacancy near record-low levels

NAI Hallmark reported that the retail vacancy rate ended the year at 4.1%, nearly the lowest in the market’s history.

NAI forecasts rates to rise but remain below 5%.

The report preceded early 2020, when Lucky’s Markets, Earth Fare and Pier 1 Imports closed, and Sears announced it would close its Orange Park Mall department store.

It also came before RH, formerly known as Restoration Hardware, announced it would open a 50,000-square-foot home furnishings and accessories store with a rooftop bar and restaurant in St. Johns Town Center.

RH is part of St. Johns Town Center’s fourth phase of development, which also is designed for a hotel, theater and more retail space.

In the year-end report, NAI Hallmark said most new construction was concentrated in St. Johns County at The Pavilion at Durbin Park, with more than 500,000 square feet of space opening during 2019.

Downtown’s Brooklyn area also continued to attract retail development.

NAI Hallmark Senior Associate Eric Yi said 2019 will be viewed as a successful year of retail in Jacksonville.

“Look for continued success in 2020 with an emphasis on retailers entering the urban core as new developments get off the ground, and successful retailers chase the increased density,” he wrote.

Yi said March 4 that the grocery stores saturated the market quickly “and they all had to compete with Publix.”

Lucky’s Market and Earth Fare closed their stores; Native Sun Natural Foods Market closed three stores and then reopened one with a new format; and Save-A-Lot closed four of its several locations.

“It will be interesting to see what type of big-box users fill those vacancies as more lifestyle, entertainment, and service-oriented retailers continue to expand in the market,” he said.

Multifamily: Thousands of apartments in pipeline

Yes, there are a lot of apartments under construction.

Colliers International reported that Jacksonville added more than 11,000 apartment units over the past five years, with more than 2,400 between 2018 and 2019.

Another 5,100 units are under construction in the metro area, with about 4,000 expected to open this year.

Yet, the apartment vacancy rate remains less than 5% and rental rates continue to rise, although more slowly.

Colliers International said almost 118,400 units exist in the area, at monthly rents of $1.102 per square foot.

Monthly rents average $1,081, ranging from $924 in West Jacksonville to $1,247 in the upper Southside and $1,277 at the Beaches.

Colliers International said that despite increased supply, it found that the fourth quarter was the 19th consecutive quarter that market occupancy remained more than 94%.

“The market’s ability to absorb new units will continue to be tested in 2020 and into 2021,” Colliers reported.

Population growth, specifically people moving into the area, played a key role in the multifamily market growth. 

It noted an 8.3% population growth rate among young adults from 20 to 34 years old from 2013-18, more than three times the national average of 2.6%.

That age group is a prime market for apartments.

Apartments also are investments.

Colliers reported that more than 60 apartment properties sold last year for about $1.3 billion, or $104,000 per unit. That was below the $140,00 average in the South and $174,000 average in the U.S.

“Multifamily investment sales crossed the billion-dollar mark for the 4th consecutive year in the Jacksonville MSA,” Colliers said.

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