As 2023 drew to a close, Tampa’s office market presented a landscape marked by resilience and adaptability amidst national economic challenges. This analysis, drawing on reports from CBRE, JLL, and Cushman & Wakefield, offers a nuanced understanding of the market's performance in the fourth quarter.

Economic and Employment Landscape

According to CBRE's report, Tampa Bay's labor market demonstrated robust growth, with a notable increase in nonfarm employment of 1.9%, translating to the addition of 29,500 jobs year-over-year (YOY). JLL's findings align with this, noting that the unemployment rate in Tampa remained steady at 3.2%, consistent with the previous quarter and below the national average.

Leasing Activity and Vacancy Rates

Cushman & Wakefield's analysis reveals a vibrant quarter for leasing activity, with 1.1 million square feet recorded, a healthy 12% increase from the prior quarter. However, JLL reports that overall leasing activity for the year was down 8% YOY, with a decrease in the average lease size. CBRE's report further elaborates on vacancy trends, indicating a marginal year-end increase to 20.5%, with notable declines in specific submarkets like Westshore.

Rental Rate Insights

CBRE's market report highlights that average asking rates showed modest growth, increasing by just 1.8% over the past 12 months. Class A asking rents saw a 3.2% decline YOY, as high demand for premium spaces led to a surge in leasing of such properties, according to the report.

Investment Activity and Market Outlook

JLL's insights reveal that amidst economic instability, office sales volumes fell significantly, leading to a decrease in average prices. The report also forecasts significant lease expirations in the coming years, particularly in Class A spaces, suggesting a competitive market for premium office spaces.

Submarket Dynamics and Future Expectations

The Westshore and Tampa CBD, as highlighted in Cushman & Wakefield's report, continue to attract corporate relocations, benefiting from consistent leasing activity. However, the rise in vacancy in areas like the I-75 corridor reflects a trend of corporate consolidation from suburbs to urban areas.

Economic Forecast for 2024

CBRE's economic outlook for 2024 indicates that the pace of growth will be more modest than in recent quarters, with anticipated Federal Reserve rate cuts possibly leading to a rebound in sales volume and real estate performance.

In summary, the Q4 2023 Tampa office market, as portrayed by CBRE, JLL, and Cushman & Wakefield, is one of enduring optimism, marked by robust leasing activity, evolving vacancy rates, and cautious anticipation for the future amidst current economic headwinds and rental rate dynamics.

The Tampa Bay office market showed signs of stability with positive net absorption and flattening vacancy rates in Q3 2023. Across the major reporting sources of Colliers, Cushman & Wakefield, Avison Young, and Newmark, the overall direct vacancy rate ranged from 14.5% (Colliers) to 20.1% (Cushman & Wakefield). Net absorption remained positive from 3,187 SF (Colliers) to 99,947 SF (Cushman & Wakefield) for the second straight quarter, indicating incremental occupancy gains. 

Asking rental rates increased slightly, ranging from $29.89/SF (Cushman & Wakefield) to $31.03/SF (Colliers) across all classes, as availability tightened. Class A rents were up as well, from $31.99/SF per Colliers to between $32.26 to $33.87/SF per Cushman & Wakefield and Newmark reports. Minimal new deliveries have contributed to flattening vacancies and increased rents, with just 75,000 to 448,941 SF under construction or delivered year-to-date, per Colliers and Cushman & Wakefield reports.

Total leasing activity slowed from recent trends but remained healthy at 377,602 SF (Colliers) to 1.2 million SF (Colliers) with Cirkul’s 90,375-SF sublease deal at Sabal Pavilion I marking the largest lease of the quarter (Newmark). Sublease space also showed signs of decreasing down to 4.4% availability (Newmark).

While economic uncertainty persists and office demand recovery continues amidst hybrid work arrangements, the Tampa Bay office market remains healthy relative to other metros with high employment driving tenant activity. Fundamentals appear to be stabilizing at a new normal amidst global headwinds.

  After the Constitution of the United States was established, and had the appearance that promised permanency, Benjamin Franklin said in this world only two things that are certain, death and taxes.  As individuals, we pay a variety of taxes.  Business owners are no exception.  However, business owners have tax incentives.  Businesses hire people, make or sell goods, or offer services that benefits the community so they get incentivized for that work.

     One of the tax incentives can be found is the US Tax Code 1031, which allows business owners to defer the capital gains tax if they roll over the gain into another like entity.

    For example, a person owns several duplexes.  The value of the duplexes increases so the owner decides to sell the duplexes.  The person will owe tax on the capital gain of the duplexes.  However, the owner can roll the capital gain into another investment and defer the tax on the gain.  That investment does not have to be duplexes, it could be an apartment or it could be an office building that is leased out.   

     The tax on the capital gain does not need to be paid until the final sale with no reinvestment.  

     The 1031 Exchange does not cancel the tax owed, it just defers it.

     Let's take this one step further.  I person owns duplexes.  Sells those and rolls the capital gains into an apartment building.  The owner dies and bequeaths the apartment building to his heir.  Because of the step-up clause in the Tax Code, that capital gain is now figured on the value of the building when the heir inherited it.  It is theoretical that the heir could then sell the apartment building and now incur any capital gains.

     The 1031 code has come under fire by some in the government who see it as a loophole.  Some of these people would like to see that code abolished.  However, the 1031 exchange has allowed owners to build equity and use that equity to buy other commercial properties.  This provides opportunities for the users of this property to have a space for use that they may not have had if they had to come up with the equity.  

     There are some guidelines for the 1031 Exchange.  The owner (seller) must use an intermediary.  The intermediary holds the proceeds from the sale of the property.  If any of the money goes into the hands of the owner, the owner has to pay tax on it.  That is why the owner will use an intermediary.

     Also, the owner has 180 days to purchase the new investment.  I have used the example of a person owning several duplexes and consolidating the gains into one building.  It could also be reversed.  An owner could sell one building and purchase multiple properties, as long as none of them are for personal use.  The owner has to close on the new purchase within 180 days of the sell of the original property.

    The owner does have the option of taking 10% of the proceeds as cash, called a boot.  The owner would pay taxes on the boot while the rest of the money is deployed into the purchase of the new properties.

     For more information about intermediaries and/or options for the 1031 exchange, contact your CPA or tax advisor to determine if a 1031 makes sense for you.

    To discuss your commercial real estate needs, contact me at JoeBrown@c21be.com

The current economic conditions have put a financial strain on businesses of all sizes. Some businesses are faced with having to reduce the space they occupy, while others need to move to a different area of town. In some cases, businesses may even have to close their doors altogether.

If you're a business owner who is facing financial challenges, you may be wondering if subleasing or assigning your commercial lease is a good option. Here's a look at the pros and cons of each option:

Subleasing

Subleasing is when you allow another business to rent your commercial space. You remain the tenant on the lease and are still responsible for paying rent to the landlord. However, the subtenant pays you rent, which can help you offset your monthly costs.

There are a few advantages to subleasing. First, it can be a way to generate some much-needed income if you're struggling to make ends meet. Second, it can help you reduce your overhead costs by freeing up space that you're not using. Third, it can give you more flexibility if you need to move or downsize your business.   

However, there are also some disadvantages to subleasing. First, you'll need to find a subtenant who is willing to pay market rent for your space. Second, you'll be responsible for any damage that the subtenant causes to the property. Third, you may have to give the landlord a portion of the subtenant's rent.

Assigning Your Lease

Assigning your lease is when you transfer all of your rights and obligations under the lease to another business. This means that the new business will take over your lease and be responsible for paying rent to the landlord. You will be released from the lease and will no longer have any financial or legal obligations to the property.

Assigning your lease can be a good option if you need to get out of a lease that you can no longer afford. It can also be a good way to sell your business, as the buyer can assume your lease and take over your space.

However, there are some disadvantages to assigning your lease. First, you may have to pay a lease termination fee to the landlord. Second, you may have to find a tenant who is willing to assume your lease at the same rent that you're currently paying. Third, you may have to give the landlord a portion of the lease assignment fee.

Which Option Is Right for You?

The best option for you will depend on your individual circumstances. If you need to generate some income and reduce your overhead costs, subleasing may be a good option. If you need to get out of a lease that you can no longer afford, assigning your lease may be a better option.

It's important to consult with an attorney before subleasing or assigning your lease. They can help you understand the terms of your lease and negotiate with the landlord to get the best possible terms for your business.

The capitalization rate, or cap rate, is a measure of the expected return on investment for a commercial property for the first year. It is calculated by dividing the projected net operating income (NOI) by the property's market value.

For investors, the cap rate is an important factor in determining the value of a property. However, for owner-users, the cap rate may not be as important.

Owner-users are businesses that own the property they occupy. They are not looking to sell the property, so they are not concerned with the return on investment. Instead, they are more concerned with the cost of occupancy.

The cap rate can still be a factor for owner-users, however, if they are considering selling the property in the future. In this case, the cap rate will affect the sale price of the property.

Another situation where the cap rate may be a factor for owner-users is if they are considering a sell-leaseback arrangement. In a sell-leaseback, the owner-user sells the property to an investor and then leases it back from the investor. The cap rate will be used to determine the sale price of the property.

Overall, the cap rate is not as important for owner-users as it is for investors. However, the cap rate can still be a factor in some situations, such as when the owner-user is considering selling the property or entering into a sell-leaseback arrangement.

Here are some additional points to consider:

• The cap rate is typically lower for properties that are in high demand and have strong tenant occupancy.
• The cap rate can also be affected by the type of property, the location of the property, and the economic conditions in the area.
• If you are an owner-user, you should consult with a commercial real estate broker or appraiser to get an accurate estimate of the cap rate for your property.

The concept of a sale-leaseback is quite simple.  A business owner runs a business out of a building owned by the business owner.  The business owner sells the building but then leases the space back to continue the business.  There are some advantages to the sale-leaseback option.

1. Unlock liquidity

One of the biggest benefits of a sale-leaseback is that it can provide businesses with much-needed liquidity. This can be used to fund growth, pay down debt, or simply improve the company's financial position.

2. Reduce risk

Another benefit of a sale-leaseback is that it can help to reduce risk. When a company owns a commercial property, it is exposed to the risk of the property decreasing in value. This could happen if the market for commercial real estate declines or if the company's needs change and it no longer needs the property.

A sale-leaseback can help to mitigate this risk by transferring the ownership of the property to another party. This party will then be responsible for the risk of the property decreasing in value.

3. Tax Advantages

 When a business sells its property and then leases it back, the rental payments are generally fully deductible as business expenses. This can provide significant tax savings, as the business can deduct the entire amount of the rent payments, including operating expenses, CAM fees, and any owner-paid tenant improvements.

There is a saying that goes, “whether you lease or buy, you pay for the space you occupy.” Both options offer advantages and disadvantages. 

Some Advantages of Leasing

1.  Leasing offers the business owner flexibility.  As the business grows it needs more space.  Leasing offers the flexibility to expand the space rented or search for a larger space to rent. The business owner also has the flexibility to relocate to another part of town, maybe closer to the customer base. 
2. Leasing allows the business owner to use cash for the business instead of toward loan financing.  Sometimes, financing is available for leases and is an easier process since the title stays with the building owner.
3. As the building ages and needs repairs, the business owner can continue to focus on the business and not worry about building management.

Some Disadvantages of Leasing

1. If the business plans to be in a location long-term, the business owner will miss out on the value appreciation of the building.
2. The size and financial strength of the business may make leasing more expensive.  Financially strong companies can get low financing rates.
3. The business owner may want to make structural changes to the building so their business is more efficient.  However, those changes can only be made with the approval of the landlord.  The business owner does not have the final say in the office renovations.