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By Gary Tasman For the majority of residents in Southwest Florida, our lives have chiefly returned to our pre-pandemic normal. Offices, restaurants, retail stores, and tourist attractions are buzzing with activity—and in many cases, they’re busier than ever before. It would be a mistake, however, to think that just because things feel “normal” again that nothing has changed. The ways that we both live and work have actually modified tremendously over the last two years, and our commercial property needs are following suit. Because of our rapidly growing population, some businesses have outgrown their capacity. Other workplaces have less need for space because of a shift to remote or semi-remote work. Delivery services and BOPIS (buy online, pick up in-store) models are changing space needs for retailers including grocery stores and restaurants. As businesses try to adapt to this paradigm shift, many will need to renovate their space or rebuild it entirely to remain competitive. But which of those options should they choose? There are a number of questions to consider when debating converting versus demolition. What’s Your Budget? Perhaps the most important consideration when making a decision of this magnitude is budget. With all other things being equal, remodeling a space is typically going to be a more budget-friendly option than a demolition and rebuild. However, a number of variables we’ll discuss later in this article can challenge that notion. When estimating your demolition or conversion budget, make sure you’re projecting carefully. Inflation, supply issues, and labor shortages have made the costs of goods and services difficult to predict for commercial builders. On a recent episode of our podcast, “What’s Developing in Southwest Florida,” Mark Stevens of Stevens Construction Inc. told us that building costs have recently increased by more than 20%. If rebuilding is your preference, but current economic conditions make you wary, consider this: You have much better control of your budget during a remodel. If your cash flow slows due to a change in consumer behavior or a recession, you have the flexibility to pull the plug on some of your “want-to-haves” and focus your budget on your most imperative needs. While you would also have similar flexibility during a rebuilding process, demolition is a bell that can’t be unrung. What’s the Building’s Age and Condition? The full lifespan of a commercial building is considered to be 50-60 years, depending on the location, type of building, materials used, and other variables. According to a 2018 study by the U.S. Energy Information Association, 46% of the commercial buildings in the United States were built before 1980, meaning they’ve either outlasted their projected lifespan or are coming close to it. Here in Southwest Florida, our commercial buildings are younger than the national average, but many are still creeping up on the end of their functional life. Our damp climate and sometimes harsh weather conditions can also negatively impact building conditions, causing foundation issues, roof damage and structural impairments, many of which can go unnoticed for years. Older structures may need significant upgrades to comply with more recent regulations and building codes. Thirty years ago this month, Hurricane Andrew devastated South Florida and swiftly brought substantial changes to the state’s building code. The Americans with Disabilities Act, enacted in 1990, presents additional requirements that older buildings may not possess. Structures more than 30 years old will likely need substantial and costly upgrades to meet compliance during renovation, making conversion potentially as costly and time-consuming as a demo and complete rebuild. On the other hand, some older buildings have “good bones,” or have been through multiple updates over their lifespans, making them more viable options for a remodel. As an example, older warehouses are adaptable for a number of uses because of their open space and large and accommodating foundations. While the age of a building and its condition are two important factors to consider, there are other variables that can help make the decision between converting and demolition. How Long Will You Need It? Chances are, if you’re making the decision about whether to convert or demolish your commercial space, you’ve already begun to make projections about your future needs. While you don’t need to be Nostradamus and predict every possible contingency, you should have a reasonable expectation about how long you plan to stay in your location. It stands to reason that if you only expect to be in the building for a short period, renovation is likely the smarter option. You may even be able to kick the can down the road on some age-related issues if you don’t expect to need the building for a decade or more. However, if you expect your location to be more of a “forever home” for your business or your portfolio, demolition and a complete rebuild make for a stronger long-term investment. There are two reasons for this. First, you should be able to recoup the typically higher costs of the rebuild over time. More importantly, when you do eventually decide it’s time to sell, you’ll be marketing a much newer building with more modern amenities. Is Sustainability a Concern? Many businesses have adopted ESG (Environmental, Social, and Governance) initiatives to guide their strategy, develop policies and procedures, and reveal growth opportunities. Environmental, Social, and Governance are often referred to as corporate sustainability. In essence, “The less CO2 and waste a company produces and the more it cares about peoples’ wellbeing, the more interesting it is for employees, customers and investors,” explains Ariane Husemann, Cushman & Wakefield’s Head of Sustainability for the DACH region. Because there are no uniform global standards for ESG or sustainability, it can be challenging to determine if a structure fits into a company’s ESG framework. Owners should look at the purpose of the building, the company’s goals, and the facility’s suitability for its employees, along with its potential environmental impact. If sustainability is a concern, converting a facility may be the more ESG-friendly option. Existing buildings, says Lutz Schilbach, Cushman & Wakefield’s Design +

Close to one year ago, 12-month inflation numbers began a steep climb into historic territory, reaching levels not seen in 40 years. At the time, analysts optimistically projected that inflation would be transitory– a temporary result of the pandemic and its resulting economic challenges. However, it quickly became apparent that inflationary measures would remain high for at least a year, if not more, and that commercial property would be impacted by the continuing trend of substantial increases in the costs of goods and services. In December of last year, we looked ahead to 2022 by discussing the potential impact of inflation on commercial real estate, focusing on owners and investors. We followed up in January by outlining the potential impacts of inflation on employers. At that time, analysts were still optimistic that supply chain issues, labor shortages, and high fuel costs would begin to slow by mid-year. However, we’re still continuing to see prices climb, making the cost of living and the cost of doing business higher than many can remember. The 12-month inflation rate reached 9.1% in June of this year. By comparison, the traditional notion of a normal acceptable rate of inflation is a 2% annual increase. Although banking systems worldwide continue to take measures, including raising interest rates, to manage inflation growth, it’s clear that these economic conditions will be with us for some time. For commercial renters, this ongoing inflation may cause significant ramifications. Inflation and Commercial Lease Escalations You can’t turn on the news right now without seeing stories about residential renters who have been priced out of their current homes. With residential leases typically spanning just 12 months, landlords have annual opportunities to raise rents on their tenants. Commercial leases, on the other hand, average five to seven years in length. Because of this, cost escalation for commercial occupiers typically develops slowly and predictably.  Commercial leases typically have built-in rate increases. In some instances, these escalations are tied to the inflation index: As the cost of goods and services increases, so too does the cost of renting that commercial space. However, Cushman & Wakefield economists Rebecca Rodkey and James Bohnaker say that these inflation-based escalations may be the exception and not the rule today: “After decades of inflation stability, many leases have an escalator—a fixed number—based on a historical average of inflation,” they explain. Today, commercial occupiers with fixed escalation rates are benefiting from the current economic environment, as their built-in annual increases are likely much lower than the rate of inflation. That’s great news for occupiers who are in the early or middle years of their leases. However, lessees whose agreements are coming to an end in the immediate future may have significant challenges keeping their real estate expenses within their current price range. Given the unpredictability of our current economic environment, property owners will be more likely to negotiate leases with inflation-based escalations than they have been in the recent past. Inflation and Buildout Costs Tenants leasing new spaces and requiring a buildout should anticipate substantially higher costs in our current economic environment. Prices for construction materials are significantly higher than before the pandemic– in some instances more than double. Compared to February 2020, PVC and plastic piping expenses have increased nearly 130%, aluminum has jumped more than 102%, iron and steel prices have increased nearly 89%, and lumber has jumped almost 50%. In some markets, lessees may be able to negotiate tenant improvement allowances or even buildout rent exceptions– but typically these are concessions made in soft markets with high vacancy rates. Here in Southwest Florida, our record low vacancy rates have created a distinct advantage for commercial owners. Our local MarketBeats reports show Southwest Florida industrial vacancy at a microscopic 1%, office vacancies at 4.7%, and retail vacancies at 3.8%, all significantly lower than the national vacancy rates of 3.3%, 17.5% and 6.3%, respectively. While some lessees may consider delaying their buildouts until conditions stabilize, they may be in for a wait. Cushman & Wakefield’s Office Fit-Out Cost Guide notes that 96% of commercial contractors expect supplier costs to increase over the next six months, with the most consequential cost increases anticipated in fixtures, equipment, and furniture. Inflation and Base Rent When it comes to base rents, the impact of inflation may be overrated. According to Rodkey and Bohnaker, evidence suggests that market conditions drive rent patterns more significantly than broader inflation. This is good news for tenants in much of the country where vacancy rates remain high. However, Southwest Florida’s remarkably low vacancy rates again are creating a beneficial market for owners rather than for occupiers. Evidence of this can be seen in our average commercial office rent rates. In Q2 2022, office property was leasing at more than $20/square foot, an increase of 25% in the last two years. However, retail and industrial rents have been growing at a much slower pace over the last eight quarters. Because these two sectors have been hit harder by labor shortages and the increased cost of goods, the market simply may not be able to bear higher rent costs for retail and industrial occupiers. Navigating Complex Relationships Our current economic environment is complicated, and unlike in days past, our current inflation issues can’t be pinpointed to a single source. The pandemic, U.S. economic recovery, worldwide supply disruptions, labor force changes, energy prices, and even the war in Ukraine each play a role. As a result, it’s difficult to predict exactly when this uncertain period is likely to end. Similarly, when it comes to commercial property, inflation is part of a complex economic equation that also involves lease terms, rent prices, vacancy rates, and buildout costs. Our current economic conditions can create both opportunities and challenges for both owners and occupiers. One thing is certain: In our unpredictable economic environment, planning further in advance is more important than ever.   The Commercial Property Experts at Cushman & Wakefield | Commercial Property Southwest Florida have the local knowledge, data, and experience to help

By Gary Tasman When the U.S. Census Bureau released its new population estimates for cities and towns this May, the numbers weren’t surprising to Southwest Floridians. Lee County was one of the top-ten fastest growing counties in the nation, with an estimated net increase of more than 23,000 new residents in 2021. More than 8,200 of those new residents moved to Cape Coral and nearly 5,900 more migrated to Fort Myers, placing both near the top of the list of the nation’s fastest-growing cities. With that population explosion comes the need for more services to meet the growing needs of our new residents, in particular medical services. Keeping up with our historically fast-growing community’s needs has always been a priority—and a challenge—for Lee Health. Keeping Medical Services Accessible With our most recent population surge, ensuring that medical services are accessible to the community is more important than ever. Recognizing this, Lee Health has $800 million of new capital projects in the works to expand access to hospitals, physicians and specialist services. Other medical providers have taken note of our growth and are also making moves into this market. In the last five years, Lee Health has built a standalone facility for Golisano Children’s Hospital and also expanded Gulf Coast Medical Center by three stories, adding 216 patient rooms, and they’re building a new tower to house intensive care units, dialysis suites and more. Those projects, totaling more than $480 million, have allowed the hospital system to keep pace with our region’s growth, but more is still needed. In 2020 (the most recent year that the Florida Department of Health has published data), Lee County had 281 hospital beds for each 10,000 county residents, placing the county in the top third for access in the state. That number is comparable to Palm Beach County and stronger than other West coast counties such as Collier, Pasco and Manatee. The fact that hospital bed availability has remained competitive is impressive, considering that Lee County’s population growth has risen significantly faster than any of those counties over the past 20 years. Upcoming Lee Health Projects Over the next half-decade, Lee Health’s aggressive plans to keep healthcare accessible include the Lee Health Colonial Campus on Challenger Boulevard between Colonial and Winkler. The $465 million hospital would include 168 acute care beds, 30 emergency rooms, 16 operating rooms and a medical office building. And with 52 total acres available to develop, the site promises plenty of room for growth in the future. The hospital system has acquired an additional 57 acres on Pine Island Road in Cape Coral, one of Southwest Florida’s fastest-growing corridors. “Cape Coral has a population of 200,000 and growing,” said Chief Financial and Business Services Officer at Lee Health System,  Ben Spence. “Where it’s moving is Northwest, outwards from Pine Island and North. The beauty of Pine Island Road right now is that there are so many developments going in, there’s going to be incredible synergies.” Although Lee Health is still determining the best use for the upcoming Cape Coral facility, Spence tells us it will likely focus more on ambulatory care. Options include a free standing emergency room and surgery center as well as specialty services focused around high-need areas such as cardiology, orthopedics or oncology. Health Care Competitors Turn to Lee County Lee Health is not the only hospital system with its sights set on expansion in Lee County. In 2019, Florida removed major portions of the state’s Certificate of Need requirement, opening the state to more competition in health care services like hospitals, and rehabilitation centers. The largest competitor to take advantage of this more competitive environment is HCA Healthcare, which targeted Cape Coral for a new freestanding emergency center on Pine Island Road. Within the next few years, HCA plans to build a hospital with 100-plus beds just a stone’s throw away from Lee Health’s new site on Challenger Boulevard. HCA, a for-profit health system, is the largest in the state of Florida. ShorePoint Health (formerly Bayfront Health) has also ventured into the Cape Coral market, opening a full-service emergency room and urgent care center in Northeast Cape. Competition leads to Innovation As these new competitors enter the market, Lee Health has made strategic moves to both prepare for and engage with potential competition. An example of this can be found with Lee Health’s strategic alliance with the Cleveland Clinic, with whom the system has established a clinical affiliation on its cardiovascular program. “We have opportunities to improve and learn from other systems that are at the top of their class,” Spence said. “Cleveland Clinic is number one in the whole nation on cardiovascular. We want to align with those types of partners.” Another partner new to Lee Health is Alabama-based Encompass Health. The two jointly own and operate the Encompass Health Rehabilitation Hospital of Cape Coral and plan to partner on a similar project adjacent to Gulf Coast Medical Center. Southwest Florida’s needs for health care are constantly evolving as our population grows and our community’s demographics shift. “We know that you need access to health care. It needs to be timely, it needs to be a great experience, the outcomes have to be of the best,” Spence said. “We know there’ll be new entrants and we want to be that provider of choice.” What does this Mean for Commercial Land Owners? With the need for more medical facilities higher than ever, investors with property zoned for commercial professional use are in an ideal position to develop or sell. Our first quarter medical office MarketBeats report notes that economic conditions, combined with six quarters of positive net absorption, have translated into record-breaking vacancies in our medical office market. To hear more from Ben Spence about Lee Health’s growth plans for Southwest Florida, tune in to episode seven of our podcast, What’s Developing in Southwest Florida. Are you ready to take advantage of this unprecedented surge in need for medical office property? Contact the Commercial Property Experts

By Gary Tasman Just six months into the year, 2022 has proven to be a challenging year economically. High inflation, a volatile stock market, a tight labor market and growing interest rates have all created havoc for investors. Commercial real estate, long considered a safe haven in inflationary times, has remained popular among investors– and with proper care and attention can still provide considerable yields for property owners. When commercial property sales topped $600 billion in the U.S. in 2019, it marked the busiest year ever in the sector. And while COVID-19 cooled the commercial real estate market the following year, the downward trend didn’t last long. In 2021, sales topped $809 billion, according to data from Real Capital Analytics– a whopping 35% over the previous high. Although we expect the market to normalize in coming months, we can still anticipate another strong year in 2022. Data from Cushman & Wakefield explains one reason why real estate has long been considered a hedge against inflation. For each 1% increase in inflation, total returns on property average 1.1%. “In other words,” explains David Bitner, Global Head of Capital Markets Insights, “commercial real estate not only protects against higher inflation but provides outsize returns specifically in these environments.” With all investment comes risk, and commercial property is no exception despite its traditional returns. As with most investments, one way to mitigate potential jeopardy is to closely monitor current business trends and economic conditions and properly manage that asset in response. For many commercial property owners, that task can be overwhelming. Just day-to-day property management tasks can quickly become a full-time job, leaving little time for the added responsibility of managing that same property as an investment asset. But these property owners have a secret weapon at their disposal: professional property managers. What do Property Managers Do? Most people’s perceptions of property managers come from personal experience as tenants, either in a residential or commercial setting. As a renter, your property manager is the person you pay once a month and on whom you depend when you need repairs. While accounts receivable and plumbing maintenance are important responsibilities, commercial property managers present many more benefits to busy owners and investors, especially in economic times like these. Manage Multiple Properties The recent property boom has allowed many investors to broadly expand their commercial real estate holdings. While economies of scale allow owners to take on more properties without a proportionate increase in some expenses, other factors can manipulate this equation. When an investor holds multiple properties, they are often widely dispersed geographically, making it difficult to respond to on-site issues in a timely manner. No matter the nature of these issues, a professional property management company has resources dedicated to efficiently deploy staff to manage those affairs. CAM Calculations Economic conditions like supply chain issues, labor shortages, and high inflation have raised expenses for property owners, and despite attempts by the Federal Reserve to quell the cost of living, inflation is still surging. In the Southern U.S., the 12-month consumer price index advanced 9.2% in May, the highest level our region has seen yet. For property owners, these rising costs can produce challenges to area maintenance (CAM) budgets. Typically, CAM fees are calculated at the start of the fiscal year and reconciled at the end of the year. If CAM fees are initially set too low, unforeseen expenses and rising costs can leave owners in the red for months until reconciliation, and tenants who are hit with high increases may be driven to vacate. A professional property manager has the knowledge and expertise to better anticipate expenses for the year and set appropriate CAM fees. Lease Negotiations and Terms During the height of the pandemic, commercial tenants were reluctant to sign long term leases, but that trend appears to be changing. Nationwide in Q4 2021, nearly one-third of all commercial leases were for a term of 10 years or longer. That same quarter, the average commercial lease was 57.8 months, compared to a low of 51.2 months in Q3 2020. Longer leases can be beneficial for property owners because of a reduced risk of vacancy, but can also be risky given the volatility of the current economy. A property management company has expertise in designing and negotiating leases to mitigate risk for owners, for example by preparing a document that includes automatic increases triggered by the cost of living index or other economic variables. Ensuring Full Units Our region is experiencing historically low vacancy rates in commercial property. Our Q1 2022 MarketBeats reports show a vacancy rate of 4.4% in the general office market and a stunningly low 1.7% in industrial properties. As the market normalizes, vacancies will eventually increase. Some level of tenant turnover is natural and expected, but lengthy vacancies can quickly become a financial drain on commercial investors, especially those not equipped to market their assets to new tenants. Property managers can keep your portfolio of properties full by marketing your assets, vetting applicants, and onboarding new lessors efficiently. Maintenance and Beyond The more properties you own, the more difficult it becomes to handle the maintenance and repair needs of those assets. The current labor shortage has made it difficult to find contractors, maintenance workers, and other vendors, and new or part-time property owners may not have the resources needed to find and enlist these tradespersons on short notice. A property management agency will already have established relationships with these vendors and some, like Cushman & Wakefield | Commercial Property Southwest Florida, employ their own facilities services team to efficiently handle issues. As the commercial real estate market normalizes and vacancies increase, it will become more difficult for property investors to keep their units full. To mitigate this trend, it is imperative for owners to have a well-maintained, financially stable asset. Professional property managers are better positioned than owners to ensure an asset is in good condition, both physically and fiscally. If you’re new to property ownership– or if you