Office Absorption

By Craig D. Timmins, CCIM

It’s simple economics — supply and demand. In the case of

office space, supply is determined by the amount of available space in a given

area and demand is governed by the market. Areas of limited supply in the

Bonita Springs/Naples market is the result of strong absorption rates,

particularly in the Class A market. This demand has triggered a flurry of

development activity in the area. Depending on how you look at the numbers,

annual office absorption is in the 150,000 to 200,000 square-foot range. The

increasing popularity of office condominiums makes the tracking of absorption

data even more challenging than in past years.

Perhaps the hottest office corridor is U.S. 41 between

Coastland Mall and Pelican Bay in Naples. Class A buildings are charging base

rents ranging from $19 to $22 per square foot and CAM ranging from $4.50 to

$8.50 per square foot. The Fifth Avenue area also is strong with base rents for

first floor space hitting the $40 per square foot mark and second floor space

at $25 per square foot.

Market Confidence

In a tremendous show of confidence in the Naples Class A

office market, a developer has commenced construction of what will be Collier

County’s largest office building. Totaling 150,000 square feet, the Fifth Third

Banking Center will be approximately 80 percent larger than the next largest

office building currently in the market. Located on Vanderbilt Beach Road just

east of U.S. 41, this project pushes the Class A office market — both in terms

of sheer size of the project as well as its location on the northern fringe of

what has historically been the preferred Class A location. As Naples and Bonita

Springs continue to merge, the entire Vanderbilt Beach Road corridor, as well

as Immokalee Road, will experience strong demand. We have already witnessed

this market strength with the success of the Gulf Coast National Bank Building

on Immokalee Road. Additionally, Citizens National Bank will be anchoring a

35,000 square-foot Class A office building on Immokalee Road at the entrance to

Collier’s Reserve.

A substantial number of new projects are in various stages

of planning and development. When totaled, these projects contain approximately

750,000 square feet of space — a big number by any measure. We must remember,

however, that not all of this space will come available at the same time. Some

projects are built in phases which, in some cases, take years to complete.

Additionally, some of these buildings will not actually be built until the

developer, and its lender, are satisfied that the space will be absorbed in a

timely manner and at an acceptable rental rate.

The influx of condominium offices also gives office

professionals an alternative. Condominium ownership gives the buyer a “bite

size” investment opportunity. Depending on the location and overall appeal of

the project, office condominium space sells for $15 to $200 per square foot.

The Bottom Line

The shortage of available vacant land, increasing impact

fees, and construction costs coupled with a historically high occupancy rate of

nearly 92 percent will inevitably push developers to build products at greater

costs. This will result in upward pressure on rental rates. Naturally, if

supply exceeds demand, office professionals will be able to negotiate favorable

terms. As existing tenants move into new space, tenants may find attractive

values in older buildings. But for now, if you want premium space, you will

have to pay the price.

Craig D. Timmins, CCIM is a principal with Grubb &

Ellis|IPC, a full-service commercial real estate company serving Southwest

Florida.