St. Petersburg is losing large companies that provide high-paying jobs to other cities due to its lack of premium office space and aging inventory.
That was Mack Feldman’s “definitive” message to city council members as local business, development and government leaders recently came together to discuss the need for more downtown office space and brainstorm potential solutions to a complex problem.
Feldman, vice president of Feldman Equities, was joined by Jason Mathis, CEO of St. Petersburg Downtown Partnership and Wendy Giffin, managing director for Cushman & Wakefield, at the April 27 Economic and Workforce Development Committee meeting. Several administrators also participated in the comprehensive conversation.
“Normally, if you have a lot of people wanting to be in downtown St. Petersburg, people would be able to pay higher rates for those office products, and you would be able to finance new buildings,” Mathis said. “For a variety of reasons, we have a market failure in downtown St. Petersburg right now when it comes to office development.”
The current situation
The problem begins with definitions. Class A office space is the most desirable and typically demands higher rental rates from prestigious tenants. However, Economic Development Director Brian Caper noted local facilities would not meet Manhattan’s definition.
Feldman took that further and said St. Pete’s Class A offices would only rise to Class B in Tampa. Caper defined those as utilitarian spaces without unique amenities that attract a range of users with average rents.
In addition, downtown’s Class A vacancy rate is just 3.1%, and the average rent per square foot is $30.66. Tampa’s premium space goes for double that amount.
“Essentially, once you hit sub-four percent, it’s the equivalent of not having any vacancy,” Caper said.
While the Gateway area in St. Petersburg’s northernmost potions has an office vacancy rate of 11.4%, all speakers noted that business owners prefer downtown amenities and walkability.
Caper noted that the Tampa Bay Rays and Hines development team proposed building 1.4 million square feet of office space in the historic Gas Plant District. Phase One would provide 600,000 square feet by the end of the decade.
“We do see that as providing some relief,” Caper said. “It certainly won’t be a silver bullet to the issue.”
Mathis explained that with increased land, borrowing and construction costs, a developer would need to lease space for $60 per square foot. In addition, he said financial institutions prefer not to issue loans without an established repayment mechanism.
Mathis said that would require a tenant to sign a lease three years in advance and pay double the city’s current rates while the building is under construction. He called creating new office space downtown “a very complicated and challenging conundrum” despite “incredible growth and demand.”
Giffin noted that 346,000 square feet of office space is currently available or under construction. However, she said many companies face an uncertain operational future as many people continue working from home after the pandemic.
She also believes high building and interest costs will begin to recede in the next six to 12 months. That would stabilize the market and allow potential tenants to realize a “more concise vision.”
“I think our opportunity to be able to predict what the future of office space will be – and more confidence from tenants and willingness to sign long-term leases – is in our near future,” Giffin added.
Feldman offered policy suggestions, beginning with redefining what premium office space looks like in the city. His firm considers Class A office space in St. Pete as a building built in the 1980s that underwent significant renovations “and looks really nice in the lobby, but at the end of the day” is 40 years old.
He said high-wage employers relocating from the northeast, like those in Tampa, want all-glass “super modern developments.”
Feldman explained that Tampa’s Midtown, Water Street and Heights Union projects feature new buildings in expansive mixed-use developments. He said the residential, hotel and retail aspects are profitable enough for a developer to create office space.
Feldman suggested expanding zoning around downtown that exempts office space from counting against a building’s allowable size. Just south lies the Innovation District and its Institutional Center zoning.
Much of the district is adjacent to Bayboro Harbor and in a Coastal High Hazard Area. The University of South Florida St. Petersburg, the Poynter Institute and John Hopkins All Children’s Hospital are a few of the local institutions.
“But a lot of the land has sat way, way underutilized,” Feldman said. “I mean, Poynter has a massive parking lot that is just sitting there half-empty most of the time. That story replicates itself all along what is otherwise beautiful waterfront property.”
While he understands the hesitation to allow residential towers in the area, he said it could host office, industrial and retail space without conflicting with coastal high-hazard regulations.
Feldman added that city officials could increase density and height allowances for projects with dedicated office space. He said they should also streamline the approval process, as public hearings discourage many developers.
Feldman also suggested reducing parking requirements and said advantages over purely residential projects would offset the risks of creating office space. Mathis explained that the city could serve as an office building’s financial backer until it is complete and leased.
While that would solve the problem, he noted the financial risk with city officials renting 30,000 square feet for five years at double the market rate.
Councilmember Ed Montanari requested the “eye-opening” discussion and expressed his concern with some of the findings. “It’s time to get to work and start providing solutions,” he said.
Feldman noted that Tampa’s new office buildings are part of “a city within a city.” Montanari believes the Gas Plant redevelopment is an opportunity to create something similar in St. Petersburg.
“And these problems with office space, there are solutions that can be found,” Montanari added. “If they can do it over in Tampa, we can do it over here.”