Are Sarasota and Manatee overbuilding commercial and office space? Not by a long shot, say local brokers. Despite the residential real estate downtown, two underlying trends bolster Sarasota-Manatee's position: population growth and Sarasota-Bradenton's enviable 13 percent job growth for the last three years, well above the national average of 2.4 percent.

While rising interest rates, land and construction costs, and insurance are all affecting the commercial market, demand from outside interests as well as local companies wanting to expand remains strong, and inventory is tight, say local brokers.

"There's always been the demand to buy in this marketplace," says N.J. Olivieri, president of Horizon Mortgage Corporation, Sarasota-Manatee's largest commercial brokerage firm. Olivieri assembles and finances deals for out-of-town investors, pension funds and national players such as Benderson Development, which plans to add 3.5 million square feet to Sarasota-Manatee's commercial inventory in the coming years. "This is a stable community," says Olivieri. "You're getting more of that type of investor. When institutions start buying, you know you have a strong marketplace."

Vacancy Rates Decreasing Office and industrial vacancy rates are declining nationwide, according to the National Association of Realtors, and Sarasota-Manatee mirrors this trend. John Swart, president of Lakewood Ranch Commercial Realty and chairman of the Economic Development Corporation (EDC) of Sarasota County, chaired the Manatee Economic Development Council's office space marketing committee last year. "Overall, the markets are very strong for office and the vacancy rates are dropping, so the absorption rate is good," he says. Downtown Sarasota's office vacancy rate is 4 percent, according to Sarasota EDC figures, while downtown Bradenton's, which not so long ago was more than 20 percent, has decreased to 13 percent, according to the Manatee Chamber's EDC. Swart sees no overbuilding, especially not in downtown Sarasota. "They need to build more office space or they are going to run out," he says.

Outside the city limits, Sarasota County office vacancy rates stand at 6 to 7 percent, says Kathy Baylis, president of the Sarasota EDC. "There's not a lot of speculative building in the office and industrial area," she says.

Nationally, office rents are projected to rise 4.4 percent this year, according to the National Association of Realtors. Sarasota-Manatee office space ranges from $18.50 per square foot (including expenses) for older buildings, such as the Bradenton Financial Center on Manatee Avenue, to more than $38 per square foot (including expenses) in downtown Sarasota's brand new Ringling Square.

On the Ranch The huge master-planned community of Lakewood Ranch that straddles both Sarasota and Manatee counties has evolved into a destination for existing employers who want to expand, consolidate or locate near I-75 and workforce and educational facilities. By the end of the year, Lakewood Ranch will include about 2 million square feet of commercial space. Only downtown Sarasota has a higher concentration, with 2.5 million square feet. "We're at about a 5 percent vacancy rate," says Swart.

Mixed-use Success The national trend that brought baby boomers and young professionals to live and work downtown has been good for commercial real estate as well. The city of Sarasota's new master plan and zoning categories encourage mixed-use buildings that combine sophisticated city condos with retail and office space. Residential demand is driving commercial. "It was like turning on a spigot," says Harshman. "All of my downtown commercial sites were overnight residential sites and worth four times more. Now, no one is building just office space."

Janet Robinson, broker associate with Ian Black Real Estate and chair of the office space marketing committee of the Manatee EDC, says downtown Bradenton is building more mixed-use as well, but the city's residential boom lags about three to five years behind Sarasota. Nearly 1,400 residential units will be built in Bradenton over the next two to three years. "The building of the residential condominiums in Bradenton will help absorb some of the existing office space that's been vacant for awhile," says Robinson.

Rising Construction Costs Rapidly rising land and construction costs are threatening the rate of return for new office space, causing some investors to turn away. "We have a $10- to $12-square-foot [gap] from the market rents to the rents one needs to charge for new construction, and I don't see that merging. New office space will be sold, but it will be sold to users," says Harshman.

"Costs of new buildings are going up dramatically," says Swart. "Concrete, steel and drywall have seen incredible cost increases. [In Lakewood Ranch] new buildings, including land, are costing in the $200 per square foot range for a multi-tenant office. Two to three years ago, it was $160 for the same building. Smaller buildings, in the 5,000- to 10,000-square-foot range are up to $250."

Broker Lee De Lieto of Michael Saunders & Company's commercial real estate division recently researched land prices along U.S. 41 from the Sarasota-Bradenton airport to the Ringling Causeway and found that land costs have risen by 235 percent along that corridor since 2002. He has been inundated with requests from hotel developers seeking sites in downtown Sarasota, but most decide land costs are too high.

Labor costs are also having an impact, says John Tuccillo, former chief economist of the National Association of Realtors. "It's an issue of skilled labor in the entire Southeast being sucked up to repair hurricane damage."

Rising Insurance and Taxes Both owners and lessees are feeling the pinch of hurricane insurance premiums. "Say an owner leases a building for $15 or $18 a square foot on a gross basis. Now $5 or $6 or $7 of expenses" are cutting into profits, says Steve Ross of Hembree and Associates. Depending on where the building is located, hurricane premiums alone can add up to several dollars per square foot.

"The insurance situation is going to be the major factor in all commercial," agrees Robinson. As reinsurers pull out of the market, some coastal businesses have not been able to find wind coverage.

Olivieri says the annual premium on a St. Petersburg marina he was handling rose from $22,000 to $130,000 in one year. "It just shows you what effect insurance is having on cash flow," Olivieri says. "Any retail centers or waterfront office buildings are going to have dramatic increases."

Property taxes have risen as much as 30 or 40 percent over the past few years in downtown Sarasota because of the increase in valuations. In the blocks surrounding Whole Foods, Plaza at Five Points and the yet-to-be-built Pineapple Square project, "the small merchants are getting clobbered right now. In some cases, a doubling and quadrupling of taxes has occurred," says De Lieto.

Office Condos Slowing, But Still Popular Lower interest rates helped fuel the office condo market in Sarasota and Manatee, and depending on the market area, they are expected to remain strong. Harshman has sold about 45 percent of the 45,000 square feet of office condos in The Atrium on Ringling Boulevard, which were listed $350 to $375 a square foot. "Office condos have been much more viable over the past few years and they will continue to be so," says Harshman.

Commercial and Industrial-Zoned Land is Dwindling Residential and retail demand has driven less profitable industrial or commercial uses away from the I-75 corridor. Land that was once designated for potential major employment centers is not being replaced. "We have lost 3,000 acres of major employment center (MEC) land in the past seven to eight years," says Kathy Baylis. Sarasota County has hired a consultant to determine where to place employment centers and industrial land in the future.

Broker Bill Kleiber of Richardson, Kleiber and Walter, who has focused on industrial land since 1982, says counties aren't responding quickly enough.

"Industrial land is getting expensive," he says. "There is demand, but there is no supply. It affects the tenants; it affects the owner-operator because his costs are up with the lack of availability. Fewer people are willing to move because there is nowhere to go. Every year, the problem gets more acute. Land prices (for raw industrial lots) have increased from $4 to $6 to $8 and in some cases $12 a square foot in the last few years."

Sarasota County must designate more industrial land soon, says Kleiber. "Realistically, I don't see where tenants and owners can pay any more than they are. They're going to limit growth in that sector, and it's the only tax-positive sector of the economy."

Likewise, in Manatee County, "our inventory is very low to meet our size of clients," says Nancy Engel, executive director of the economic development council of Manatee County. "The market has been more residential and the commercial that feeds residential. The cost per square foot is much more than it has been in the past." However, three new industrial parks (Buckeye Industrial Park near Port Manatee, Washington Crossing at U.S. 301 and Tallevast Road, and Lakewood Ranch Commerce Park), are adding 2.2 million square feet to inventory, which should help with demand, Engel says.

Despite the challenges, most brokers are not predicting a downturn in the commercial sector. The market will adapt, even to rising interest rates and higher land costs, they say. Developers may become more creative in financing office condos. Sellers may reduce prices to improve capitalization rates, the annual rate of return by which investors evaluate the viability of commercial property. Lack of affordable land in Sarasota may continue to spur redevelopment in downtown Bradenton and new commercial centers in southern Sarasota County. "It's all cyclical," says De Lieto.