Commercial real estate: Flailing elsewhere, but ‘pretty good’ here

PHOTO BY JOSHUA KODIS

Despite scary headlines in the national press about the dire state of the commercial real estate market, sales prices and lease rates for commercial property here are mostly stable and even rising in some sectors, according to three top commercial real estate brokers.

Rising interest rates, increasing e-commerce and remote work don’t seem to be having the negative impact here that is causing consternation elsewhere.

“Things are pretty good,” said Derek Arden, who owns a commercial property management company on the barrier island and is a broker with Landmark Commercial Realty Advisors, noting that, as of now, problems reported in the national press have not impacted the Vero market to any significant degree.

“I don’t have any vacancies on Ocean, Cardinal or Beachland,” Arden said. “For the most part, lease rates on the island are rising,” with retail properties leading the way while office lags somewhat.

“Commercial real estate in Vero Beach is doing OK,” agreed Mike Yurocko, vice president and broker, SLC Commercial, Inc. “Rental rates are holding their own.”

“We are writing leases and selling properties,” said Billy Moss, a broker with Lambert Commercial Real Estate. “It’s pretty much business as usual. Prices and lease rates in the warehouse segment are strong and the restaurant business is picking up. It was a tough time for restaurants during the pandemic, but that sector is recovering.”

Worries about commercial real estate nationwide are not unfounded. REITs, funds that invest in commercial real estate, had a terrible year in 2022, losing a quarter of their value. Some offices still sit empty due to pandemic-inspired remote workers, who now perform their New York City and Chicago jobs from bungalows in Central Beach and similar locales.

E-commerce was already taking a bite out of brick-and-mortar retail before the pandemic came along and accelerated that trend. And both inflation and high interest rates pose a direct threat to commercial property values because of the CAP – or capital appreciation – rate, the benchmark for many real estate investors.

Most investors value property by comparing rental income to purchase price. If a property costs $1 million and it has a net rental income of $100,000, then the CAP rate is 10, which is very attractive. But if rising expenses and interest rates push profit down to $50,000, the CAP rate is cut in half and investors will pay less for the property in order to get a better return on investment.

As Yurocko explains it, “With inflation and rising mortgage rates, operation expenses are going up, along with insurance and taxes, at a much higher percentage than we have seen in recent years. And rents are not going up to a commensurate level – which means less profit. For buyers looking for a worthwhile CAP rate, the property is worth less.”

On top of that, the turmoil among regional banks has sent tremors through the commercial real estate industry since regional banks make the majority of commercial real estate loans.

And yet, despite all that, commercial property in Indian River County is doing just fine.

Moss said factors supporting the market include the intrinsic desirability of the community that made it a magnet for pandemic migrants who swelled the population and brought new wealth to the city.

“A commercial real estate boom usually follows a housing boom because more people with more money need more commercial space and services,” Moss said.

“Retirement isn’t what it used to be. Many people coming here these days need space for their existing business or want to start a new business like they had up north or down in Miami. We also have many national restaurant brands looking for space here since Vero has become more well known.”

Meanwhile, the area is not overbuilt.

“There is a finite supply of industrial property here, warehouses and so forth, and that is the strongest segment of the mainland market, with values and lease rates going up,” said Yurocko.

“Retail properties are holding their own, though it’s harder to get rent increases. Office is the most challenging of all, but even there, I am not seeing higher vacancy rates, so far.

The good thing is there is not tons of office space in Vero, so we don’t get impacted like Manhattan. We are not playing on that scale.”

The shortage of office and other commercial space is most acute on the barrier island, especially in Central Beach, where, not coincidentally, lease rates are the highest in the county.

On Monday morning, top online commercial property site LoopNet listed just nine office spaces for rent in all of 32963, most between 1,000 and 2,000 square feet, with lease rates ranging from $23 to $36 a square foot.

There is even less for sale. According to LoopNet and other online listing sites, there is only one office or retail building available on the island – a 9,198-square-foot office building at 505 Beachland Blvd., at the northeast corner of Beachland and Mockingbird Drive, that’s offered for $3,890,000 by Kevin Lambert, Lambert Commercial Real Estate.

It is hard to tell what is happening with commercial property sales prices on the island because there are so few transactions. None has been recorded by the county property appraiser so far in 2023 and there were only three sales each year in 2022 and 2021. Only one of those properties had a prior sale recent enough to provide a useful comparison.

The sale of that boutique mixed-use building zoned for office, retail or restaurant at 3096 Cardinal Dr. bodes well for values. Sold Dec. 1, 2021, for $1.825 million, it resold in July for $2.65 million, a 45 percent bump in less than eight months.

“There is a need for more retail space on the beach,” said Moss of the supply and demand equation. “People from Boca and Delray and other parts of South Florida want to open shops on Ocean or Cardinal but there’s not much there. Very little is happening” in terms of people selling property or moving out of leased retail spaces.

Even with lease rates topping out in the high $30s, twice what they were 10 years ago, Vero’s island is much more affordable for entrepreneurs and businesspeople than Palm Beach. Lease rates on that island range from $60 to $100 per square foot.

Lease rates in Indian River County fall off as you go west, trending down into the $20s or high teens along Miracle Mile and in busy commercial plazas further west along route 60.

Rates are in that same range along the 37th Street medical corridor and the Sebastian waterfront.

Further south and west of town, space is available for $8 to $12 per square foot. In all locations, mainland or island, the quality of the building has a big impact on what tenants are willing to pay.

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