Lee County Sees Decline in Office Vacancy Rates

After peaking at 18 percent in 1997, the vacancy rate in Lee County's office market is headed down this year as construction slows and new tenants occupy existing space.

Several other trends have begun to emerge in the last year:

** After years of stagnation, the Downtown and Colonial Boulevard submarkets are beginning to heat up.

** A scarcity of income-producing property has led to a high demand for it.

** For now, the number of new, larger projects has fallen sharply, further signaling that vacancy rates will continue to fall as supply and demand equalize.

All said, developers have shown remarkable restraint by not overbuilding and glutting the market with an oversupply of office space. Like most other real estate segments in the local market, this trend has extended the mature phase of the real estate cycle and held off an inevitable downturn.

According to a year-end survey by the Allen Morris Company, the vacancy rate in the Lee County office market is 15.6 percent, down from 18 percent in 1997. Vacancy rates had been rising from a low of 12 percent in 1995, primarily due to a flurry of construction in the mid-1990s.

I expect the rate to continue decreasing, possibly to the 13 percent range in 2000, as a lull in development leads to natural absorption in the market. In fact, the pipeline is dry. It usually takes about 12 months to design, permit and build a large project, and currently there are few projects of this kind in progress.

Of the office submarkets, the University/College Parkway area continues to have the lowest vacancy rate of 9.9 percent, fueled by business growth in South Fort Myers. This area also had the highest absorption in 1998 of 57,142 square feet.

The area east of Interstate 75 has the highest vacancy rate at nearly 28 percent, as most office developers are still reluctant to jump across I-75 into what has recently emerged as a strong industrial area.

Median rents also decreased slightly in 1998 to $11.93 per square foot compared to $12.11 in 1997.

Emerging markets

While major activity still is slow, downtown Fort Myers is emerging from years of high vacancies as private funds replace public sector investment. Another positive sign is that private investment is actually going into renovations (such as the Franklin Arms complex) instead of just buying properties for speculative purposes.

Another budding market is the Colonial Boulevard corridor east of Metro Parkway. The completion of the Midpoint Bridge linking Cape Coral to Lehigh Acres has started to benefit this section of the road.

The area also had been slow to develop because of a lack of nearby "rooftops," or housing. But that is beginning to change. For example, U.S. Homes is developing Heritage Palms, located just north of Colonial along Six Mile Cypress Parkway. As development moves eastward along Colonial, we'll begin to see more office buildings like the two-story, 20,000-square-foot Brown & Poe Building completed in 1998.

Income Property

Recently, demand has surged for income-producing property as investment capital chases a limited supply. This has led to much activity, including multiple sales of some buildings.

To illustrate, the 130,000-square-foot University Park was sold in 1998 to a German investment group for $23.9 million (the $173 per square foot included the nearby 8,200-square-foot Prudential Securities building recently built by Owen-Ames-Kimball Company). The sale occurred just two years after another group bought the building for $16.2 million ($124 per square foot).

Smaller buildings also are being built, leased, then sold as income-producing property. For example, the 11,500-square-foot Charles Schwab building developed by Mel-Re Construction in 1998 was quickly sold for $1.9 million. Investors are also purchasing and sprucing up older multi-tenant buildings. Last year John McGarvey's Twosome Flex Associates purchased Executive Centers I and II at Bonita Bay. The Centers were then sold as a package with adjoining land.

Surprisingly, consolidation in the banking industry has not led to an excess supply of space, as small community banks have found a niche in the local market and have bought some of the branches abandoned through large mergers.

One notable bank transaction in 1998 was the purchase of the NBD Bank site on University Drive by investors for $249 per square foot, making it the most expensive income producing property in Lee County.

Summary

All said, the office market in Lee County remains strong due to restraint in development during the good times and a high demand for income-producing property. Because very few large projects are currently in the pipeline, I don't foresee an imminent downturn. However, vacancy rates will continue to decline as existing space is snapped up.

Frank D'Alessandro is the CEO of Grubb & Ellis|VIP-D'Alessandro, a full-service commercial real estate firm in Fort Myers.