By Fran Pepis
Senior Vice President, Colliers Dickinson
Despite a softening economy, demand for office space will match the robust levels seen in 2006, again led by financial, professionals, and business sectors. The short-term forecast for the Jacksonville office market indicates a continued interest in expansions, corporate relocation and gradual improvement in the financial, leisure/hospitality and business service sectors.
Growth within the city’s MSA is a continuing factor in the office market. Jacksonville has become a desirable place for corporate expansion and relocation due to the powerful combination of a low cost of living and a low cost of doing business. The Florida Chamber of Commerce reports in-migration of 1,000 people per day with 7 percent of those people settling in the First Coast. This growth accounts for a vacancy rate that has gone from nearly 20 percent to under 12 percent in less than three years. First quarter data suggests that vacancy will fall below 10 percent by the end of 2007.
To the surprise of some, 2006 was characterized by significantly higher office rents. This trend will continue throughout 2007 as various submarkets like the Beaches, Butler/Baymeadows, and southern Duval County reflect tightening markets. Rents are anticipated to increase by 5-7 percent by the end of the year, due to several factors. Some of the rise is due to healthy demand and relatively modest amounts of new construction; but spikes in expenses such as insurance, maintenance and property taxes also play a part.
According to CoStar Group’s 2006 year-end office report, developers are expected to deliver less office space in 2007 than delivered in 2006. Approximately 955,302 square feet of new office space is anticipated for completion this year. This is roughly 484,000 square feet less than delivered in 2006, and the least amount of delivered space since 2004.
Most of the new space under construction is concentrated in the Butler/Baymeadows and Southside submarkets.
On average, about 64.8 percent or 871,806 square feet of all projects currently under construction have been pre-leased. These numbers do not take into account the emerging office condominium market.
In 2006, nearly 600,000 square feet of new office condominiums were constructed. Chasing after the “American Dream” of ownership, businesses that invest in this commodity, shield themselves against volatile market forces and inflation. Two multi-story, multi tenant buildings in the CBD have converted to an office condo environment. It is too early to determine wether this concept will be received in the marketplace, but one thing is for sure: vacancies will rise in Class B and Class C properties as tenants move into the office condominium market.
Investor interest remains strong
The demand for office investment has continued into 2007. In January, a Montreal-based investment group purchased the 470,390 square foot, eight building Metro Square office complex for $53.2 million or $113 per square foot. The property was 95 percent leased at the time of sale.
At the end of 2006, the following flurry of office sales took place:
Cypress Business Center: 121,758 square feet for $15 million, or $123 per sq. ft.
The Quadrant: 216,960 sq. ft., $22.2 million, $102 per sq. ft.
The Summit at Southpoint: 276,400 sq. ft., $30.4 million, $109 per sq. ft.
Exchange South: 194,000 sq. ft., $15.6 million, $80 per sq. ft.
Oak Grove Plaza: 230,812 sq. ft., $17.7 million, $76 per sq. ft.
Source: Property Appraiser’s office
These particular properties are positioned well in the market. They are well maintained, with low vacancies and credit tenants. CAP Rates on these sales averaged 7-7.5 percent. There are a large number of buyers chasing Jacksonville real estate. Investors find the Jacksonville market affordable, compared to other parts of the country. Rental rates will continue to move in an upward trend as the vacancy rate decreases.
The nation is becoming acquainted with the city’s appeal, which has fueled investor interest. In 2007, Forbes magazine listed Jacksonville as the third best city in the nation for jobs. The survey included factors such as the local unemployment rate, job growth, income growth, median household income, and the cost of living. Money Magazine, for the second time in four years, ranked Jacksonville among the ‘Top 10 Best Places to Live’ and Jacksonville tops Expansion Management Magazine’s list of “America’s Hottest Cities”.
Market Trends
• Improving conditions will reduce the overall vacancy rate below 12 percent from a high of nearly 20 percent three years ago.
• Asking rents for Class A office space increased on average 25 cents per square foot to $1 per square foot depending on location. The current rate is over $20 square foot.
• Average sale prices, with 65 percent or greater occupancy, with quality tenants, are trading at $95 per square foot in the CBD and $120 per square foot in the suburbs.
• New companies locating to the area and local businesses seeking expansion will increase absorption and further growth.
• Office condominiums are gaining strength. Entrepreneurs and small businesses tending to own rather than pay escalating rents.
Office outlook
• Downtown remains attractive for financial institutions, law firms, government and businesses seeking a signature address.
• Downtown vacancies will decrease as the demand for larger blocks of space cannot be met in the suburbs. The larger user will look to the downtown area to meet its size requirements.
• Local demand for proposed Class A build-to-suit suburban properties, will dictate 100,000 to 150,000 square feet, driven by increasingly higher occupancy rate, rising rents, and land costs.
• Rents expected to resume historical 5-7 percent increase per year while vacancy rates anticipate dropping below 10 percent.
• Suburban growth will shift with expanding population toward southern reaches and into adjacent counties.
• Most build-to-suit projects are tenant driven, which will add additional space to the market.
Market summary statistics
Vacancy rate: 12 percent
Absorption: 1.68 million sq. ft.
Under construction: 1.34 million sq. ft.
Asking rents per sq. ft.: Class A-$19.75, Class B-$17.70, Class C-$15.20.