Daytona Beach Commercial Real Estate – Pigs and Bacon?

The building cycle for commercial real estate in Daytona Beach is much like the pig and bacon cycle. When bacon prices rise, farmers raise more pigs. When prices fall, they raise fewer pigs. In the Daytona Beach area, prices rose and developers built more buildings. Prices have fallen and developers have pretty much stopped building until… Yep, until prices rise again, but not for a while.

Commercial property in Daytona Beach has been suffering with high vacancies. There’s no doubt that the local and national economy is affecting occupancy rates as well as prices. Many people have asked me where the commercial market is going over the next few years. This article will address my thoughts.

It’s going to take a while for the commercial sector to recover in the Daytona Beach area, maybe over 5 years. I don’t have a definitive answer on when. Our local economy is still largely dependent on tourism and events, second and vacation homes and retirees. Few local businesses are outside of services to support people in these demographics. We don’t have a strong manufacturing or technology base. Any job growth in our area is likely to be in tourism, medical, education or government.

The impact of a services economy on the Daytona Beach homes market is less significant than on the commercial property market. We believe that the big boom in commercial strip malls in the early and mid-90s was based on a faulty understanding of the local market. That understanding was that the area was going to grow enough to support all that additional space. We believe the availability of money to finance these projects clouded the judgment of many developers. Further, the growth would be in housing for second homes, retirees and service workers. There was no corresponding growth in major attractions, technology or manufacturing businesses.

I watched strip malls and office buildings rise all over the Daytona Beach area. I wondered then where the tenants for these building would come from. Well, one place they came from was people who were in older buildings moving into the newer buildings when their leases expired. Another was very unfortunate. Many people refinanced their homes because of rising home values and started business at or near the top of the boom. Many lost the businesses they started and commercial property owners lost tenants and income.

We believe that commercial spaces that are unique, like Port Orange Pavilion, will fare better than “common” office and retail space. Of the common spaces, those that are newer and in prime locations will recover faster than older buildings in less prime locations.

Prices of commercial properties have dropped significantly. Rents and lease rates have dropped as well. We expect that they will stay there for 3-5 years. There have been a few recent articles in the national press about the commercial market stabilizing. I’m not convinced, but there is no doubt that other markets will recover well before Daytona Beach. New York, LA, Seattle, San Francisco and other area with large diversified economies will stabilize before our area. Why? Because for a smart business operator to occupy a new space, they will need the confidence that their business will be profitable. That confidence will come from the perception of a sufficiently strong local market and economy.

When the demand for commercial real estate in Daytona Beach rises, rents and prices for buildings will rise. It will happen again, just not anytime soon.