Commercial real estate market remains strong, Colliers manager says

TAMPA — This time last year, Colliers International executive Danny Rice and his colleagues were preparing, at least mentally, for the possibility of a downturn this year.

Rice, 35, is Colliers’ managing director and market leader for central and west Florida, a job that puts him in charge of the company’s brokerage and marketing divisions for office, retail, industrial, land development and a couple of more niche practices in the Tampa Bay area, Lakeland, Orlando, Sarasota and Fort Myers. In all, he supervises more than 80 brokers.

Rice recently discussed what his firm has seen over the past year with the Tampa Bay Times and what he expects looking ahead. Here is the conversation, edited for length and clarity:

You’re working on your quarterly market update today. What are the headlines for what you see?

It’s an interesting time. We have the lowest vacancy in pretty much all the asset types out there that historically we’ve ever had.

And then on the flip side, you’ve got this noise around what’s the next two years look like? Is there a recession coming? Is it a slowdown? Is it not a slowdown? I think if you asked that question a year ago, some of us might have said this year or next year would be the slowdown. But here we are: We’re still seeing declining vacancy. We’re still seeing positive absorption. We’re still seeing a lot of confidence in the market.

It makes it a unique challenge. We’re dealing now with people on one side of the table who might be thinking we’ve got some slowish conditions coming, and on the other side thinking we’ve still got a long runway still happening.

You’ve got some tenants that are being cautiously optimistic, so they might not be pulling the trigger on a deal that they would have done a year ago or two years ago, potentially, or because they’ve already saturated the market with a bunch of activity over the last year, they’re being more selective of where they want to go.

Lease rates have been increasing, so it’s getting harder to justify costs, and that cost is not just the lease rate. It’s the construction cost and the build-out and all the pieces that come to operating the business. That challenge is making them put the pencil a little bit harder to the paper around, “Are we going to have enough revenues at this restaurant or this retailer to justify that lease rate?”

Landlords, on the other side, they’re holding strong because of where the market’s at right now and rates are at, but they’re being cautious and making sure of the quality of the tenant that’s going to go in the space. If there is a slowdown, they don’t want to have a tenant that could be out of business three years, five years from now.

Are you hearing of any tenants who are in existing leases saying, “I’d like to renegotiate this just to be safe”?

It’s very rare right now. Ask me that question a year from now, maybe two years from now. It might be a different answer.

I’m going to talk about retail. If you look at the headlines — 600 of this retailer’s stores closing, 200 stores of this retailer closing — it’s just a constant barrage of what you think is negative. But look at the numbers and the activity side. If all of that was so negative, we would see increasing vacancy, we would see drops in lease rates just from a supply and demand standpoint. But vacancy continues to go down. Everyone’s not talking about how many new spaces are being occupied by different retailers. So yeah, this tenant might have gone out of business and they’re shutting 600 stores down, but it’s being backfilled not 1X, it’s being backfilled 2X because vacancy over the past five years has basically been cut in half.

Restaurants has been one of the biggest growing pieces of backfill retail. Medical has made some use of the bigger box spaces, or the owners have cut it up and leased it out. If you have a big box in a bad location, that’s a challenge. If you see any big box vacant today, it’s because of its location.

What do you have your eye on for the coming year?

Overall activity. Overall sentiment from our teams, which are advisers to our clients, continues to be very positive. I think it’s when we start to see deals falling apart that you thought would have made sense to happen. We haven’t seen too much of that.

If the land business is active, that gives us a good runway from a development standpoint about confidence of the market. Developers aren’t going to buy a piece of land if they think three years from now, once they actually pull the trigger on development, it doesn’t make sense. Right now, that’s still very, very active.

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You’ve talked about retail. Compare that to how things are going in industrial.

Hot and hot. But it’s changed. Over the past 15 years, I think 20 percent of (Collier’s west central Florida industrial) market is new developed product, so our entire scope of what the industrial world looks like has been changed. That does come from e-commerce. Amazon is a big component of that, but it’s also how other retailers are leveraging their multi-channel approach. When you have retail that’s not the same retail as to what it was before, and you’ve got industrial that’s got to shift to accommodate the new retail, and I think those two are going hand in hand. Industrial’s almost the new retail, because of how the product is now flowing and the consumer’s need-it-now expectations. It’s causing industrial to be more visible. If you drive down I-4, you see these beautiful industrial facilities. Fifteen years ago, being visible wasn’t a desire.

Here’s a question I ask myself, probably, three times a week: Where are all these multi-family developments going to find people willing to pay these rents?

But, yet, it’s occupied. Most projects that are coming out of the ground are within a short period of time close to full occupancy, maybe sitting in the upper 80s, low 90s pretty quick. A lot of that has to do with population growth. I feel like today’s generation is more okay with apartment living, renting and having roommates. They don’t want to have to worry about the responsibilities of taking care of their yard. They want to be able to have the experience with their friends and have the amenities, quick access to their office and a live-work-play kind of feel.

It is an interesting thing because you see all this activity going on and you do wonder, are they going to be occupied, especially at some of the rates? What we’re seeing is that there’s more people sharing the apartment together. It’s not just one single earner. It’s either dual-income earners from married couples or it’s friends who are fairly new in their careers and say let’s go ahead and get an apartment together. It’s a really nice apartment in a great location. Yeah, we’re paying a lot, but individually it’s not that bad.

Is there an end in sight?

I don’t think so, at least in the short term. Depending on who you ask, some people are going to be like, “Yeah, in the next 12 months we might have some shakeup happening, and all of this good can’t continue.” But then on the other side, you check all the boxes — economic growth, population growth, general affordability of housing — and it’s still a good market. There’s nothing in the writing on the wall right now that says the next 12 to 24 months is going to be doomsday, at least from my perspective.

Wage growth in the Tampa Bay area has not been robust and lags the rest of the country. How does that affect your business?

Wage growth does impact the way people are going to spend on an individual person basis. But population growth is really more the impact on us, because whether wages are at this point or this point, when you have more people in an area spending, you’re just going to have more economic impact, which is going to drive industrial, retail, all the other food groups that we’ve been talking about.

Talking about retail and industrial, the words you used were “hot and hot.” That’s true of the best locations and the Class A stuff. Is demand just as strong for Class B, Class C properties?

It’s not as strong, but it’s still active. If you look at, for instance, retail, a lot of these retailers have opened a lot of locations over the past couple of years, and they’ve already picked that Class A, that prime location. So now their choices are, do they go to the B location just to continue their growth or do they be more strategic and say, “We’ll take the B, but it better be the right B at the right price point.” If they can’t make it work, they’re willing to pass, but they’re still looking, and they’re still active in those secondary markets.