Wow, what a year! Our team certainly had a busy and productive 2014, although this does not hold true throughout all asset classes and market sectors. The local commercial real estate (CRE) market has absolutely turned the corner and is on the upswing in both number of deals as well as pricing, depending on factors such as asset, asset class, and location. 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 our feeling is “hold on for the ride”. The general consumer seems to agree and understands that now is a good time to get back into real estate. Prices have bottomed and started to trend back up (albeit slowly and reasonably). Interest rates are still at all-time lows and sellers remain anxious to get deals done.
Location, condition and proper pricing remain the strongholds of the activity today. Sellers that are trying to hang on to yesterday's inflated prices still struggle 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. Office sales have become a hot commodity while leasing has seemed to flatten out in both number of deals and pricing. This may be due to a slightly relaxed lending environment for qualified end-users. As mentioned above, interest rates are still low and although pricing is on the upswing, they are still far from the prices we witnessed in 2006-2008. 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 wide variety of sizes, locations, type etc.
The vast majority of our deals over the past 18 months have been cash deals which we believe is due to the extremely low returns investors can achieve through other financial vehicles. Banks are slowly starting to get on board and realize the market is recovering however, and one by one, they seem to be returning 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. We have seen a drastic uptick in interest for vacant land and development. Multi-family and Assisted Living (ALF) developers have been calling more and more frequently on properties that were stagnant for years. This is a great sign and the first step to new product coming on-line.
A few comments about specific market segments (and this hasn’t changed significantly since mid-year):
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 12-14 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. Demand to purchase offices is very strong and deals are being converted at the right market price. The sweet spot for offices seems to fall into the $90-$100/SF range with that number being slightly higher in prime locations.
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 larger buildings was approximately $30/SF. There are plenty of warehouses available in the 10,000- 20,000 SF range that can be purchased or leased for very competitive prices. We have seen a drastic reduction in small Warehouse and Office/Warehouse inventory. Spaces 3,500 SF and below are relatively easy to lease or sell and do not stay on the market very long.
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, while 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. The newest Publix anchored retail center, located in Alachua on 441 next to Santa Fe High School, will begin construction in early 2015. Pre-leasing of this center has been very strong in both demand and the prices we are achieving. It has been a long time coming, but the City of Alachua sure is excited for this new addition! We do have a couple 1,300 sf in-line suites left so please contact us if you are interested. A second new Publix also appears to be emerging near UF.
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 continue 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 from a closed transaction stand point, however interest is strong. Residential builder/developers are starting to emerge and look at available land for potential future residential development. This 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.
On a personal note, 2014 was special for Dan in that he achieved the prestigious Certified Commercial Investment Member Designation (CCIM) which currently less than 6% of CRE professionals worldwide have attained. With the average CCIM having 19 years of professional experience and Dan completing it in less than 3 it is culmination of a lot of hard work. If you are interested in finding out more about how a CCIM can help you achieve your Commercial Real Estate goals please call us.
The Drotos Ryals Group had a fantastic 2014 and is very thankful to all of you who contributed to our success. From our management to our support staff, vendors and our fellow CRE brokerage community, we sincerely thank you. All signs are pointing to a strong 1Q 2015 and beyond and we sure hope this holds true. We are not saying pricing is back to being "rosy", but we are happy to say it is continuing to move in the right direction and we are enthusiastic about the future. We wish all of you a happy and healthy 2015!
Senior Vice President, Commercial and Land Division
MSRE, CCIM, Vice President