Commercial real estate and economic development leaders are urging the St. Petersburg City Council not to pump the brakes on supporting office construction in the city.
St. Petersburg needs more office space to add jobs, to attract new companies and to allow existing companies to expand, yet there is little space currently available for those new and expanding businesses, said Alan DeLisle, city development administrator. Financing for new office projects is tough, but one way to make the cost of office building projects more feasible is through partnerships between the city and private developers, such as selling city land at favorable prices or subsidizing parking garages, DeLisle told the City Council during a meeting of the Committee of the Whole Thursday.
Council members had asked for the briefing as they work to balance multiple needs in the city, including funding for affordable housing, and as the Covid-19 pandemic shakes up traditional office demands.
Mack Feldman, vice president of office building owner Feldman Equities, was among those who told the council that now is not the time to step away from continued city support for private developers. Most tenants see Covid-19 as a short-term disruption and are not letting it upset their long-term plans for lease that may last five or 10 years, Feldman said.
In addition, developing a new office building can take three to five years, he said.
“If the city was to decide today maybe we don’t want to support new office space through a parking facility, and then in three years companies are banging on our door, saying I want to move into downtown and there’s no space available, even if at that point the city wanted to start subsidizing office again and helping get some supply started, it would be three, four, five years before we see any results from that,” Feldman said. “It’s a caution here. If we were to make a decision based off this short-term uncertainty, we wouldn’t be able to revert to the status quo for many years to come and there’s a real risk to the city’s job growth in my opinion if we were to do that.”
Market to watch
At least three companies are currently interested in additional office space in St. Petersburg, with their needs ranging from 50,000 square feet to 100,000 square feet, said Sophia Sorolis, the city’s director of economic and workforce development. Eleven companies are seeking at least 8,000 square feet or more office space, according to the St. Petersburg Area Economic Development Corp.
Long-term term projections indicate there will be a demand for between 78,500 and 135,000 square feet of new office space each year for the next 30 years, DeLisle said.
A new report from the Urban Land Institute ranks the Tampa-St. Petersburg market as No. 6 among 80 communities nationwide as a market to watch for overall real estate prospects, and says the market is a “magnet” with a powerhouse economy that has attracted and will continue to attract a wide range of businesses.
Right now, vacancy rates in St. Petersburg are low with only 5 percent of the all the office space in the city available for rent. Rents have gone up more than 30 percent on average over the past five years, indicating strong demand. With the exception of a small project at Mirror Lake, there’s no current office building under construction in downtown, and the projects that are planned are years away from completion.
That means now is the time to be looking at building new office space, said Wendy Giffin, director at Cushman & Wakefield.
“A couple of year I sat on city panel and argued it wasn’t quite the time yet to look at new office space,” Giffin said during the Council’s online meeting. “But I’m pleased to sit here today and give you my strong opinion that it is time and maybe a little past time, and why the public-private partnership is really critical to job growth, because there is such a delta between the cost of constructing new office space and what the rental rates need to be in order to justify that new construction.”
Most companies the EDC talks to are looking for new or additional office space, especially in the downtown core, said J.P. DuBuque, president and CEO of the St. Petersburg Area Economic Development Corp.
While the EDC has been able to find locations, many times the companies have had to compromise on their needs and desires just to be in the location they want, he said.
“The more troubling thing, from my perspective, is that we have no idea the number of companies or the potential impact to our community that we never hear about because they never look at us because of the perception that we don’t have the office space available.”
Financing plays a key role in the need for city support for office development.
Right now, there’s hesitancy in the lender market for office products, Feldman said. While interest rates are near historic lows, lenders generally require signed leases with tenants before they will finance a project, and getting those signed leases three or more years before a building is completed is difficult.
“Financing makes it almost impossible for developers to build new offices, which take three years to develop, without a significant portion of the building having signed leases in advance. Left to their own devices, office wouldn’t get built because of a timing issue,” said Jason Mathis, CEO of the St. Petersburg Downtown Partnership.
“That’s where it’s appropriate for the city to step in. Very few companies today are willing to sign leases three to five years out, which makes it almost impossible to build this new space. That’s where the public sector can step in, fill the gap and help with parking or some other consideration, in a limited, thoughtful way and only in certain projects that makes sense.”
Covid shift not evident here
In some parts of the country, Covid-19 has dramatically shifted the office dynamic. Major employers including Microsoft, Target and Ford Motor company have told their workers to expect to work from home until next summer, the New York Times reported on Oct. 13.
An analysis from Moody’s Analytics earlier this year said suburban offices might come back into favor over central business districts and dense urban areas.
That may be true in cities like New York and San Francisco, or even in Tampa, but it’s not the case so far in St. Petersburg, Giffin said.
“The population of offices in St. Pete are smaller and more privately held. Offices in Tampa are large corporations and they are getting a lot of pressure from up the chain to look at putting their space on the market for sublease, because there is so much uncertainty,” Giffin said. “But from my perspective, [in St. Petersburg] we have not seen rates drop or concessions, and we’re still seeing good demand.”
There’s much more office construction underway in Tampa, DeLisle said. About 2.1 million square feet of planned or underway at projects in Water Street, Midtown Tampa and Tampa International Airport. In St. Petersburg, there’s 175,000-square-feet of office development planned, but except for the Mirror Lake project, “The Mirror,” none of the other developments have yet to break ground. The Mirror has 18,000 square feet of office space, said Jason Jensen, principal of Wannemacher Jensen Architects, architect, developer and contractor on the project. About 11,400 square feet remained available for lease as of late October.
City Council Chairman Ed Montanari was concerned about the implications for St. Petersburg, with so much construction underway in Tampa.
“I don’t want people looking other places. I want them to look in St. Petersburg first. For many years, I’ve been a proponent of not having St. Petersburg turn into a bedroom community in the greater Tampa Bay area. We need to have jobs here. It’s vitally important,” Montanari said. “When I see the data about the vacancy rates and office space growth in Tampa, it concerns me quite a bit, and we need to address that problem.”