Why Our Market Will Not See a Class “A”, Speculative Office Building - Winter 2019

The days of single-purpose, speculative office buildings being constructed in downtown Sarasota are, at least for the foreseeable future, history. While some mixed-use developments will continue to contain a small office component – think The Kolter Group’s The Mark building, which will contain 11,000 square feet of office space along with 157 condos and retail – pure office buildings, even with ground-level retail, is highly unlikely in our current environment. Why? Simply put, land costs in Sarasota, coupled with construction expenses for labor and commodities, are too high to justify office development at current rental rates. At roughly $30 per square foot, landlords cannot recover development costs, let alone make any profit. Consider this, too: During the golden years of Sarasota office development, 1983 to 1987, the cost to construct a multi-story office building was approximately $100 per square foot. Today, that same building would cost roughly $350 per square foot to deliver. At that cost, office rental rates would need to be in the $40 per square foot range, excluding operating expenses of $12 per square foot. Today’s office rental rates, by comparison, are about $30 per square foot on a gross rental basis. That means that office rental rates would need to increase by a whopping 70% for a new, “pure” office project to cash flow and proceed. We at Harshman & Co. don’t foresee such a scenario anytime soon.