Sweet Spot

Andrew DeSalvo has a long list of investors interested in

commercial properties. The problem is that DeSalvo, who in May took the helm of

the new Premier Commercial Properties of Southwest Florida (a Bonita

Springs-based division of The Lutgert Cos.), has a much shorter list of

potential income-producing commercial properties available. And when one comes

on the market, it's snapped up.

Fed up with the stock market and economic turmoil and attracted

by low interest rates and a decent rate of return at a relatively low risk,

investors have kept Southwest Florida's commercial real-estate brokers busy for

the past several months.

"A lot are selling property in other parts of the country

and moving it to Southwest Florida," says Randal L. Mercer, managing broker and

partner in CB Richard Ellis-Fort Myers/ Naples. He notes that some investors

are taking advantage of an Internal Revenue Service rule that allows

individuals to defer their taxes on a previous gain by rolling it into another

piece of property.

Property that generates a reasonable income at a fair price

is scarce, says Bob White, district president for Southwest Florida's chapter

of Certified Commercial Investment Managers and principal of Bob White

Commercial Real Estate in Fort Myers. The scarcity is partly because many

owners are holding onto their property. Owners must decide what to do with the

capital if they were to sell. Because there are limited low-risk, high-return

alternatives, fewer are selling. "Demand keeps pushing the price higher," says

David Stevens, a principal with Grubb & Ellis/IPC in Naples.

"As the stock market begins to recover, then we'll see some

people selling and cashing in some of the [real estate] equity that they've

accumu-lated over the years," says R. Scott Cameron, president of Cameron Real

Estate Service in Naples. "That should open it up a little bit for the buyers."

Until then, the best deals are either in new development or in buying and

upgrading older centers.

Retail and Rooftops

Fort Myers is one of the leading markets nationally for

retail growth. "We're seeing a little softening in the office market, but

retail has avoided hardships because of the tremendous population growth," says

Tom Woodyard, a commercial advisor with Grubb & Ellis/VIP-D'Alessandro in

Fort Myers.

As in any growing region, developers of neighborhood

shopping centers are following rooftops. Multinational oil companies such as

ExxonMobil are slowing their

construction of service stations, but pharmacies such as Walgreens and Eckerd,

the fastest-growing sector of the retail market, are thriving, DeSalvo reports.

Second to pharmacies in retail activity are grocery stores, followed by banks.

Grocery stores, especially Lakeland-based Publix Super Markets, have shifted

away from the superstore concept and are building smaller stores closer to each

other. They would rather compete among themselves than against another company.

Although U.S. 41 continues to be a mainstay for retail,

businesses are also concentrating on arterial routes between U.S. 41 and I-75,

typically fed by a grocery store, says Brian K. Tunnell, regional director and

managing broker of Coldwell Banker NRT for Lee and Charlotte. He predicts the

retail sector will continue to grow in third-tier markets such as Southwest

Florida, fueled in part by national retailers that have to produce growth for

their shareholders.

In Lee, commercial growth is expected to follow residential

development to the north and east and at I-75 corridors such as Colonial

Boulevard and Corkscrew Road. "If you look at every major interstate

intersection, a grocery is there or in the works," Mercer says.

Hot spots for retail in Collier remain along Vanderbilt

Beach and Pine Ridge roads and U.S. 41. At Rattlesnake Hammock Road and State

Road 951, a Publix-anchored center is commanding lease rates of $23 per square

foot, which is comparable to the rest of Collier. "I fore-casted a fair bit

less because it's East Naples and unproven," Stevens says. For the most part,

East Naples remains weak, with lingering vacancies and lease rates "frozen in

time," Stevens says, at $10 to $12 per

square foot.

Office Market Overload

Vacancies, particularly in class a space, have created a

soft office market in some parts of Lee and Collier, but also have opened

opportunities for both landlords and tenants. In previous years, growth spurred

firms to add staff and move to larger offices, driving "intra-market growth";

now that has almost ceased, Stevens says.

Meanwhile, many hundreds of square feet in new office space

have come onto the market. In Lee, that includes the four-story Fifth Third

Center on Daniels Parkway at Metro Parkway, the five-story Colonial Bank Plaza

at Boy Scout Drive and Summerlin Road, and Riverview Corporate Center in Bonita

Springs. In Collier, Florida's new headquarters for Fifth Third Bank at

Vanderbilt Beach Road and U.S. 41 will create about 100,000 square feet of

class A space beyond what the bank

will occupy. "That's a whole lot of space to be adding to the inventory at one

time," Stevens says.

Compounding the vacancies are a number of tenants like

brokerage and real-estate firms that have left class A space for free-standing buildings,

and national companies such as Humana, Allstate and a small WorldCom office

that have downsized or moved away. "That creates a lot of space, so it's

bringing prices down," Mercer says.

Effects from the class A glut are trickling down. The vacancies

are being filled in part by businesses moving up from class B space, enticed by

low class A lease rates. In turn, class C tenants are moving up to class B

space. On the other hand, uncertain economic conditions have made some

companies "decide they don't need the amenities" and move down from class A to

class B, White says.

Owners "are being careful before making long-term lease

commitments or purchase commitments," DeSalvo says. It's a buyers' market, he

adds, and buyers are conservative.

In Lee, the office market spiked in 2000 but diminished in

2001. "Overall, it looks like the Lee market is going to be very much in

balance with the exception of Bonita," says Stephen Duckworth, director of

research for Integra Realty Resources in Collier and managing director of ARC

Realty Advisers.

Daniels Parkway is becoming the new business corridor due to

its proximity to Southwest Florida Inter-national Airport and I-75, experts

say. Other hot spots are Colonial Boulevard north toward-but not necessarily

including-downtown as well as Colonial Boulevard and Metro Parkway, Mercer

says.

The Bonita/Estero area has the weakest office market because

it has so much new product, partly due to its prox-imity to Florida Gulf Coast

University. "New office growth that might have gone into some other area of

Collier is going into Bonita Springs, so you really have Naples office growth

going into Bonita," where it is cheaper because it's in Lee, Tunnell says.

The Booming Industrial Sector

The industrial sector is one of the strongest markets in

Southwest Florida, specifically in Lee, Mercer says. Residential growth

supports the industrial real-estate market, which consists primarily of

plumbing, air conditioning, tile and flooring, and other small, light

manufacturers that work out of small- to medium-sized facilities. Some of the

industrial activ-ity has trickled from the east coast, where developers can't

find large tracts. As they have consumed the available properties in Collier,

they've gradually moved up I-75 to more affordable properties in Lee.

Purchase rates are "alarmingly high numbers," Stevens says.

For example, he's seen buyers paying $9 or $10 per square foot on vacant

industrial land that would have garnered $4 a few years ago.

Metro Parkway between U.S. 41 and I-75 continues to be an

industrial focal point in Lee. But high transportation costs and the need to be

near the interstate to serve many areas are helping drive the boom around the

airport and Alico Road.

Merging Markets

Ultimately, the gap between naples and Fort Myers will be

closed and the two will be one market, Stevens predicts, citing growth on

corridors like Ben Hill Griffin Boulevard and Three Oaks Parkway in Estero.

"Miromar Outlets will become the center of our universe," he says.

For now, Collier and Lee remain completely different

markets. The Collier market is more mature than Lee, which means that as

Collier builds out, growth is slowly trickling north. "Charlotte is where Lee

was 15 years ago and Lee is where Collier was 10 years ago," Tunnell says.

In Collier, industry experts say that government decisions

such as proposed impact fees that would send construction costs skyrocketing

are creating obstacles to growth. "Quadrupling impact fees will slow the

process-and that's the goal-but there's got to be some middle ground," Stevens

says.

One concern is that developers whose proposed projects could

impact infrastructure will have to wait to receive a building permit until the

impact can be remedied, which could take a long time. In effect, Stevens says,

"That's the same as a morato-rium." As a result, developers, unwilling to have

property sitting idle for months while awaiting approvals, are refusing to

close on properties until all their building permits are in place. In theory,

those obstacles to new development could raise the value of existing

properties.

As the market matures, commercial real estate will shift.

There will be fewer land sales, less new development and more sales and

redevelopment of existing properties. The region's continuing growth will bring

increasing pressures to control development. "We'll have to be smarter about

how we approach our business," Tunnell says.

MARKETFACTS

A snapshot of lease rates in Lee and Collier.

Class A Office Rates

Lee: Range from $13.85 to $22 per square foot.

Collier: Average $19.54 per square foot.

Some of the highest class A rates are in Pelican Bay in

Naples, running in the low $30s per square foot, and along Fifth Avenue South