Download - Florida Investment Monitor First Q 2012
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Investment Monitor
LEADERS IN COMMERCIAL REAL ESTATE
Q1 2012
Q1 2012 ECONOMIC AND COMMERCIAL REAL ESTATE TRENDS REPORTNATIONALAND FLORIDA MARKET UPDATES
FLORIDA
All Sperry Van Ness offices independently owned and operated
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Page 2
has lagged the broader recovery. The
unemployment rate remains stubbornly high, not
only because of challenges in the private sector
but also as a result of cutbacks in state and local
government payrolls. The outlook is slowly
turning more positive, however. As recently as
last summer, employment in the state wasessentially flat as compared to a year earlier.
Hiring has picked up since then; between July and
November, Floridas private businesses created
more than 60,000 jobs. As a result, total
employment increased by 1.6 percent during 2011,
outpacing the national trends with the Sunshine
States best result since 2006. Education and
healthcare and the leisure and hospitality sectors
have been the primary contributors to the long-
awaited improvement.
Floridas improving jobs picture is clouded by the
challenges facing the state government and the
negative impact of an unnerving pipeline of
foreclosures. Last summers projections of a
balanced budget have been revised down
Increases in tax rates are unlikely, but state
programs are likely to face further cuts. Helping
to close the gap over the next several years,
Florida stands behind just two other states Texas
and California in attracting new residents and
spending. By 2016, it will be the third most
populous state in the union, overtaking New
York. Most of those gains are in older age cohorts,
principally retirees. A strong recovery in tourismand household refinancing into record-low
mortgage rates are also supporting the increase in
sales tax revenue.
Orlando and Tampa both experienced very sharp
job losses during the recession but have been
recovering at a slightly faster pace than peer
markets.
Tampas gains
have come
late. With a
2.7 percent
increase in2011, Tampa
Bay
accounted for
almost one in
four of
Floridas new
jobs during
the last year.
NATIONAL ECONOMY
National and Florida Economic Update
One-Year Change in Employment
('000) %
Florida 113.9 1.6%
Fort Lauderdale 5.9 1.0%
Fort Myers 4.0 2.5%
Gainesville -0.2 -0.2%
Jacksonville 9.9 1.9%
Miami 18 2.1%
Ocala 1.8 2.5%
Orlando 8.3 0.9%
Sarasota 2.3 1.1%
Tallahassee 0.1 0.1%
Tampa 25.8 2.7%
West Palm Beach 7.8 1.8%
Following a loss of momentum in the third
quarter of last year, the national economicrecovery showed signs of strengthening in the
final months of 2011. Measures of business and
consumer confidence have improved. Most
important, a steady decline in new claims for
unemployment benefits and a corresponding
increase in job openings suggest that labor
markets are finally firming. Investors have been
cautious in their response to the improving data,
reflecting that the recovery remains susceptible to
spillovers from the European debt crisis,
challenges in the domestic policy environment,
and continued weakness in the single-family
housing market.
A Firming Job Market
While corporate profits now surpass their pre-
recession levels, the frustratingly slow
pace of hiring has been a major
shortcoming of the recovery thus far. A
more robust labor market is a necessary
condition for sustained increases in
consumer spending and a range of other
economic outcomes. While the monthly
data on net hiring show that firms are
ramping up slowly, complementary data
on job losses and new job openings are
leading indications of trends in 2012.
Confidence Improves
As business confidence in the recovery
begins to improve, employment is
projected to rise. The most current data
on business sentiment show that while
sentiment remains weak by historic
standards, the outlook is brightening. As
of its January 2012 update, the NFIB
Small Business Optimism Index has been
improving for four consecutive months.
The Conference Boards CEO
Confidence measure improved in the
fourth quarter, as well.
Floridas Prodding Recovery Picks Up
With parts of Florida still grappling with falling
house prices and construction job losses, the state
-8%-6%-4%
-2%0%2%4%
2007 2008 2009 2010 2011
Year-Over-Year Change inNon-Farm EmploymentSource: Bureau of Labor Statistics
FloridaNational
80828486889092949698
100
2007 2008 2009 2010 2011
US Small Business Optimism IndexSource: National Federation of Independent Business
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Page 3 NATIONAL REAL ESTATE
While the pace of investment activity slowed in
the third and fourth quarters, the years final tally
easily surpassed sales activity during 2010. Salesvolume reached $160 billion in 2011, up more than
30 percent from a year earlier and more than three
times the markets nadir in 2009. The gains remain
uneven, however. Extending the investment
recoverys overarching theme, transaction volume
has been skewed to larger core assets in gateway
markets. Sales in other parts of the country,
including Florida, have been recovering more
slowly as investors have waited for a occupancy
rates and rents to stabilize.
Investors Looking Outside Gateway Cities
Competition for trophy assets in gateways likeNew York City and Washington, DC have pushed
cap rates lower at the top end of the market. The
most coveted CBD office towers and mid- and
high-rise apartment buildings were trading at cap
rates below 5.0 percent in the fourth quarter. In
the most extreme cases, a small subset of
buildings has traded at higher prices than in 2007.
As prices have outpaced cash flow, the value
proposition has weakened in these markets. As a
result, prospective buyers have begun to explore
acquisitions elsewhere, balancing the risk of
investing in less active markets against theirsignificantly higher yields.
Spillovers into secondary markets and trading in
smaller properties have been increasing slowly.
As the outlook for the economy brightens and
investors reach for value, sales activity is still
constrained in these segments of the market by a
lag of cash flow inflexions and limited access to
financing. In some cases, investors also cite a
dearth of distressed assets and high quality
properties both performing and value-add
available for sale.
Apartments Fundamentals Strengthen
Bucking the trends of slow recovery in cash flow
and credit availability, the apartment sector held
its place at the fore of the investment recovery in
the fourth quarter. Five years into the housing
crisis, young households show a strong bias to
renting. For those who are ready to make the
transition to homeownership, the need for larger
down payments and higher credit scores are
limiting their access to financing. Even as
Apartments Lead National Investment Recovery
residential mortgage rates fell to their
lowest levels in history the 30-year
fixed mortgage rate dropped below3.9 percent in January home sales
and price trends remain weak,
dragging on the national and Florida
economies. The recalcitrance of the
housing downturn continues to
power gains in apartment
fundamentals. Axiometrics reports
that national apartment rents jumped
4.4 percent in 2011 and projects a 5.5
percent increase in 2012. The sectors
falling vacancy rates and robust rent growth have
prompted an increase in development activity and
development land sales. As new properties begin to
come online in 2013, the pace of rent growth will
moderate.
Banks Start Lending But
Outlook for CMBS Remains Uncertain
While the apartment sectors investment and
development activity benefits from the strong support
of Fannie Mae, Freddie Mac, and the Federal Housing
Administration, other sectors have depended on
private sources of financing. The
largest net buyers in 2011, REITs
raised more than $50 billion in equityand debt, setting a new record.
While the largest REITs have put
their money to work in gateway
markets where life companies and
international banks have also been
active, investors in other markets
have depended on banks and CMBS.
Banks entered the fourth quarter
with significantly lower default rates
than a year earlier. While many banks
are still pulling back from real estate,a larger number reengaged with the
borrowers by making new loans in
the third and fourth quarter. Bank
lending remains critical to the health
of the industry since the outlook for
CMBS is uncertain. CMBS issuance of
$32.7 billion in 2011 fell short of early
expectations; projections for 2012 do
not anticipate a significantly stronger
level issuance.
0 10 20 30 40 50 60 70
2007 2008 2009 2010 2011
Thousands Rental Apartment Construction StartsSource: Census
$0$10$20$30$40$50$60
$70
2003 2005 2007 2009 2011
Billions Hisorical Offerings ofREIT SecuritiesSource: NAREIT, Chandan
$0$10$20$30$40$50$60$70$80
2007 2008 2009 2010 2011
Billions CMBS Issuance by QuarterSource: Chandan
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Page 4 FLORIDA ECONOMY
Gains Across Floridas Apartment Markets
FLORIDA APARTMENT
Florida Apartment Rent and Vacancy Rate Trends
2011
Change in
Asking
Rents
Q4 2011
Vacancy
Rate
2011
Change in
Vacancy
Rate
Fort Lauderdale 2.5% 5.4% -0.4%
Fort Myers 2.4% 8.5% -1.0%
Gainesville 2.0% 8.5% -0.3%
Jacksonville 2.5% 9.0% -1.8%
Miami 4.5% 4.3% -0.6%
Naples 2.9% 7.9% -1.3%
Orlando 2.8% 7.0% -1.9%
Palm Beach 1.0% 7.2% -0.3%
Sarasota 1.8% 5.1% -0.8%
Tallahassee 2.0% 8.0% -0.1%
Tampa 3.0% 6.5% -1.0%
Among the states hardest hit by the housingdownturn, tentative signs of stability emerged in
Floridas single-family markets during the fourth
quarter. Even so, rental demand is improving,
pushing occupancy rates and rents higher.
Vacancy rates fell across the board in 2011, albeit
only by 10 basis points in Tallahassee. Orlando
and Jacksonville both saw vacancy rates fall by
almost 200 basis points. That is a welcome trend in
Jacksonville, which opened 2011 with vacancy
above 10.0 percent. By the end of the fourth
quarter, vacancy rates were below 6.0 percent in
Fort Lauderdale and Sarasota and just 4.3 percent
in Miami.
The favorable trends are expected to hold, even as
housing affordability in Florida reaches historic
highs. Similarly, the positive outlook is largely
unaffected by new Federal Reserve proposals that
would repurpose foreclosed home as rental
properties, threatening to expand the supply of
available rental options.
Higher Occupancy Rates But Slow Rent Growth
Apart from a limited supply of new purpose-built
apartments, job growth trends in Florida are an
important factor in driving rental demand.
Workers finding jobs in hospitality and
healthcare, which have dominated Floridas
employment recovery, are more likely to rent thanto buy. In Jacksonville and Orlando, the two
Florida markets that have seen the least progress
in the single-family housing market, the relatively
stronger uptick in occupancy reflects challenges in
obtaining mortgages and concerns that prices may
fall further. The downside of an employment mix
weighted to lower income occupations can be seen
in slower rent growth. Even in Miami, which
boasts one of the lowest vacancy rates in the
country and where condos are being snapped up
by cross-border buyers in all cash-deals, average
rent growth was 4.5 percent.
Apartment Sales and Development
Investment activity in Floridas apartment sector
has been surprisingly strong, supported by its
favorable cash flow trends and low-cost financing.
As compared to gateway markets, however, cap
rates averaging 6.6 percent in the fourth quarter
are relatively high.
This combination of improving cash flow and
higher yields, coupled with a positive long-termoutlook for population growth and available
financing, supports a positive investment outlook
for cautious buyers. Fort Lauderdale, in
particular, has seen a strong uptick in price
discovery and sales of properties trading below
$10 million. As in other markets, investors in Fort
Lauderdale must watch for potential overbuilding
that would undercut gains down the road.
6.3%6.4%6.5%6.6%6.7%6.8%6.9%7.0%
Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11
Florida Apartment Cap Rate Trends
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Grappling with an absence of new jobs in office-
using occupations, net absorption remained weak
or negative in Floridas office markets during the
fourth quarter. The vacancy rate at the end of the
year was 20.0 percent or higher in six of the eleven
reporting metros.
Only one market, Miami , reported an observable
increase in rents. The small gain reflects the
movement of tenants to other, better properties
offering generous incentives rather than an uptickin net absorption. The increase in the market
average has been helped along by the completion
of three new buildings in the last year and half,
even as the new properties have pushed the
market vacancy rate higher. Overall, Floridas
office vacancy rate could trend higher through the
second or third quarters of 2012.
If firms hiring plans offer any indication,
occupancy gains in 2012 will benefit some of
Floridas hardest hit markets. A small but growing
net share of businesses in Fort Myers, Sarasota,
and Tampa are reporting plans to increasepayrolls in 2012. While many of the new jobs will
be in healthcare and hospitality, corporate
employers will contribute to the overall
improvement.
FLORIDA OFFICE
Florida Office Rent and Vacancy Rate Trends
2011
Change in
Asking
Rents
Q4 2011
Vacancy
Rate
2011 Change
in Vacancy
Rate
Fort Lauderdale 0.0% 19.0% 0.1%
Fort Myers -1.3% 23.8% 1.0%
Gainesville -0.8% 20.2% -0.4%
Jacksonville -6.5% 18.9% -0.9%
Miami 1.7% 19.7% 0.7%
Naples 0.5% 22.0% 0.4%
Orlando -2.1% 18.3% -1.0%
Palm Beach -4.0% 22.0% -0.4%
Sarasota 0.2% 20.4% 0.3%
Tallahassee -1.0% 14.5% -0.2%
Tampa 0.2% 20.0% -0.6%
In Jacksonville , a single fourth quarter lease
signing by EverBank Financial stabilized the CBD
office market. Looking to move roughly 1,500
employees from its suburban headquarters,
EverBank took 270,000 square feet and naming
rights at the AT&T tower in a December lease
signing that will increase CBD employment by as
much as 8 percent.
Even with concerns about weak fundamentals
weighing on office valuations, investors showed a
new readiness to buy assets at a discount in the
fourth quarter. Recent trades in Brevard County
and a spate of sales in Tampa, including the
January sale of the Pointe office building to
Parkway Properties, reflect a departure from the
disappointing levels of activity reported earlier in
2011. Underperforming assets are trading at deep
discounts. Palm Springs Center, which defaulted
on its mortgage in early 2011, sold in December
for less than half of the outstanding principal
balance on the mortgage.
Medical Office Buildings Capture Upside
Medical office property investment activity
slowed in the fourth quarter, but investor demand
in the niche remains strong. Floridas projected
population growth is weighted heavily towardsseniors, who will account for almost half of new
Floridians over the next two decades. These
prevailing demographic trends support long-term
demand for medical services in the state. At the
same time, buyers are finding a relatively deep
pool of acquisition opportunities. Regulatory and
compliance changes are motivating hospitals and
health systems to dispose of tenanted properties
or undertake sale-leasebacks.
Healthcare reform and its impact on doctor
reimbursement rates are ever-present
considerations for this sector. The outlook forphysician practice reimbursement is dim given
constraints on the federal and state purses.
Seeking to redeploy equity, reduce overhead, or
unencumber themselves of mortgage debt, a
larger number of physicians may bring properties
to market in 2012. A sudden increase in supply of
small assets for sale, and the potential for defaults
by doctors who levered up during the real estate
boom, could hurt prices. But investors with
reasonably long-term investment time horizons
will look past the immediate pressures on value.
Florida Office Struggles; Niche Opportunities in
Medical Office
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Page 6 FLORIDA OFFICE
Tourism Spending and Discount Retail Both
Benefit from Floridas Imbalanced Recovery
FLORIDA RETAIL AND
INDUSTRIAL
Ports, Trade Boosts IndustrialWarehouses and Distribution
Floridas industrial fundamentals and investment
activity carried gains from prior quarters into the
fourth quarter, outpacing the recovery in the
office and retail sectors. Managing to avoid the
spotlight that has accompanied highly visible
office sales, several recent trades of well-located
warehouses and research and development
facilities have allowed investors to secure stable
cash flow streams at favorable prices. Avoidingfunctionally obsolete space has been a key
consideration since these assets are trading at the
deepest discounts.
Investment opportunities in the $2 million to $10
million range are abundant, charting a path to
portfolio diversification for buyers that may have
focused on retail or office space up to now. Within
this subset of the market, warehouse and
distribution centers located near major ports are
benefiting from healthy year-over-year gains in
trade volume. In 2010, waterborne trade in and
out of Floridas ports jumped 22.6 percent on the
prior year.
Apart from container traffic, the Ports of Miami,
Everglades, and Canaveral have held their
positions as the top three cruise ports in the
world. In its 2011 fiscal year, Canaveral reported
its best year ever for cruise passenger traffic. The
Brevard market faces drags on container traffic if
the surrounding businesses cannot replace the
jobs lost upon the sunset of the Space Shuttleprogram or prospective cuts in military budgets.
Port authorities in Brevard still report
overcrowding at existing cargo facilities on
account of the rise in container traffic. Canaveral
completes development of a new pier in 2012 and
will kick off construction of another facility in the
coming months. Liberty Property Trusts fourth
quarter acquisition of 126 acres in Miami presages
the development of the 1.6 million square foot
Miami International Tradeport.
Florida Retail Rent and Vacancy Rate Trends
2011
Change in
Asking
Rents
Q4 2011
Vacancy
Rate
2011
Change in
Vacancy
Rate
Fort Lauderdale -1.8% 10.9% -0.4%
Jacksonville 0.1% 12.1% 0.3%
Miami 1.0% 6.9% -0.7%
Orlando -2.1% 10.0% -0.3%
Palm Beach -1.1% 11.0% -0.3%
Sarasota -5.8% 19.0% -0.5%
Tampa -2.9% 9.6% -0.4%
At the other extreme, retail spaces along major
tourist corridors, including parts of South Beach,
have seen vacancy rates fall on a sustained
increase in tourism and related spending. A recent
South Beach trade commanded a valuation in
excess of $800 per square foot. Value-add deals for
big box retail centers are also contributing to sales
volume and, as part of repositioning efforts,
marginal improvements in occupancy.
Floridas retail sector has struggled during the
states housing crisis, weighed down by
joblessness and anemic consumer confidence.
Street-level retail in CBD office properties has
faced particular headwinds given the high office
vacancy rate. While most markets had lower
vacancy rates at the end of 2011, Miami and
Tampa are alone in reporting single-digit vacancy.
The recent uptick in service jobs and
lackluster wage growth in other
sectors have afforded some upside.Discount retailing has been one of the
few retail subtypes to capture the
downturns silver lining. Land sales in
support of discount retail
development, such as the January
acquisition of a Port Charlotte site that
may become home to a Dollar General,
are indicative of Florida consumers
cost-conscious mood.-15%-10%-5%0%5%
10%15%
2007 2008 2009 2010 2011
Year-Over-Year Change inTaxable Florida Tourism SalesSource: Florida Office of Economic &
Demographic Research
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0%2%4%6%8%
10%12%14%
2009 2010 2011
Multifamily Default Rates3%
4%
5%
6%
7%
2009 2010 2011
CRE Default RatesSource: Bank Call Reports, Chandan
FloridaNational
10%12%14%16%18%20%22%24%26%
2009 2010 2011
Construction Default Rates
The recovery in Florida tourism spending and the
return of large conventions that had avoided the
state during the recession has parlayed into
improving fundamentals and transaction activity
for high-quality hotels, restaurant spaces, and
other hospitality venues.
Improving fundamentals have not kept hotel and
hospitality owners that levered up prior to the
recession from defaulting on their debt. In fact,
several recent trades have involved funds
acquiring notes and foreclosing on borrowers. In
Florida Hospitality Buoyed by Tourism
FLORIDA HOSPITALITY
AND DISTRESSED
Distressed Opportunities Increase asCMBS Loans from 2007 Reach Maturity
Investors frustrated by a thin set of opportunities to buy distressed properties are
understandably skeptical of whether 2012 will see a shift in banks and special servicers
handling of non-performing loans. Sales of distressed properties increased in the 2011. The
underlying trends fueling the increase in activity will persist well into 2012 and beyond.
As delinquency and default rates for bank-held mortgages have declined from their peaks,
banks and their regulators have been increasingly inclined to liquidate non-performing
loans and offload real properties from their balance sheets. Florida banks holdings of
multifamily properties have become prime candidates for disposition as investor demand
has strengthened and recovery rates have improved. Banks have been parting with REOassets in other sectors, as well. Roughly half the retail property trades in Orlando in 2011
were through banks or special servicers. Amongst the sales, Washington Shores Plaza was
acquired in the fourth quarter for less than $40 per square foot.
The outlook for failed construction projects remains uncertain, as default rates in Florida
have diverged from the national trend, leaving almost one in every four loans in this
category in default. Bank losses on these loans generally remain high. This January, PNC
Bank internalized a loss of more than 70 percent on a stalled development project in
Jupiter, south of Port St Lucie.
CMBS represent a potentially larger source of distressed investment opportunities in 2012
and 2013. Five-year interest-only loans made at the markets peak in 2007 begin to mature
in the first quarter. Hundreds of loans will fail to meet prevailing criteria for refinancing,
requiring injections of new equity or new sponsorship.
The mix of properties runs the gamut from the traditional to the unusual. In December,
Zions First National Bank offloaded a former Montessori School in Boca Raton, recouping
$1.5 million against a 2006 mortgage. Legacy Bank of Florida funded the current
acquisition. Distressed industrial properties are often trading at deep discounts, as well.
Also in December, SunTrust Bank sold a flex condominium unit in Venice, just south of
Sarasota, for $195,000. The new price is roughly 40 percent of the $468,700 paid by the last
owner in 2006.
December, the Traymore Hotel in South Beach
was sold for $17.5 million. In this case, the new
sale exceeded the principal balance on the
defaulted mortgage significantly, demonstrating
that the best-positioned distressed assets can
command healthy investor attention.
In another fourth quarter South Beach trade,
Hersha Hospitality Trust acquired the Courtyard
Miami Beach Oceanfront for $95.0 million, more
than $360,000 per key.
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FLORIDAInvestment MonitorQ1 2012
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