With the remarkable growth of the permanent population in the Naples area, I thought it surprising that the last major office building constructed in the area was Newgate Phase II, in 1995. But after some research, I found several reasons for the seeming lack of new structures.

To see how the market has changed, I turned to Craig Timmins, CCIM, of the Wood/IPC Commercial Department of John R. Wood real estate. Timmins has kept comprehensive records on Class A and Class B Office Space Occupancy since 1987 on a representative sample of buildings.

A comparison of the vacancy rates of 1995 and 1998 indicates that in Class A space, vacancies had dropped from 19 to 11 percent. "Class A" office buildings generally have impressive lobby areas, interior elevators and well-appointed common areas -- they target that class of office users who insist on making the best impression with their clients. Rents in these buildings are usually somewhere in the area of $25 per square foot, all inclusive, except for janitorial service.

Timmins currently shows that there are 1,151,490 square feet of Class A space in the marketplace (See Figure One) with 121,668 square feet available for rent. Of the available space, 40 percent is concentrated in the Pelican Bay area and 26 percent on Fifth Avenue South east of 10th Street.

In 1995, the estimated permanent population in the Naples Urban Area was 139,100, while 804,343 square feet of Class A office space was occupied. This meant we had 5.78 square feet of occupied space for every permanent resident.

In 1998, we had 1,029,822 square feet of Class A office space occupied and an estimated permanent population of 159,849, or 6.44 square feet of occupied space for every permanent resident.

In the past three years, therefore, the occupancy rate has increased to 89 percent, and the square footage of occupied Class A space per permanent resident has increased 11 percent. This would seem to indicate that the population increase is demanding more Class A space.

But I was still concerned with the 11 percent vacancy rate for this type of space. "It feels like a very active market for the high-end office user," I said to myself. "But then, why do we still have 11 percent vacancy? Where are the high-end users going?"

I thought that it might make sense to look at the Class B market, different from Class A space primarily in that the access to each office is from outside walkways, there is generally no lobby, elevators are accessed through the outside of the building, and amenities are limited. In 1998, Class B office space cost about $16 per square foot per year, or more than 1/3 less than Class A space.

In 1995, 575,032 square feet of Class B office space was occupied, representing an 88 percent occupancy rate. With an urban area population of 139,100, this represented 4.13 square feet of occupied space for every permanent resident. In 1998, we had 647,680 square feet of Class B occupied office space, a 91 percent occupancy rate. This represented 4.05 square feet of occupied space for every permanent resident. Therefore, the square feet per resident had actually dropped, not increased, during the 1995-1998 period.

The question persisted: Why an 11 percent vacancy rate when population growth was so high?

I found the answer in two new kinds of office space that defy the traditional classification:

** The first kind is relatively small buildings, some of which are constructed to Class A interior and exterior standards. A good example is the part of the Park North complex that fronts Castello Drive and was constructed as part of the Newgate project.

These buildings are approximately 3,000 square feet in size and are generally considered too small to keep track of in most office surveys. But these offices are fully occupied, with private entrances, convenient parking, excellent architecture and landscaping, high ceilings and a sense of quality that users feel is equal to that of Class A office space.

Michael Fernandez of Planning Development, Inc., an occupant of Park North, feels that this is the type of building that will dominate the office market in the future. "These buildings are constructed to high standards and attract professionals who would normally be traditional office-tower tenants," he says. "But the units are so user friendly, have much lower costs of operation and are significantly more efficient, since there are no interior hallways, elevator shafts or lobbies. Instead of having up to 19 percent of the building unusable, 100 percent can be leased."

Another example is the Coventry Square complex at the corner of 111th Avenue North and Tamiami Trail. There we find occupants like the Cleveland Clinic, physicians, attorneys and other professionals that one would normally see in Class A space.

And then there is the Park Central complex, which is currently in the final phase of completion, located just north of the Sports Authority on Airport Road and Pine Ridge Road. There we find 11 buildings, each 2,950 square feet. They all sold within eight weeks of being announced. The buildings were placed on 3.75 acres, producing a net yield of 8,653 square feet per acre. If we assume a 15 to 20 percent inefficiency factor in tower-type buildings, we have a gross equivalent yield of between 10,180 to 10,816 square feet per acre.

Again, we find physicians and professionals that are taking advantage of this new office genre. Occupants have reported that they can own these buildings for less than it costs to rent comparable space, given the current favorably low interest rates. And some occupants have reported that while they only need perhaps half the building, they can rent out the other half until they grow into the space, generating some income to partially offset the mortgage cost -- just like the old duplex idea in residential income property.

This product is developing the appearance of a hot product. There are at least three developers who have similar projects on the drawing boards. They all have reported excellent market response to preliminary offerings. And the locations of their products are outside the US 41 Corridor, where most office space has been concentrated. Two projects are planned for the Vanderbilt Beach/Airport Road intersection, as part of the Galleria complexes, one is planned further east on Vanderbilt Beach Road, and one is planned at the intersection of Immokalee Road and I-75 as part of the Pelican Strand development.

** A second area of office activity generally not represented by most office surveys is the Fifth Avenue South area. Here we have mostly mixed-use buildings as opposed to standard office buildings. But there is a total of 225,000 square feet of office space in that marketplace, which has an approximate vacancy rate of about 10 percent, most of which is concentrated in two new buildings that have just opened.

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