CITY HIGHLIGHT, FEBRUARY 2005

BROWARD COUNTY SEES GROWTH IN ALL SECTORS

Multifamily investors showed a high amount of interest in Broward County, Florida, in 2004. The area’s apartment performance should continue to improve this year as the employment market expands and the supply is reduced through condominium conversions. Condos are also a hot product right now in the office sector. These days, many companies prefer to own their office space. In the industrial sector, Southwest Broward County is quietly becoming a major market in South Florida.

Multifamily

Apartment Realty Advisors is marketing Pinehurst Club in Hollywood, Florida, to condominium converters and income investors.

Broward County’s strong supply-demand fundamentals make it a favorable location for rental apartments. Broward County experienced a record amount of interest from multifamily investors, converters and developers in 2004. While multifamily development has increased, so have multifamily investment and condominium conversions. Seventeen Broward County communities with approximately 6,195 units were converted in 2004.

Broward County remains the Florida market with the highest institutional interest. Institutions, including advisors and REITs, purchased nearly one-third of Broward’s apartment transactions in 2004 versus 19 percent for the state as a whole. Institutions have focused on Broward County’s dwindling supply of land, continued population growth and elevated income levels. With institutional interest, Broward County posted more than $1 billion in transaction volume for the first time in its history. Notable transactions include St. Andrews at Kingspoint in Tamarac, Villaggio in Miramar and Bridgeside Place in Fort Lauderdale.

With Broward County nearly 97 percent built out, apartment developers have been forced to focus on redevelopment areas. More than 58 percent of the 4,719 units delivered in 2004 and expected to be delivered in 2005 are in Fort Lauderdale and Coral Springs. As evidence of the development shift to infill areas, 40 percent of 2004 and 2005’s deliveries are mid- and high-rise communities versus only 13 percent for the previous 4 years.

One of the tightest markets in the Southeast United States, Broward County’s occupancy levels increased 1.3 percentage points in the past year to 96 percent. Average monthly apartment rents for Broward increased 4.2 percent to $958. Apartment rents are relatively level throughout the county due to residents paying a premium for older apartments in more convenient locations. Areas such as Hollywood and Pompano Beach have experienced rapid increases in occupancy and rental rates due to their downtown revitalizations. Additionally, apartment communities in areas where there have been substantial conversion activity, such as Coral Springs, are benefiting from decreased competition. Coral Springs apartment communities are being positively affected from four recent condominium conversions, reducing the supply of apartments by 1,235 units. Broward County’s apartment performance should continue to improve in 2005 as the employment market expands and the supply is reduced through condominium conversions.

— Avery Klann, Apartment Realty Advisors

Office

There have been a few notable trends in the way office buildings are designed, leased and sold in the past few years. A shift in the needs of tenants as well as outside economic influences have played a major role in shaping these changes. From a development perspective, we have noted that most suburban buildings being developed today are in the range of 80,000 to 120,000 square feet and typically four floors. The preferred method of construction is “tilt-wall” construction and the buildings are primarily rectangular in shape. Tilt-wall construction was originally used primarily for warehouse and big box retail development but was introduced into office development in the 1990s as it shaves several months off the time to construct the building with added benefits of insulation and strength. The trend has clearly been toward utilitarian efficiency including a more efficient core and floorplates resulting in lower common area factors. It might be said that we are not seeing as many architecturally significant structures these days as a result. The building height and size is primarily a function of elevator and fire code issues for buildings under five stories and floorplates conducive to local tenant sizes.

While landlords have made great efforts to create more efficient buildings so that the cost savings can be passed on to the tenants, many influences beyond the control of the developer make the cost to construct a building much more expensive today. Land availability for office buildings has become scarce in most submarkets, causing land prices to double and sometimes triple over the past 7 years. World demand for structural steel, concrete and drywall has caused the prices of these building materials to skyrocket. Having recently experienced hurricanes Frances, Charlie and Jeanne we can expect some additional increases in the cost of materials and labor in the near future. The building codes instituted after hurricane Andrew have also added to the cost of the skin of the building, adding approximately 3 percent to the overall cost of new office construction. This convergence of increased costs of development will have a major economic impact on developers and tenants in the times ahead.

We have also seen changes on the interior of buildings. Tenants are striving to maximize interior efficiencies. For the most part we are seeing slightly smaller offices for executives and law partners. Various-sized conference rooms are strategically placed to accommodate meetings with clients and computers are reducing the storage needs for many firms. Although demountable wall partitions and modular furniture have been around for some time, improvements in their appearance and recent renovations in the way they can be reconfigured is encouraging some larger users to consider the space flexibilities created by these systems over fixed walls. The initial cost is typically more expensive but they offer greater flexibility in modifying the office space over the lease term to accommodate the needs of the tenant. The demountable partitions are also considered furniture and may be subject to some tax advantages in the form of preferred depreciation as compared to fixed improvements.

Most every office worker today spends much of his or her day on computers. Eye fatigue is a big complaint and we are seeing an increased utilization of indirect lighting. The cost of these fixtures is a bit more than the typical parabolic lights, but because they are powered in a line, there is a savings in the cost of installation. There is also a shift toward flat screen monitors for computers as they usually offer better resolution and take up less desk space. In general there has been a 15 to 20 percent increase in employee office density over the last 7 to 10 years.

Another notable change that we have seen the last few years is a very significant increase in operating expenses. Unfortunately, I expect this trend to continue. Insurance costs went up dramatically after the attacks of September 11. Demand by tenants for improved security systems and personnel have added to the cost of operating an office building. Full-time security personnel can add as much as $1 to 1.50 per square foot to operating expenses depending on the hours security guards are employed and size of the building. The active 2004 hurricane season will result in future increases in property insurance as well. Storm preparation and clean-up costs will be passed on to tenants in the ensuing months. The “save our homes” tax caps that have limited increases on homestead residential property have resulted in a shifting of the tax burden to commercial properties. Real property is reassessed upon sale, and office buildings have sold at record prices and at a high volume the last few years. Sellers are the big winners benefiting from sizable profits at sale of the properties, while the tenant bears the increase tax consequence resulting from the sale. We are seeing real estate taxes in the $3 to $4 per square foot range and higher for some recently traded Class A buildings in South Florida.

The lack of viable returns from stocks and alternative investments in conjunction with historically low interest rates has shifted trillions of dollars into real estate investment. The result has been an extremely active investment arena that has driven down capitalization rates and returns allowing sellers to benefit from extremely high sales prices relative to the income produced by the properties. Although the depressed economy put downward pressure on rents and occupancy levels, the sales price of buildings have gone up, not down as would typically be expected. One might ask, is that likely to create an office building bubble if interest rates rise? I don’t expect so, as the supply of space is coming into check because of limited construction the last few years. Also, the increased cost of new buildings will allow the rates in old buildings to rise as vacancy rates continue to drop.

Another trend we have seen the last few years is an increased interest in office condominium ownership. Historically low interest rates and high real estate appreciation in recent years have created some demand for user-owned buildings and office condos. Office condos are not without pitfalls as they are not well suited to companies that may need to change the size or location of their operations. It also remains to be seen how future increase in interest rates will impact the value of these assets. Increased mortgage amounts relative to leasing rates may make these less desirable in the future. Unlike landlords that can combine and subdivide spaces to accommodate tenants varying size requirements, sellers of condo office space have a limited market; tenants that can utilize the exact square footage that they have to offer. If a company has limited resources to expand its business, they may also be able to generate a better return by investing in their core business rather than in real estate. It is important that tenants fully understand the benefits and pitfalls of ownership as it relates to their specific needs before embarking on this alternative.

What is the impact of these trends for tenants that are trying to minimize occupancy costs for their business in the future? Absent a severe economic downturn, I believe that the supply of available space has come into balance in most submarkets and we are in the final stages of a tenant’s market. By “tenants market” I mean that economic conditions favor the tenant over the landlord. As the supply of available options continues to decrease, rental rates will rise. I anticipate that the increase in rental rates will happen more in the form of spikes than as a gradual increase because of the significant increase in the cost to construct new product and anticipated future supply constraints.

Tenants can benefit from the economic concessions of today for many years to come by entering into long-term leases. If a tenant occupies a significant amount of space, typically 10,000 square feet or more, they can even restructure their lease if it has 2 or 3 years remaining, resulting in an immediate rental savings. The tenant must be cognizant of the need to negotiate lease flexibility to accommodate fluctuations in space needs over time as well as liberal sublease language and controls on portions of operating expenses. In order to maximize the benefits from these long and short-term savings, it is critical to involve an experienced tenant representative consultant. The costs associated with office space is typically second or third largest business expenditure and has a major impact on a company’s ability to function as well as attract and retain qualified employees. Consequently the economic consequences of a bad decision can be far reaching.

— Rod Loschiavo, senior director, Cushman & Wakefield

Industrial

Southwest Broward County is quietly becoming a major industrial market in South Florida. Sunbeam was the pioneer with the Miramar Park of Commerce, which currently has more than 4 million square feet of industrial and office service space, but its success has drawn other heavyweights into the market. In 2002, IDI developed 475,000 square feet of big box distribution space and purchased another partially developed office/warehouse site at the northwest quadrant of I-75 and Miramar Parkway, which was master planned for roughly 1 million square feet in 2003. At the time it seemed risky, but they have been very successful in leasing up the vacancy and they are moving forward with the development of the additional phases. The area’s success can be attributed to its location on the Dade/Broward line, excellent highway access and the migration of people from Dade to Broward County.

Smaller developers have also had success in the market. National Constructors seems to be the most innovative in the area with the Flamingo Park of Commerce. The first phase was small bayfront loaded space, which isn’t very functional but has allowed the developer to maximize the site that now includes a mezzanine level over the office with rentable square footage. We have seen office/ warehouse condominiums get away with this, but the jury is still out on whether or not tenants will be willing pay for mezzanine space.

The ongoing regional interest in office/warehouse condominiums and continued low interest rates are also helping to fuel the growth of that niche market in Broward. Office/warehouse condominiums offer tax advantages and the potential for appreciation. Low interest rates have spurred demand, and developer interest has been raised due to the high cost of land in South Florida, since office/warehouse condominiums are often more economically feasible to build than rental projects. One of the newest condo projects in Broward is the Monarch Commerce Center, a 140,000-square-foot condo-warehouse distribution facility that is being developed by AMB Property Corporation. Designed to target the smaller and mid-level distribution companies, this project’s functional design should afford it success given the limited availability of this type of space for sale.

The industrial market in Broward continues to develop and show signs of improvement through 2005. The area’s success can be attributed to its central location in South Florida, easy access to major transportation hubs and continued population growth, which continues to fuel the economy and drive industrial traffic into the region.

— David Duckworth, senior associate, Codina Realty Services, Inc.

Retail

New Urbanism. Verticality. Mixed-use. Town Center. These are the buzz words in the retail real estate industry today. The shrinking supply of available land in South Florida is altering the landscape of future retail development. The days of developing single-story, large-box dominated shopping centers with acres of asphalt parking are fading in the rearview mirror.

Throughout South Florida, markets are beginning to see ground-floor, street-front retail with residential, office or parking garages above it. Town center or Avenue-style projects with structured parking are being designed from Doral to Davie.

Flagler Village, just north of downtown Fort Lauderdale, is representative of New Urbanism. Hundreds of new townhomes and lofts are being combined with mixed-use offices and retail stores to transform a neighborhood. Areas in the cities of Hollywood, Davie and Delray Beach are all seeing similar transformations.

Delray Beach’s Atlantic Avenue has reinvented itself as a model of the live/ work/play lifestyle, with new townhomes joining offices and shops, all within walking distance to the Beach.

Vertical development will eventually surround the Circles in the city of Hollywood, bringing both high-quality retail and residential to the neighborhood.

Shoma Homes is developing a mixed-use project on the 40-acre Ryder campus in Doral. The project will include approximately 1,500 residential units, 200,000 square feet of office space and 150,000 square feet of retail space.

Nob Hill Partners of Fort Lauderdale has plans for 227 condos, 18 luxury townhouses and 100,000 square feet of retail at the corner of Griffin and Davie Roads in Davie. The project will house shops, a bank, restaurants, offices and some of Davie's municipal services.

The Cordish Company of Baltimore is beaming over Seminole Paradise, the 350,000-square-foot complex that recently opened to complement the Seminole Hard Rock Hotel and Casino.

The greatest critical mass of development is occurring in the Brickell/ Downtown Miami/ Performing Arts Center corridor in Miami. With over 15,000 units in varying stages of planning or development, the area will also be transformed with more than 1.5 million square feet of retail development.

Not to be outdone, the city of Fort Lauderdale has taken steps to increase the development density on the downtown corridor upping the total to 13,000 units.

The successful Weston Town Center in the heart of Weston will see delivery of vertical timeshare units in the near future and an expansion of its retail component by 2006.

As far north as Royal Palm Beach, mixed uses of retail on the ground floor and apartments and condos on upper floors have been proposed for the development of Cypress Key, approximately half the size of West Palm Beach’s Cityplace.

Wayne Huzienga announced in January proposed enhancements to the Dolphins Stadium complex, which could include a retail complex and residential units.

— Gregory Masin, director - retail services, Cushman & Wakefield of Florida, Inc.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.