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OFFICE VACANCY RATE INCREASES, BUT WHY?

A downtown St. Petersburg surplus has observers pondering causes.

Two years ago, the city's central business core had an office vacancy rate of 5 percent. The recent spike to 12 percent is either a blip or the sign of a downturn, depending on whom you ask.

"It's maybe a little bit of a hiccup," said Darin Kucera, managing partner of One Progress Properties, which leases out space in the Bank of America building, which lost its biggest tenant, Progress Energy. "We're optimistic we'll be able to have the vacancy filled."

Kucera's 300,000-square-foot building was nearly full last year when Progress vacated 80,000 square feet to move into its new building on First Avenue N. He said the expanding Revolution, which launched GratisCard last year, has taken up 37,000 square feet. He said the building should be nearly full again by the end of this year.

The addition of Progress' own 210,000-square-foot building increases capacity, which increases the vacancy rate until that vacated capacity is filled. But some say the declining economy is what's driving the empty feeling downtown.

"The trend this year is going to be companies moving out of downtown to mid county," said Mike Talmadge of Echelon Real Estate. "A lot of people are worried about what '08 and '09 are going to look like, so they're looking at their expenses."

Talmadge, a leasing agent for property downtown and in the mid Pinellas Gateway area, said he knows of a large accounting firm downtown that is looking north to save as much as a half-million dollars a year in rent. He also pointed to the Bankers Financial move out of First Central Tower, a.k.a. the BB&T building, to space in Gateway. That move opened up another 85,000 square feet in a downtown that has just under 4-million square feet of total office space.

A new opportunity

Progress and Bankers nearly account for the change in vacancy rates, said Dave Goodwin, the city's economic development director. With a modest inventory, a couple of big moves can shift the statistics dramatically. But he said there's a "sunny side."

"Before, people who wanted to be downtown couldn't find space," Goodwin said.

The city's vacancy rate started increasing in 2006, according to Colliers Arnold, which provides data to Goodwin's office.

Vacancy was 7.7 percent in '06, reflective of Progress' first move to its new building from the 130,000 square feet in the South Core garage building. That space is still empty and on the market as either office or retail space. Accenture also left McNulty Station in late '05.

But Goodwin notes that the core is still in a good position relative to other office submarkets. Tampa's vacancy rate been moving downward slightly of late but is still at 13 percent of its 8.7-million square feet. Gateway took a jump similar to St. Petersburg's downtown last year, going from 8.5 percent to 12.4 percent on almost 7-million square feet. North Pinellas is up to 11.4 percent on almost 5-million square feet, Westshore is at 10 percent on 14.4-million square feet, and the area east of Tampa along Interstate 75 is at 10.5 percent of its 17-million square feet.

Landlords will adjust

Talmadge said St. Petersburg will suffer as long as rents stay high because downtown tenants face expenses for parking, and the slender buildings are less efficient for office layouts. Goodwin said vacancies will force rents down, but downtown has enticements that make the investment worthwhile for some companies.

"It's a 24/7 entertainment environment," he said. "The creative-class companies see that as attractive."

The decline in the residential real estate market also has hurt the downtown office market, said Ken Heretick of Vector Properties. Until more homes and condos start selling, office space also will languish.

"The residential market is in the pits, so a lot of those companies are downsizing," said Heretick, who leases out office space all around the Tampa Bay area but keeps his own offices downtown.

There has been a lack of interest in building new offices downtown. Other than the Progress building and 40,000 square feet at the base of Signature Place, Goodwin said nothing is on the table downtown. A proposed office building at Fourth Street and First Avenue S is on hold, but Heretick is considering turning the former YMCA building into office condos.

Heretick, who also chairs the Downtown Partnership and works on its tenant recruitment committee, said landlords will adjust to bring new tenants downtown. He said low debt on most buildings creates room to negotiate.

"Downtown's a heck of a nice place to be," he said.

Paul Swider can be reached at pswider@sptimes.com or 892-2271.

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