Commercial Real Estate Mid-Year Report

    Presented by: The Drotos Ryals Group

    The local commercial real estate (CRE) market is continuing to improve and gain momentum. A year ago, this report used the words “slowly emerging” when describing the marketplace. Six months ago, the message was “recovery is the theme of the day”. Now my feeling is that market improvements are absolutely all around us. The general consumer seems to agree and knows now is a good time to get back into real estate. Prices have bottomed and have started to trend back up (albeit slowly and reasonably). Interest rates remain at all-time lows and sellers remain anxious to get deals done.

    Location, condition and proper pricing remain the strongholds of the today’s activity. Seller’s that are trying to hang on to yesterday’s inflated prices are still struggling to see activity while those that have recognized and accepted today’s market values as a reality are back in business.

    Some segments of the market continue to move faster than others. For instance, available inventory in the office sector has dropped significantly. We are still doing more lease transactions than sales in the office arena. This may be somewhat due to Sellers still not being comfortable with today’s prices, or to potential buyers continuing struggles with obtaining new financing. Regardless, deals are happening and available inventory is being reduced. With that being said there are still deals to be had here. Our team has a strong inventory of office properties of a wider variety of sizes, locations, type etc.

    Banks are also slowly starting to get on board and realize the market is recovering. One by one, they seem to be trying to return to the world of making loans. While we haven’t seen much (if anything) in the way of speculative development and/or speculative lending (for years), and vacant land transactions are still far and few between, this sector too will eventually resume as existing inventories of available properties continue to thin and the supply vs demand pendulum continues to move toward a more balanced marketplace.

    A few comments about specific market segments:

    Office – While we didn’t see a single vacant office lot transaction between 2008 and early 2013, almost all office lots listed in MLS have sold in the past 12 months. This is primarily due to (1) the market beginning to recover and (2) inventory of existing office buildings being either leased or sold and available inventory being reduced. What a change. Probably a good time for some new office development! We are currently working on Phase 2 of an Office Park in Jonesville that can accommodate this strong demand for office lots.

    Warehouse – Interestingly, we had a significant oversupply of large buildings (> 25,000 SF) a year ago. In the past year we’ve seen a strong run on these buildings including the former Budweiser building north of the airport (38,000 SF), the Webster building just south of Alachua (28,000 SF), the former Lowes building on Waldo Road (58,000 SF), the former Scottie’s/ABC roofing building at 441/53rd Ave (58,000 SF), the former Heat Pipe building in the Airport Industrial Park (30,000 SF) and the Ball building in the NW Industrial Park (94,000 SF). That’s a pretty significant run of big building activity for Gainesville. The average sales price for these “big buildings was approximately $30/SF.

    Retail – This market sector continues to improve, but at price points well below several years ago. Also tenant interest seems to be very location sensitive. Better locations are showing more positive improvement. B and C locations are still slow. There has also been a spark of new retail development emerging with a few small projects along Archer Road, a final phase of University Town Center (anchored by EarthFare), the new Celebration Pointe and the Butler expansion. Larger new tenants such as Hobby Lobby, Lucky’s Market and Bass Pro Shops have all recently announced new stores coming in Gainesville. My guess is that Whole Foods may not be far behind.

    Average tenant sizes (and activity) in both the office and retail sectors hasn’t changed much over the past few years. The majority of office and retail transactions continues to be under 4000 SF. While we continue to have an abundance of larger spaces in both sectors, there has been some recent traction with a few larger office and retail transactions (Lucky’s Market, Hobby Lobby, a 43,000 SF medical device building, and the Hillside office building). Owners of office/retail spaces above the 4000 SF range should continue to anticipate a longer than average marketing period, with a direct correlation between “greater square footage equals longer marketing period”.

    Vacant Land – Still a fairly quiet segment of the market, but definitely starting to see some rumblings of activity. Residential builder/developers are starting to (slowly and cautiously) emerge and look at available land for potential future residential development. This slow return to recovery will also continue to spread into the commercial sectors (new office and/or retail development).

    Farmland, timberland and speculative land investments have seen a slight uptick in activity, but at price points well below several years ago.

    Investment Properties – Quality investment properties, with solid, sustainable investment returns (and quality tenants) are definitely in vogue, but are hard to find. A great time for companies to do a “sale-lease back”! We have had several clients recently take advantage of sale-lease back opportunities.

    Our advice to clients who want/need to sell or lease is very similar to what it’s always been… Make sure your property is in tip top condition and presents itself well vs competing properties and make sure you are priced consistently within ongoing market activity. Position your property well (condition and price) and you will see some action.

    Our Commercial Division is busy and we are excited at the return of activity. I’m not saying the CRE is back to being “rosy”, but I am happy to say it is continuing to move in the right direction and we are enthusiastic about the future.

    Mike Ryals
    Senior Vice President, Commercial and Land Division
    (352) 371-7111 ext. 329

    Dan Drotos
    MSRE, Commercial Realtor
    (954) 551-9846

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