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Signs Of Glut

In the coming months, more than 1.7 million square feet of new office space will be available in San Juan. At most, 200,000 square feet are needed each year. Are we headed for trouble?


February 20, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

Location, location, parking, parking: The secret of business success has always been ‘location, location.’ With 2.5 million cars on the road in Puerto Rico, it is now also about ‘parking, parking.’

The rate of office-space vacancy in the greater San Juan area was low (2% to 5%) about three years ago, mainly because of a hot economy and high demand. Practically every office space, whether old or newly built, was occupied in a relatively short time.

Developers have built over two million square feet of new office space in the metro area since then, hoping that the economic bonanza and the high demand for prime office space would continue unabated.

It hasn’t. A slow economy, jitters about the stock market, high unemployment, and concerns over an impending war with Iraq have altered Puerto Rico’s office real-estate market. Some office projects that had been announced a couple of years ago have either been cancelled or changed to suit other purposes. New projects are taking longer to occupy, and some still have vacant spaces.

With more than 1.7 million square feet of new office space to be available in the metro area within 18 months, developers are worried there could be a glut in the commercial real-estate market if the economy doesn’t turn around soon.

Local industry experts say there are about eight million square feet of Class A (prime) office space in the San Juan metro area, yet the market absorbs only up to 200,000 square feet of new space each year.

What’s in the pipeline

A number of new office buildings have entered the market during the past 18 months. These include the 11-story, 116,000-square-foot building at 304 Ponce de Leon Ave. on Hato Rey’s Golden Mile; the 15-story, 252,000-square-foot Torre Chardon in Hato Rey; Doral Financial Corp.’s nine-story, 200,000-square-foot headquarters on Roosevelt Avenue in Caparra; and Universal Insurance’s five-story, 105,000-square-foot headquarters in Metro Office Park in Guaynabo. Doral and Universal Insurance’s headquarters are owner-occupied buildings. When firms build and occupy their own facilities, they no longer absorb office space from the market. The same goes for government agencies that choose not to lease office space in favor of acquiring their own. The State Elections Commission (in Hato Rey), the Puerto Rico Electric Power Authority (Santurce), and the State Compensation Insurance Fund (Rio Piedras), for example, used to lease a large amount of office space but recently moved into their own facilities, thanks to the Public Buildings Authority.

If that isn’t enough to aggravate the situation, at least 1.7 million square feet of new office space are under construction for delivery and availability within 18 months. All the existing office space plus the new space in the pipeline have many developers worried about a glut and its effect on the existing properties’ bottom line. Others see it as part of the market’s cycle.

Vacancy rates climb, but prices remain stable

According to industry experts interviewed by CARIBBEAN BUSINESS, the vacancy rate of office space in greater San Juan is between 8% and 10%, depending on the project location and type. However, most developers and landlords won’t admit to those figures, preferring to claim a more favorable vacancy rate of 5%.

Despite an increase in office vacancies, lease rates have remained stable during the past three years. Gross rents in Hato Rey range from $19 per square foot to $30 per square foot, with $26 being the average. Gross rent includes operational expenses (maintenance, security, insurance, etc).

"Most office buildings have a hole inside [they’re empty], something we didn’t have before," said Miguel Figueroa, president of commercial real-estate broker OMNI. "In June 2002 I estimated a 5.5% vacancy rate, which in an eight-million-square-foot market means some 450,000 square feet are vacant. That number didn’t include office space under construction at the time."

Figueroa used the former World Trade Center in New York to explain what a 5.5% vacancy rate means in an eight-million-square-foot office real-estate market. "On 9/11, some 13 million square feet of prime office space was lost, which also wiped out the sublease market," he said. "Today, New York has a 7% to 8% vacancy rate, and that’s a lot."

That doesn’t mean Puerto Rico’s 5.5% vacancy rate puts it in a better position than New York or, for that matter, any other major stateside city, said Figueroa.

"Comparatively speaking, our office-space market is much more conservative than that of the U.S. mainland, and a 5.5% vacancy rate affects us more than it would them," said Figueroa. "Landlords and developers in the States take more risks. When their vacancy rate reaches 5% they start erecting the cranes for more construction."

By the same token, Puerto Rico was fortunate to avoid the problems faced by many stateside cities when the dot-com bonanza ended in the late ’90s. "When the dot-coms went belly up, they left a large amount of vacant office space, mostly in the northeast, southwest, northwest, and California," said Figueroa. "Though we [in Puerto Rico] were salivating for the dot-coms initially, we are fortunate they never came because we weren’t affected when they went bust."

Increase in subleased vacancies

One major challenge for landlords these days is an abundance of unused office space being subleased by current tenants. "Soon after 9/11, tenants began to cut costs by downsizing or by laying off employees. Both have created empty office space which must now be subleased," said Jorge Fournier, executive vice president of Commercial Centers Management. "Until that space is filled, it is unlikely that we will be able to lease our higher-priced vacant office space." According to Figueroa, subleased space is usually offered at a lower price in order to cover losses more quickly.

An excess of subleased office space also makes it harder for landlords to raise tenants’ rates, especially if the tenants are having a hard time financially. Landlords usually end up reducing their rates out of fear of losing tenants. Many landlords can’t afford to have additional vacancies and would rather lose some profit than lose it all.

Parking space is the key

As Hato Rey--the preferred cluster of prime office space in the metro area--began to experience increased traffic congestion but limited parking space, landlords started looking for ways to keep their properties attractive.

"What is really helping newly constructed projects is the availability of parking space," said Figueroa. "The older the building, the fewer parking spaces it has available and therefore the less attractive it is."

Figueroa said older buildings have less parking space because there used to be fewer vehicles on the road. According to statistics from the Department of Transportation & Public Works, there were 2.5 million registered vehicles in Puerto Rico last year, compared with 1.2 million 20 years ago.

Older buildings usually have two parking spaces for every 1,000 square feet of office space, whereas newer buildings have four or even five spaces per thousand square feet.

"If you have 20 parking spaces at an older building and 45 at a new one, which building will the tenant choose?" asked Figueroa. "That’s why newer buildings have a better chance than older buildings."

"It will get worse before it gets better," Fournier said. "Unless you offer good parking facilities and security services, you are going to have vacancies." Since Scotiabank began construction of a 600-space parking structure next to its building on Hato Rey’s Golden Mile last year, inquiries for office space in the building have been pouring in, said Fournier.

"That’s because there will be more parking, better illumination, and better security," he said. "There will be four parking spaces for every 1,000 square feet of office space in the beautiful, Class A building."

Hato Rey continues to expand

Despite the traffic and parking headaches in Hato Rey, it remains the island’s financial district and therefore will continue to attract financial institutions and other businesses that cater to the industry.

Last year, development firm Empresa Puertorriqueña de Desarrollo opened what was then thought to be the last new office building in the heart of the Golden Mile.

Known simply as 304 Ponce de Leon, the 11-story building has one floor with 20,000 square feet of commercial space, six levels of parking with 500 spaces, and four office floors with 24,000 square feet each. The Class A building, which incidentally also has the only operational helipad on the Golden Mile, is almost 100% full, according to project manager Cesar Lopez.

The building’s owner, Empresas Villamil, has another project in the pipeline for Hato Rey. Its first phase will consist of a parking structure with 600 spaces on a 5,600-square-meter lot at 103 Ponce de Leon Ave. A second phase will add an office building to the site, but Lopez said those plans are on hold for now.

"The Golden Mile is the Golden Mile," said Jorge Estarellas, president of construction firm Rabbit Tower Corp. "There might be traffic problems, but with the arrival of the Urban Train, those office buildings near the Hato Rey stations are going to have an advantage over buildings in Buchanan."

Estarellas is currently working on Sevilla Plaza, an 11-story, 78,000-square-foot building with a three-level parking structure on the corner of Sevilla and Alhambra streets in Hato Rey. Estarella said practically all the space in the Class A building has already been snatched up. Banco Popular is addressing the chronic shortage of parking and office space at its main building in Hato Rey with two current projects next to Popular Center, the bank’s headquarters. One of them is a five-story, 482,827-square-foot office building with a seven-level, 1,169-space parking structure. It will be across the street from Popular Center, on the corner of Ponce de Leon Avenue and Popular Street.

The Popular Center itself will be receiving a $35.3 million makeover, which includes the addition of an activity center with 150 parking spaces as well as a food court.

The island’s top banking institution also has ongoing projects at its Cupey Center and in Altamira in Guaynabo. The nine-story Altamira building will have 155,166 square feet of office space plus a 173,000-square-foot parking structure with 560 spaces. Popular’s Cupey Center is getting a new 166,000-square-foot office building and a six-level, 1,175-space parking structure.

Landlords becoming more creative

Landlords with older buildings (and even newer ones) with parking limitations thus have had to become more creative. Many buy an adjacent property and convert it into parking space. According to Figueroa, that solves one of their biggest problems and brings them back into the game.

Sevilla Plaza will include a three-story parking structure with 170 spaces. Additionally, an adjacent property was acquired to create another 100 spaces.

Sevilla Plaza is one of a handful of office projects whose space can be either leased or purchased. Other buildings following this new trend include the Corporate Center on Roosevelt Avenue in Caparra, Centro International de Mercadeo in Buchanan, and Capital Center Building in Hato Rey. Office space sells for $205 to $265 per square foot, depending on the project and the location.

Allied Center Building in Hato Rey, next to the Citibank Tower, was reinaugurated last year after a $1.9 million refurbishment. A single tenant had occupied the building since it was built in 1963, but now it can accommodate numerous tenants.

Building away from Hato Rey’s Golden Mile

Landlords and tenants who wish to avoid the traffic and parking difficulties of Hato Rey’s Golden Mile have begun looking to other areas with easier highway access and better parking facilities.

Most in the industry believe good projects with adequate parking and good highway access will sell well, regardless of their location.

One example is Torre Chardon, Empresas Fonalledas’ 15-story, 252,000-square-foot office building on Chardon Street in Hato Rey, just blocks from the Golden Mile. It also has a six-level parking structure with 935 spaces. The Class A building was almost completely filled within a year. "People are trying to move away from Hato Rey," said Jose Vizcarrondo, vice president of Desarrollos Metropolitanos (DM). "Proof of that is the number of office projects being built away from the Golden Mile, in places such as Metro Office Park, City View, and Buchanan, to name a few."

DM is currently working on Montehiedra Office Building, an 11-story, 188,000-square-foot building in Rio Piedras, next to the Montehiedra Town Center shopping center. The building, in its final construction stages, is selling well, though some space is still available, said Vizcarrondo.

"Tenants move because they want better access. On Hato Rey’s Golden Mile, banks continue to grow and to occupy much of the available space," said Vizcarrondo.

DM is also constructing Galeria Tower in San Patricio, a 10.5-story building with 195,000 square feet of rentable office space. It will include a multilevel, 227,000-square-foot parking structure with 1,100 spaces plus 65,000 square feet of retail space, occupied mostly by stores and one restaurant. Caparra Center Associates, the building’s owner, is also considering adding a medical office building on the site.

Following are some other projects already built or under construction away from the Golden Mile:

The third tower at Professional Office Park V in Rio Piedras. Expected to begin construction in March, the new phase will add 115,000 square feet of rentable office space in a five-story building, with a 10-level, 900-space parking facility.

The second tower at Centro Internacional De Mercadeo in Buchanan, in its final construction stages, includes 141,000 square feet of rentable space. The first phase entailed a similarly sized tower with a 1,500-vehicle parking structure. Space can be leased or bought.

Capital Office Building, an 118,000-square-foot multistory office building with a multilevel parking structure on Ponce de Leon Avenue in Miramar. Under construction.

Corporate Center Building on Roosevelt Avenue in Caparra. Space in the 100,000-square-foot building is for sale or lease; 50% of the space has been committed. Will have three parking spaces per 1,000 square feet. Under construction.

Expansion of R&G Financial Corp.’s headquarters on Piñero Avenue. Includes a five-story building with 80,000 square feet of office space and a six-level parking structure with 300 parking spaces. Owner-occupied. Under construction.

A&M Tower, a 13-story, 53,000-square-foot office building with a three-level parking structure on the corner of Del Parque Street and Baldorioty De Castro Avenue in Santurce. Completed last year.<LI>Winston Churchill 2000, a five-story, 35,000-square-foot building with 170 parking spaces. It recently opened on Winston Churchill Avenue in Cupey’s El Señorial sector.

"The occupancy rate of office space in 2002 was labeled as one of the industry’s lowest ever," said Fournier of Commercial Centers Management. "Despite the downturn, however, lenders continue to lend, buyers continue to buy, and developers continue to build. They just do it more conservatively and with greater creativity."

Fournier said the commercial real-estate industry is like the eternal optimist, always believing that things will get better. He predicts 2003 will be like 2002, though he holds out hope that better things will come in 2004.

"Prime space gets leased, mediocre space takes more effort, and bad space is a big problem," said OMNI’s Figueroa. "There’s the impression that there’s a lot of office space available. There is, but not enough to kill you."

Challenging times for island’s commercial real-estate market

According to industry sources questioned by CARIBBEAN BUSINESS, there will be few new retail spaces developed this year as the major retail chains cope with a soft economy, lower profits, and the prospect of a war with Iraq.

Vacancy rates at the island’s main shopping malls have increased in the past year to 5% or higher, a sign that retailers are scaling back expansion plans and, in some cases, closing shop and leaving town.

Three years ago there were hardly any vacancies at island malls. Today, however, practically all of them have space available, said Sterling Consulting Group President Laurence Campbell. "Vacancy at Plaza Las Americas used to be zero. Its vacancy rate now might be 5% or more, and 100,000 square feet of available space is a lot," said Campbell. Another challenge for commercial real-estate developers today is the habitual delays in the permitting process. "There are smaller shopping centers being developed, but it’s a matter of getting the permits," said Campbell. "I know of a developer in Humacao who has been trying to get permits for years."

Dollar for dollar, the rate per square foot of retail space in Puerto Rico is about the same as in other U.S. jurisdictions, though it varies by location, according to Campbell.

"The retail-space market isn’t what it used to be. There are no expansions or big projects in the pipeline," said Campbell. "The reasons for that are higher operating costs and less business."

A soft economy, a jittery stock market, high unemployment, and fears of war have put a brake on the industry, said Jorge Fournier, executive vice president of Commercial Centers Management. "We don’t foresee development of new, big commercial spaces, because tenants [retailers] aren’t expanding," he said.

Current conditions have made it difficult for landlords to lease space or raise rents, which affects their bottom line. "The norm in commercial real estate used to be that if a lease was up for renewal, you would raise the rent, but the market is soft nowadays. It’s not so much about raising rents as it as about retaining your tenants," said Fournier. "You don’t want them to leave."

In order to retain tenants, landlords are being more flexible. Nevertheless, it doesn’t look as if 2003 will be a banner year for rent increases, said Fournier.

Highway Authority investing $49 million to improve access to Hato Rey

Plagued for many years by inadequate highway access and traffic snarls, Hato Rey is finally getting $49 million from the Highway & Transportation Authority (HTA) to improve access to and from Las Americas Expressway (PR-18).

These upgrades could breathe new life into Hato Rey as a business hub, since tenants who have moved from the Golden Mile cite the area’s traffic and parking problems. The project’s first phase entails building a new off-ramp from PR-18 over Roosevelt Avenue to Chardon Street. Other changes will improve traffic distribution to Hato Rey, Puerto Nuevo, Plaza Las Americas, and Chardon and Calaf streets in Hato Rey, said HTA Executive Director Jack Allison.

Work on the $8.9 million ramp, which was started in December, calls for removing and improving public service installations between Chardon and Calaf Streets, as well as constructing a three-meter drainage pipe to replace a smaller, obsolete one.

"The second phase involves an elevated structure from Calaf Street toward Jose de Diego Expressway, plus south and north on-ramps to the sector," said Allison. "The two phases are expected to be completed this year and next."

A third phase includes a reforestation plan, endorsed by the Conservation Trust, to plant 254 trees, conserve another 408, and transplant seven mahogany trees. It also calls for removing 127 trees and trimming nine Dominican mahogany trees.

According to Allison, the fourth and fifth phases of the project haven’t yet been awarded. They involve two ramps, one between Calaf and Chardon streets and a southbound ramp to PR-18. The cost of the two ramps is estimated at $5.1 million.

"All these projects will reduce vehicular congestion and provide drivers with faster access to this important area," Allison said.

Office Building Projects Completed in the Past 18 Months--San Juan Area

(Rentable office space measured in square feet)

Project Name: Location / Rentable Office Space / Completion Date

Torre Chardon: Hato Rey / 252,000 / 2002

Doral Financial headquarters*: Caparra / 200,000 / 2002

Centro International (first tower): Cataño / 141,000 / 2001

Professional Office Park III & IV: Rio Piedras / 140,000 / 2001

Universal Insurance headquarters-MOP*: Guaynabo / 105,000 / 2002

304 Ponce De Leon: Hato Rey / 93,400 / 2002

OnePark-MOP (DaimlerChrysler): Guaynabo / 77,000 / 2002

A&M Tower: Santurce / 53,000 / 2002

Winston Churchill 2000: Cupey / 35,000 / 2002

Total: 1,096,400 square feet

Buildings are multitenant unless specified.


MOP: Metro Office Park

Source: Individual developers

CB graphic by Ingrid V. Reyes

Office Building Projects in the Pipeline for the Next 18 Months--San Juan Area

Rentable office space measured in square feet

Project name: Location / Rentable office space / Completion date

Galeria Tower: Caparra / 195,000 / 2004

Montehiedra Office Building: Rio Piedras / 188,000 / 2003

BPPR at Cupey Center*: Cupey / 166,000 / 2003

Millennium Office Building-MOP: Guaynabo / 165,000 / 2003

BPPR at Altamira*: Guaynabo / 155,000 / 2003

Centro Internacional (second tower): Cataño / 141,000 / 2003

City View Building III: Buchanan / 130,000 / 2004

Capital Office Building: Miramar / 118,000 / 2003

Professional Office Park-V (third tower): Rio Piedras / 115,000 / 2004

Corporate Center: Caparra / 100,000 / 2003

R&G Financial headquarters*: Hato Rey / 80,000 / 2003

Sevilla Plaza: Hato Rey / 78,500 / 2003

Office building at MOP: Guaynabo / 62,000 / 2004

BPPR office building (second tower)*: Hato Rey / 72,000 / 2004

Las Cumbres Office Building: Guaynabo / 20,000 / 2003

Total: 1,785,500 square feet

Buildings are multitenant unless specified.


MOP: Metro Office Park

Source: Individual developers

CB graphic by Ingrid V. Reyes

This Caribbean Business article appears courtesy of Casiano Communications.
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