EXECUTIVE SUMMARY The overall Tallahassee/Leon County economy was not as negatively impacted by the Great Recession as was the State of Florida as a whole, because its economy is largely driven by State government and three (3) institutions of higher learning. However, the overall economy was still negatively impacted and is still in a state of recovery. Employment is still below its high and its residential housing market is still constrained by vacancies and foreclosures. DEMOGRAPHICS The overall population growth over the last three years is approximately 1% annually. Data suggests full recovery is possible in 2015. The County s overall population is projected to increase from its current population of 278,377 to 298,400 in 2020, or a growth rate of approximately 1%. The Demographics are: Still recovering from Recession, Full recovery by 2015 Projected annual growth rate of 1% Market shows that District can support a Full Service Hotel, Student Apartments, Retail, and Parking Garage but does not currently support additional Office space. MIXED USE CONCEPT The analysis of the Tallahassee/Leon County real estate market and the new development occurring within the greater Gaines Street/West Madison Street redevelopment area (including the District) indicate that much of the new real estate development is being based on Smart Growth principles that feature the concept of live, work, play and buy all within a walkable community. This highest and best use analysis assumes that the various real estate segments discussed below and within the body of this report will also be based on Smart Growth principles and are not stand alone developments but rather fully intergraded mixed use developments whose individual parts are synergistically connected to one another. HOUSING MARKET The overall housing market is in a state of recovery. The market has a large amount of vacant units; vacancy rate is estimated at 13%. Foreclosures have been averaging 1,625 per year. The residential market has a growing multi-family segment which accounts for approximately 31% of the market. Over the last two years, multi-family housing (primarily student oriented) accounted for the majority of permits and construction. The market has not seen any major increase in market grade apartments (which has been the major housing growth section nationally and State-wide). The growth of student housing is the result of a geographic redistribution, not overall growth, and is largely driven by a new student housing paradigm. The new student housing product is largely driven by walkable proximity to the campus and located in mixed use smart growth communities. This mixed use student housing model, currently represents only ten (10) percent of the student apartment market, has the highest rental rates ($1.72 per sq. ft. to 2.15 per sq. ft.). Gaines Street and West Madison developments have created a new major student housing hub based on the concepts of a live, work, play and buy walkable community. The area has seen 183 student housing units (813 beds) open in 2013 and are fully occupied, with another 414 units under construction with openings planned for late summer 2014. Interviews suggest that preleasing is proceeding at better than projected rate. There is not sufficient data to determine the potential size of this new product. The Gaines Street/ West Madison student housing market, with its mixed use developments, has the potential to become an entertainment and retail district with the introduction of 44,000 sq. ft. of retail space. It is the location of choice for new retailers to the area, including Urban Strategic Planning Group, Inc. Page 1
Outfitters (14,000 sq. ft.). Should the units now under construction be fully leased by next fall (2014), the product would appear to have the ability to increase its market share from 10 percent to 20 percent plus or 600+ units. While these units command higher rents, due to their proximity to campus as well as retail/entertainment, there is less of a need for an automobile and its associated costs. Housing Market: Single family market has not recovered Student housing is growing due to a new student housing model, not growth Current lease rates for the new student model are approaching 100% but full impact will not be known until construction is complete on new units in the Gaines Street and West Madison Street Hub New Student Housing Model only represents about 10% of student apartment market but should be able to increase to 20-25% of the student apartment market New Student Housing Model lease rates are between $1.72 and 2.15 per sq. ft.; generating the highest rents in the MSA New Student Housing Model is not as automobile dependent due to proximity to campus and retail/entertainment venues and therefore could apply transportation cost savings to increased rental rates. RETAIL MARKET The overall Tallahassee/Leon County market is also in a state of recovery. The market currently has an inventory of approximately 24 million sq. ft., having added 1.1 million sq. ft. since 2008. The market absorbed 206,419 sq. ft. last year and had a vacancy of 6.3%. Overall market rents are averaging $14.07 per sq. ft., triple net. The retail market is largely dominated by traditional regional mall type B retailers and locally generated retailers. The market appears to have captured the interest of the larger national retail market; as Whole Foods, Trader Joe s and Urban Outfitters have recently opened or are under construction. The Gaines Street/West Madison Street redevelopment area has absorbed over 32,000 sq. ft. of space in 2013, with an additional 66,500 sq. ft. under construction. Current asking lease rates are in the $24-$26 sq. ft. range, triple net. Interviews report that preleasing is excellent and ahead of projections. Should the retail space currently under construction be fully absorbed, the Gaines Street/West Madison Street will establish itself as a new retail hub and should be able to continue to absorb 25,000-40,000 sq. ft. of retail space by capturing a larger share of the overall Tallahassee retail market. This square footage does not include a new grocery store, which SPG believes could be supported within the greater District. Retail Market Current retail market has not recovered from Recession. Retail mix is limited to Mall type tenants. Market has begun to attract new national tenants: Whole Foods, Trader Joes, and Urban Outfitters. Gaines Street/West Madison Hub asking rents: $24-$26 sq. ft. triple net. Gaines Street/West Madison is becoming a Retail and Entertainment Hub; and with Urban Outfitters should attract customers from the entire City as Urban Outfitters will be a destination retailer. Strategic Planning Group, Inc. Page 2
HOSPITALITY MARKET The Tallahassee/Leon County hospitality market is dominated by State government and University driven demand. The overall County hospitality market appears to have recovered from the Great Recession. August year-to-date occupancy was 60%, increasing one percent (1%) over a 2007 high. Average Daily Rates, $80.41, August year-to-date, are slightly below 2007 ($81.15) but have shown improvement from 2010 lows ($72.53). The Downtown hotel market has achieved an August year-to-date occupancy of 70.2%, a considerable improvement over the 2008 occupancy of 56.8 %. August 2013 year-to-date ADR was $107.69, still below the 2008 high of $112.16. Historically, total year ADRs exceed August year-to-date figures. The overall market, including downtown, does not have a true full service hotel comparable to the conceptual on-campus hotel analyzed. A review of comparable on-campus hotels, e.g. Ohio State, Penn State, Cornell, LSU, etc., reveals that 65%+ of campus hotel demand is University driven. The hotels have been used to promote overall brand, expand Executive Education programs and provide experience for students in their Hospitality Schools. In addition to the impacts associated with sports (home football games account for 11% of Penn State s gross revenues), a significant part of its demand is driven by users of its conference facilities. Based on the previous data presented, SPG believes that the overall meeting and association market appears to be constrained. The market does not have a full service hotel conference facility and there is a geographic disconnect between available exhibition/meeting spaces and hotel rooms within the market. Based on our research, SPG believes that linking the Civic Center and Turnbull Center together with a hotel will create a singular operating unit with the potential to attract additional demand. Existing meeting spaces may be renovated, supplemented, or repurposed for maximum utility. Should a full service hotel, with larger meeting rooms be constructed (deficient in existing meeting spaces), linking the hotel with the adjacent exhibition/meeting spaces, the regional meeting and association market segment should increase hotel demand and drive occupancy of the meeting facilities. The new hotel should be able to capture a significant share of its market. A review of comparable on-campus hotels (discussed earlier) demonstrates a 65%+ demand generated directly from the University and largely sports and meeting derived. SPG believes that a new full service hotel would command an ADR boost as well as a boost for its location on-campus or an ADR range of $125 - $150. Average conference/association attendees averaged $150 as discussed in the body of the report. Hospitality Market The local hospitality market is recovering from its recessionary lows, as is nationally. August year-to-date occupancy of 70.2% is the highest in the six year study period but ADR s still are recovering The market does not have a true full service hotel (exception might be the Doubletree). Current August 2013 ADR of $107.68 for downtown hotels is still below the 2008 high of $112.16 The Tallahassee hospitality sector has not grown a strong conference meeting market, despite being the State Capital and home to three major institutes of higher education, due in part to lack of a proper full service hotel and supporting conference, exhibit space. A full service hotel connecting the existing conference and exhibit space (Turnbull Conference Center and Donald L Tucker Civic Center) as well as a relocated College of Business and Dedman School of Hospitality should increase the City s conference and meeting market. Reports on Florida s Conference and Meeting market show an average ADR of $150. Strategic Planning Group, Inc. Page 3
FSU is the region s major generator of hotel room nights and if its hotel demand is directed to a single hotel it should support 1,029 rooms at 70% occupancy Interviews with other on-campus hotel managers suggest the importance of on-campus full service hotels to their overall brand and to their College of Business Executive Programs. PARKING GARAGE The current Civic Center parking lot comprises approximately 600 spaces which according to numerous studies is not sufficient to handle some of the Civic Center events. Traditionally a 250 room hotel would need one (1) space per room or 250 rooms, apartments usually require two (2) spaces per unit with three or more bedrooms and retail traditionally requires four (4) parking spaces per 1,000 sq. ft. of retail space. In a mixed use project, there are traditionally reductions in parking requirement due to cross usage of the parking (residential is usually at night while retail is usually during the day, etc.) and increasingly mixed use developments have lower automobile usage. Taken together the components would require 750 spaces without taken into account the loss of the original 600 spaces (for a total of 1,350 spaces) without taking into account increased parking from use of the Conference Center or Civic Center. That said, SPG recommends the construction of only a 1,250 space parking garage to satisfy projected demands as parking demand occurs at different time intervals depending on the type of demand and the efficiencies of mixed use developments. Parking Garage Existing Park Space 600 spaces Proposed hotel, apartments and retail space 750 spaces Addition parking needs include increased Meeting and Exhibit space utilization College of Business and Dedman School of Hospitality parking needs General lack of parking space on-campus and within the greater West Gaines/West Madison Hub OFFICE MARKET The overall office market has slightly over 6.8 million sq. ft. of inventory and a vacancy rate of 21%. As stated earlier, employment while growing has yet to reach its prerecession high. The downtown market has a current inventory of 957,825 sq. ft. and a vacancy of 19.03%, with current asking rents ranging from $18.00 to $26.00 per square foot, triple net. Due to the overall condition of the area s office market, the FSU Real Estate Foundation felt that this market segment should not be pursued as part of the overall study. HIGHEST AND BEST USE The District contains slightly over 10 vacant acres (the vacant western Civic Center parking area and the O Connell property). The area has extreme topographic differentials, which has resulted in drainage issues. The County has appraised the fair market values of the O Connell property at $10 per square foot. It is reported that the current land value of the newly constructed mixed use developments on Gaines Street and West Madison are approximately $20 per square foot and reports are that some vacant properties in the area are asking $30 per square foot. The University is interested in relocating the College of Business and the Dedman School of Hospitality to the site. The redevelopment of the District is perceived to be critical to enhancing the College of Business brand, its Executive Program, and the overall FSU brand. After analysis of market research data, it was determined that conceptually the district, specifically the Civic Center parking lot and O Connell site, be further analyzed based on the relocation of the College of Business, the Dedman School of Hospitality, a 250 room full service hotel, 200 apartments, 25,000 sq. ft. of retail and a 1,250 space parking garage. Strategic Planning Group, Inc. Page 4
The program is based on a unified development concept with each separate development component being fully integrated as they are synergistic to one another. For example, as shown in the analysis of comparable on-campus hotel properties, the location of an on-campus hotel elevates their individual College of Business brands, which in turn increases meeting demand and hotel occupancies. The individual development components conform to local land development regulations and meet zoning and future land use designations. Post-recession real estate market trends are improving but given the impact of the Great Recession, long term historical trending is not reliable. The introduction of the new mixed use, walkable student housing model built in proximity to the campus has been highly successful, and additional units are under construction. The main question that has not been answered is the size of the student market that can support the rents being asked. To a large degree, the absorption of units currently under construction should provide insight as to the continued growth of that market segment. Continued retail growth within the District will require more than just capturing the new resident demand. It will need to capture part of the overall University demand (dorms) as well as City-wide demand. The opening of the Urban Outfitters and the beginnings of an entertainment district will enhance the retail viability of the Gaines Street/West Madison Street Redevelopment Area. Based on our analysis, the overall real estate market appears to be able to support the construction of new apartments (both market grade and student), additional retail space and a full service hotel linking the existing conference and exhibit space at both the Civic Center and Turnbull Center. As shown in the Appendix, a series of conceptual financial models were run testing the potential viability of each component. These analyses are intended for directional purposes rather than operational considerations, programmatic assumptions, etc. The analysis was for only the four components described above ($93 million) and does not include the College of Business, Dedman School of Hospitality, the basketball training facility or other infrastructure capital costs. The analyses assume a land value of $20 per square foot, and a three year stabilization period. Each component was subjected to different operational assumptions (square feet, rents, etc.) again from a conceptual point of view not a financial sensitivity analysis. ECONOMIC IMPACT The development concept is projected to create a total of 3,954 (FTE) short term construction jobs. The hotel and retail components are projected to create a total of 305 jobs, and expenditures from the increased meeting/association demand are projected to create a total of 206 jobs. FINANCING OPTIONS Financing options will largely be determined on ownership of the various development components. The parking garage could be owned by the University and/or the owner of the hotel. Because a major part of the development would be built on the existing Civic Center parking lot, the existing demand for additional parking at the Civic Center, general University demand and other Gaines Street CRA demands, the parking costs could be partially funded through Tax Increment Financing from one or both CRAs. The use of Tax Increment Funding has been used in the past within the Gaines Street CRA and this source of funding is commonly used throughout the State for parking structures. For the purpose of this analysis, it was assumed that 50% of the construction cost would come from one or both CRAs. Revenue from the garage is sufficient to cover construction costs and generate operational profits. The rental apartments and retail development are expected to be private sector funded, utilizing normal funding techniques. The hotel and the relocated College of Business and Dedman School of Hospitality pose the most challenges to securing financing. The biggest financing hurdle for the hotel is obtaining the necessity equity to secure the 30% equity needed to obtain funding at 70% loan to value (or $15 million excluding land). Strategic Planning Group, Inc. Page 5
Contributions from TIF and Bed Taxes could potentially cover some equity. Other campuses have relied on contributions to cover most of the required upfront funding. Securing tax free bonding, if possible, could further limit the loan to value ratio. One technique that has been used to fund public buildings is the Build Lease Back approach, where a company builds the facility and leases it back to the Public Entity for a period of 20-30 years after which it reverts back to the Public Entity (or in this case the University). This approach could potentially be used for the hotel as well as the relocated College of Business and the Dedman School of Hospitality. Strategic Planning Group, Inc. Page 6