Here’s a recent interview I had with Florida Real Estate Journal editor Robert Pitts on why I love Ocala.
OCALA – Confidence is returning to the Ocala-area commercial real estate market, and 2010 will see a significant increase in investment sales as the general economic recovery continues to play out, according to Bartow McDonald IV, managing director for Sperry Van Ness | Skye Commercial Real Estate in Ocala.
Florida Real Estate Journal recently conducted an e-mail interview with McDonald to get more of his thoughts about the current state of the market and how it may progress this year.
FREJ: In general terms, how is the Ocala-area commercial real estate market holding up in this economic downturn?
McDonald: “Ocala experienced a level of unprecedented growth throughout the housing boom, where prices of commercial properties excelled far beyond their property fundamentals. No news there, right? But having a local economy so dependent on the housing market has made it even more painful for our community. On top of that, we lost Taylor Bean and Whitaker this year (2009), a major employer, which put a highly skilled workforce on the streets overnight.
“While we are seeing the market fundamentals coming back to more historically normal levels, it is no doubt a very painful time right now for many people who acquired commercial real estate over the past five years. Keeping my emotional rudder steady has probably been the biggest challenge for me personally this year in advising clients. It’s been a rough sea, but rough seas really do present opportunities.
“One that comes to mind is the new level of collaboration and cooperation with the leadership of our county and city governments, EDC, Workforce Connection and Chamber. This is really unprecedented. There is a unity in our community that we didn’t have before that will make it exponentially easier for companies to want to move into Marion County.
“Then there are the deals. We haven’t seen anything like the Silver Dome yet, but we are starting to see a few properties come to market that make you scratch your head. When was the last time you saw entitled lakefront multifamily land with utilities for $3,000 a unit?”
What occupancy levels are you seeing in the major property types – office, industrial, retail, multifamily?
“We’re seeing vacancies in every asset class increase by 25%-35% and expect this to continue this year.”
How are rental rates holding up?
“What a great time to be a tenant. There’s significant pressure on rents right now across the asset classes, and we expect this to continue throughout the next 12 months. Savvy owners are laser focused on stabilizing their assets and know that, as painful as it may be, some cash flow is better than no cash flow.
“We’re advising landlords to stick close to their existing tenants to avoid jingle mail (keys in envelope) and reminding them that prospective tenants have very short attention spans when it comes to the negotiating dance. In the deals we’re closing, we’re seeing more businesses trading up to higher quality spaces at the same price points they negotiated for lower quality space several years ago.
“Office $8-$12 psf, down from $17-$19. Industrial $2.75-$3.50 psf, down from $5-$7. Retail $10-$14 psf, down from $17-$25.”
Are you seeing any sales? At what price points, cap rates?
“We have seen a marked increase in acquisition activity in Q4 with both investors and owner/occupants. The sales deals we closed this year were all cash transactions with owner/occupants. Buyers pounced on office opportunities where they could leverage their cash to acquire space at prices significantly below construction costs, particularly in the medical space. We’re also starting to see investor activity again on land.”
Is anything at all going on with development?
“Development – that’s a word we haven’t heard a lot. Net residential inventory in Marion County remained flat for most of 2009 at around 5,700 units, which is about a 2.5 year’s supply. This will affect the appetite for land deals until we see the absorption velocity pick up. While the freeze in capital markets has put the kibosh on most projects from retail to multifamily, we have seen activity continue in standalone medical offices.
“One of the things I didn’t expect to see are owners who acquired agricultural land and took it through the entitlement process are now trying to revert the land use back to agricultural land to ease the tax burden. That’s a strategy sure to make a few county commissioners and city councilmen scratch their heads.
“The other thing that has caught my attention is the uptick in purchase offers we’re seeing for vacant land. This tells me the fear factor is starting to ease in the market as people are finding price points that make sense with the property fundamentals.”
How do you see a commercial property recovery playing out in the Ocala area?
“I love our community, and people will still keep coming to Ocala for the same reasons we did: beautiful land, quality of life, close proximity to beaches, easy access to Jacksonville, Tampa and Orlando, Gator games in our back yard. I could go on. These things still make Ocala an amazing place to live, work and raise a family.
“We’re on the road to recovery and market stabilization as prices come back in line with how people perceive value in Ocala. I think we’re going to see a significant uptick in transaction activity in 2010 as commercial real estate trades hands either by choice or sometimes by force at new price levels. A lot of these deals will be smaller in nature, closing in the $1 million to $2 million range – and probably take twice as much work and brain damage to successfully close.
“There’s reason to be optimistic. At one of our recent investor forums, I listened carefully as a very wealthy, silver-haired guest shared some of the details of a land deal he is working on acquiring. Confidence is starting to enter back into the market, and the pros like the seasoned investor at the forum are starting to act on opportunities with their wallets.”