IN THE SHADOW OF TAMPA BAY'S OFFICE MARKET
Office space available for sublease in the Tampa area has spiked to a historic high since the pandemic arrived in the U.S. That could spell trouble for properties from restaurants to hotels.

By Ashley Gurbal Kritzer
Tampa Bay Business Journal
Published: Oct 12, 2020

Tampa Bay's office market is showing the first signs of strain since the novel coronavirus pandemic forced employers to transition to a work-from-home model seven months ago.

The most telling data point is the increasing amount of office space available for sublease across Tampa Bay — which JLL Inc. says has hit a historic high of 1.5 million square feet at the end of the third quarter. Nearly 700,000 square feet of sublease availability has been added since March, when the pandemic arrived on U.S. shores.

"We’ve had such an activation of the sublease market, which we see in recessionary periods, so it’s not new in that case," said Kyle Koller, JLL's Tampa research director. "But it’s come with such a force this time around that we wanted to keep an eye on it."

Sublease availability is a sort of shadow office market, offering a preview of space that may soon be counted as a direct vacancy if the company terminates their lease or the lease expires (of the 1.5 million square feet available for sublease in Tampa Bay, 850,000 square feet is already vacant, according to JLL). That dynamic, combined with the addition of just over 1 million square feet of brand-new office space between buildings under construction in Midtown Tampa, Water Street Tampa and the Heights, could shift the Tampa Bay office market in tenants' favor for the first time in several years.

Within those new projects, all slated to deliver in the first half of 2021, 750,000 square feet is yet to be leased, according to JLL's data. The current total market vacancy rate, which includes direct vacancies and sublease vacancies, is just under 15 percent.

"You can’t gloss over the fact that there’s a million square feet under construction, and the vast majority of that is still available," Koller said, "and unless we see some pre-leasing, it’s going to have an impact on the market vacancy and competition between building owners."

Office vacancy rates affect more than companies hoping to win favorable terms on their next lease. Restaurants, retailers, hotels and small-shop services like nail salons and dry cleaners pay a premium for real estate in densely populated office districts. In downtown Tampa, for example, the office market remains the anchor of the urban core, even as the number of residential units has exploded in the last five years. Office buildings with large chunks of empty space can spell trouble for their sexier neighbors, like restaurants and hotel bars.

"We really are only looking at two quarters of sublease data relative to Covid, and the lag time it takes C-suite leaders to meet, discuss options, make a decision, engage a broker and put it online and then it’s available — that lag time is significant," said Ryan Kratz, the Tampa-based president of the Southeast region for Colliers International. "So I think it’s safe to say that sublease vacancy as a percentage of total will continue to increase the next one or two quarters at least. We’re probably not at the high point."

JLL is tracking 140,000 square feet of anticipated move-outs from tenant-occupied space over the next quarter — but simultaneously tracking 475,000 square feet of anticipated move-ins, Koller said.

"Most of these are large users who signed leases pre-Covid or in the early stages of Covid," he said. "So we need to watch if they still commit to their spaces."

Covid may have accelerated some trends

It's too soon to speculate what the long-term implications of the pandemic might be for the office market. Some household names in Tampa Bay — AdventHealth's West Florida division and Tervis Tumblers — have already declared remote work a win and plan to shed some of their current real estate. Others, like Heritage Insurance, say they're fully committed to in-office workers; Heritage in early October announced a 90,000-square-foot office lease and equity stake in Westshore City Center.

Franklin Street founder Andrew Wright, whose investment firm Ally Capital owns the Westshore City Center, says he doesn't foresee a mass exodus from the office market.

"I do think we’ll see downsizing," Wright said. "I just don’t think it’ll be a 10-year trend."

Most companies are grappling with what their office space and remote-work policies will look like in a post-Covid world, and that uncertainty is driving at least a portion of the sublease market.

"It’s definitely not 100 percent Covid, but Covid may have accelerated some trends," Kratz said. "Some companies were already looking at consolidating space, and candidly the cost of real estate for the last year or so has been largely at an all-time high."

Koller says some of the sublease availability may have been in the works pre-Covid, and some could simply be testing the market. According to JLL's data, the vast majority of companies subleasing their space are typical office tenants for the Tampa Bay region, with 20,000 square feet or less.

"While there are a couple big ones, most of it is that average sized Tampa user," he said.

The office space under construction in Water Street, Midtown and The Heights is more multitenant space than has been built in the city proper in the last-quarter century. And it may be the last for awhile, said Owen LaFave, Pinellas County market president for The Bank of Tampa.

"There’s a fair amount of office space under construction in Water Street, Midtown and the Heights, and taking into consideration the subleased space, it’s going to be a challenge to find construction financing today for a new office unless it’s pre-leased, owner occupied, or conservatively leveraged with strong, well-known, successful developers," LaFave said. "Speculative multi-tenant office space isn’t being financed by banks in this market."

More aggressive than normal

Feldman Equities, which owns office buildings in Tampa and St. Petersburg, is still seeing leasing activity that's pretty close to pre-Covid levels, said CEO Larry Feldman. But the firm is seeing more sublease space than normal.

"We are more aggressive than normal, and maybe that’s why we’re signing a lot of leases," Feldman said. "Every recession I’ve been in, I hunker down. I cut rents and provide a lot of concessions." Face rents, also known as the asking rent price at which the building is marketed, have not dropped, Kratz said. But that doesn't mean other landlords aren't getting as aggressive as Feldman.

"If this is short and relatively V-shaped, it’s not likely they will," Kratz said. "However, if a significant landlord or even a collection of landlords drop their face rate, others will have to follow to meet the market. Statistically, that doesn’t happen until the third quarter following a recession, which puts it in the first quarter of 2021."

Even with the potential for more vacancy on the horizon, Feldman, a veteran owner of office properties, said he doesn't foresee a glut of distressed properties within the Tampa Bay market. Brand-new buildings are typically financed with terms that allow for lease-up to occur over a two-year time frame.

"Real estate is a slow-moving process," he said. "It's not like the stock market that moves on a tweet."