Lead Photo: Studio+ image of NeoGenomics building. Courtesy of Seagate Development Group
When Seagate Development Group built its new headquarters in Fort Myers, it wasn’t preparing for a pandemic. But by noticing and following an emerging shift away from big, open workspaces, the company put itself in a good position to deal with the realities of office life today.
“We did some preliminary research on our design and saw a trend of moving away from cramming as many people into a space as possible,” says Seagate COO James A. Nulf Jr. “It’s a distraction and creates noise. In our office design, we have a lot of private space, and then open a collaborative space where people can meet collectively. We weren’t planning for this [pandemic], but our floor plan is as ideal as it can be given the circumstances.”
COVID-19 has already had a range of impacts on the way people work. And whether employees are still working from home or have returned to the office with social distancing and other precautions in place, it seems the typical workplace environment will be anything but usual for a good while.
So, what does that mean for the Southwest Florida office market, where the supply of office space has been outpacing demand for a long time?
“We’ve had an oversupply of office space in Lee and Collier counties since 2005,” says Justin Thibaut, president of Fort Myers real estate firm LSI Companies. He said too much got built during the boom, and then the Great Recession caused a rise in vacancies that haven’t yet been leased back up.
“You’re always going to have a challenged market sector when there is oversupply,” says James E. Doane, vice president of leasing and brokerage for Welsh Companies Florida. And now the question is whether COVID-19 will cause more damage.
Lee County was faring better than Collier County leading into the pandemic. According to statistics from real estate analytics firm CoStar, the Fort Myers area office vacancy rate was 5.9% in the first quarter of 2020. That’s a significant improvement from a high of 16.5% in the second quarter of 2011.
In the Naples area office market, the office vacancy rate in the first quarter of 2020 was 9%, according to CoStar. That’s still down from a high point of 15.2% in the second quarter of 2011, but the rate has been trending upward since the fourth quarter of 2018.
“Naples entered the pandemic on much weaker footing,” says Brian Alford, director of market analytics for Central and West Florida for CoStar. “It’s just been trending in the wrong direction for many quarters. A glut [of space] is not the right word. Naples has got less than 10 million square feet in its entire office market; it’s a relatively small office market as far as markets go. So, there’s not a glut, but the vacancy rate has doubled in the past two and a half years.”
There are many reasons for that. One is higher rent prices in Collier County, especially in Naples and North Naples. “With the cost of rent there, it must make sense to have an office in Collier County,” says Nelson Taylor, market research director for LSI Companies. “You have to be able to feed off an ability to utilize high-net-worth individuals in the area to make office space worth the highest rents in Southwest Florida.”
So, it may make sense for a high-touch, high-end wealth management firm to pay $27.18 a square foot in the North Naples submarket (per CoStar figures), versus $19.11 in the south Fort Myers submarket. But for other types of companies, that’s a price they don’t want to pay.
“We are actually seeing modest flight from both of the Naples submarkets because of pricing,” says Randal Mercer, founding partner of local commercial real estate firm CRE Consultants. “Those tenants who need to be there and cater to that North Naples market, they have to stay. But those that don’t are coming back to the Bonita Springs and Estero area. A lot of the staffing for those businesses resides farther north in Lee County or even Port Charlotte. I think to attract good people who live closer to their offices, businesses are looking at and executing leases in Bonita Springs because they can save upward of $10 a square foot.”
For example, at the time of this writing, CRE Consultants has a listing for 51,461 square feet of Class A office space available at Riverview Corporate Center in Bonita Springs with base rates of $14.50 a square foot. Another listing for Class A office space at Pelican Bay Financial Center in Naples, on the other hand, is currently available for $32 per square foot triple net.
The picture is similar throughout Lee County. “There’s a lower vacancy rate and more corporate headquarters in the Fort Myers area because it has more affordable labor, and it has more affordable labor because it has an abundance of relatively inexpensive housing,” says Welsh Companies’ Doane.
The median sale price for a single-family home in Lee County in May 2020 was $263,225, according to the Royal Palm Coast Realtor Association. In Collier County, the median sale price was $333,000 for the same time period, according to the Naples Area Board of Realtors.
There are still a lot of unknowns as to how COVID-19 will impact the modern workplace. But the work-from-home trend will likely continue in some fashion. A WalletHub survey released in June found that almost 60% of Americans think COVID-19 has changed the way we work for the better, and almost a third of Americans think that physical offices are “a thing of the past.”
No one interviewed for this story thinks things will go that far locally. But COVID-19 will likely affect how local businesses use their office space, and how much space they use. Real-estate firm LandQwest had been working with a prospect looking for 15,000 square feet of office space in Fort Myers. As the process went on, the client also began considering a 10,000-square-foot space for comparison.
We suggested maybe looking at it in case the client wanted to do side-by-side modeling of what it would look like if they increased work from home,” says Adam Palmer, principal and managing director for LandQwest. “And now that’s the space the client is focused on.”
But while some offices might shrink their footprints if more employees work from home, others might need to expand in order to accommodate social distancing measures. “The average square footage per employee metric should be increasing, which could potentially offset the amount of jobs
that might be working from home,” says Palmer. “If it was 140 square feet per employee before, maybe now it’s 200 square feet.”
“So far, we haven’t seen, at least in Lee and Collier counties, anything that says the office is ‘done,’” says Thibaut. “All we’ve seen is that the office is changing, and we expect that landlords will probably end up having higher operating expenses on running office buildings to accommodate more cleaning and changing the way common areas work.”
OUT WITH THE OLD, IN WITH THE NEW?
Not surprisingly, older office buildings are generally harder to rent or sell than newer ones. And
in many cases, the work needed to bring them up to date may not be worth it for most users.
“For individual properties, it all comes down to what it costs to retrofit the building,” says Justin Thibaut of LSI Companies. “Is there an opportunity for adaptive reuse with some of these buildings? Yes. But the problem with some of them, especially in good locations, is the cost of A: the underlying land value; and B: what it takes to retrofit. It comes down to an individual cost-benefit analysis that has to be done of, ‘Will it cost me more than it’s worth to renovate this?’”
If the answer is yes, these spaces get passed over. The medical office sector, for example, often avoids these kinds of older buildings, and it’s a sector where Thibaut has been seeing some activity. “A lot of permits are being pulled for new medical space,” he says.
“Medical space will have the most resiliency against COVID-19 and longer-term structural office space planning,” says James E. Doane of Welsh Companies Florida. “Your doctor doesn’t do house calls and has to have their staff on-site while seeing patients.”
Low interest rates may encourage more businesses of all kinds to start fresh rather than move into existing office space. “The cost to retrofit spaces has become significant, which is one of the reasons we went out and built our own building,” says Matt Price of Seagate Development Group. “We’re seeing a significant push to the single-tenant type of building, where companies are taking it upon themselves to either own their own building or get someone to build them a building and lease it from that person. It gives the client more control. If a company is in a multi-tenant building and someone gets sick these days, the whole building might close and you can’t go to the office. That concern is starting to spill over into people asking the question of, ‘What if I had my own building?’”