COVER STORY, FEBRUARY 2008

SOUTH FLORIDA INVESTMENT OUTLOOK

The metropolitan areas comprising the Southeastern commercial real estate markets have been impacted in varying degrees by the credit crunch and subsequent devaluation of the U.S. dollar that manifested itself in the last half of 2007. In the investment market, the rate of price appreciation has slowed, especially in Florida, and values are forecast to stabilize or even fall slightly in 2008 as yield-oriented investors play a larger role. Investors will be wary of how the capital crisis is going to impact job growth throughout the Southeast, and in turn, how that will impact the demand for commercial real estate.

WEST PALM BEACH

Retail

A promising long-term outlook for Palm Beach County remains intact, due to the projected addition of more than 10,000 households annually during the next five years and the resulting increase in traffic volume. The ongoing realignment of the local housing market, however, will have a mildly adverse effect on retail properties in Palm Beach County in the near term. In the months ahead, vacancy is expected to rise to approximately 7 percent as residential-related spending slows and retailers react by trimming space requirements. Rents will continue to grow, especially in high-demand areas like Boca Raton and West Palm Beach, but some owners may elect to hold the line on rents to retain tenants. Retail property stock, meanwhile, is expected to expand by only 1.2 percent this year after several periods of annual growth in excess of 2 percent. Supply additions may slow significantly in 2008, as there is little new space in the planning pipeline. The large Callery-Judge tract in the western portion of the county, for example, may contain up to 3,000 homes, but only 220,000 square feet of retail is presently proposed.

Apartments

More than 9,000 new households are projected annually in Palm Beach for the next five years. Accordingly, apartment property owners and investors may want to consider this favorable view of the market’s potential, even as a realignment of housing supply and demand linger in the near term. The growing number of residents looking for housing in the quarters ahead will have more options, due to an expanding stock of unoccupied or unsold for-sale homes. As such, vacancy is expected to rise this year, although several forces at work will supplement the renter pool and limit the extent of the increase. These forces include low housing affordability, demand generated by growth in low-paying employment sectors and foreclosures relegating some homeowners to renter status. Against this backdrop, many local apartment owners may choose to increase concessions and accept a lower rate of rent growth in exchange for maintaining occupancy.

Office

The long-term prospects for the Palm Beach County office market remain bright due to ongoing population growth and an expanding economy, but the near term will be marked by softening space demand. The vacancy rate climbed 130 basis points in 2007 and is projected to rise again this year in response to a reduced rate of employment growth that is partly attributable to a slower housing market. Effective rents, meanwhile, surged 6.7 percent last year, with a more modest increase forecast in 2008 as countywide leasing volume decreases. In the large Boca Raton submarket, for example, effective rent growth tapered steadily during the year to 5.8 percent. Effective rents in the submarket are anticipated to rise approximately 3.5 percent this year, and concessions, which ticked up at year end, could continue to climb in the quarters ahead due to softer demand.

— Gene A. Berman is the group managing director of the Florida offices of Marcus & Millichap Real Estate Investment Services.

FORT LAUDERDALE

Apartments

Another year of supply and demand realignment awaits apartment property owners and investors in Broward County. The condo market has cooled considerably and some units originally slated for conversion are expected to re-enter the market as rentals in 2008, resulting in a forecast vacancy increase into the mid-5 percent range. Apartment demand will continue to be generated by the many households for whom home ownership remains unaffordable. In addition, swelling foreclosure rates will force existing homeowners from single-family residences into rentals. In the year ahead, however, submarkets where Class A units comprise the bulk of rental inventory, such as Miramar and Coral Springs, will face the greatest pressure from condo reversions. Vacancy in these areas will likely trend higher than the marketwide rate this year and concessions could increase significantly due to competition from the shadow-rental market. In largely

Class B/C submarkets, especially those located east of Florida’s Turnpike, vacancy and concessions are expected to outperform the entire market due to the working-class mix of renters.

Office

The Broward County office market is in the midst of a transition. In 2008, construction is picking up at the same time as leasing activity is slowing, placing upward pressure on vacancy and restraining rent growth. Additionally, conversions to office condos have reduced supply and driven vacancy lower in recent years, a trend that is unlikely to persist as job growth tapers off and the number of office condo sales slows. Besides the supply issues related to office condos, Broward County’s soft housing market will continue to affect office properties. At the height of the recent housing boom, office assets in growing residential areas such as Coral Springs, Pembroke Pines, Sunrise and Plantation recorded significant rent and vacancy improvements. Not coincidentally, as the housing market weakened, vacancy in these areas inched up in the second half of last year, a trend that is expected to persist into 2008. Concessions in these areas were also climbing as 2007 came to an end.

Retail

While the long-term outlook for Broward County retail properties remains quite bright due to household growth and greater population density, more modest results should be expected this year. Net absorption will be positive in 2008 but will fall short of annual gains posted during the recent housing boom. In the near term, newer Class A shopping centers, especially those located in high-growth areas west of Florida’s Turnpike, are likely to outperform. Owners of such properties should expect to fill vacancies relatively quickly, while re-leasing times are likely to stretch out for older assets, where greater concessions may be needed to attract tenants. Meanwhile, completions are forecast to slow in 2008 and will continue to ease over the next few years as developers respond to a significant decrease in housing permits.

— Gene A. Berman is the group managing director of the Florida offices of Marcus & Millichap Real Estate Investment Services.

TAMPA

Apartments

More housing alternatives will emerge for metro residents, and the softening housing market is expected to drive more modest gains for apartment owners in 2008 than in recent years. The affordable single-family rental market, especially in newer suburbs such as North Hillsborough County, will compete directly with Class A properties, causing some local apartment owners to elevate concessions to maintain occupancy levels. In close-in submarkets, the shadow-rental market will include a few high-end condos recast as rentals and some units previously removed from inventory for conversion will come back online as apartments. In the Central St. Petersburg area, for example, a 270-unit complex that sold for conversion in early 2006 will instead be upgraded and restored to apartment inventory. Demand-side indicators will remain positive; however, job growth acceleration in most sectors, indicates that the rise in vacancy will be short lived. In particular, the traditionally lower-paying leisure and hospitality sector is forecast to expand nearly 2 percent by year end, due in part to currency exchange rates that encourage overseas tourists to visit the metro.

Office

Office vacancy in Tampa fell 500 basis points from 2003 to 2006 but is now expected to rise for a second successive year, while rent growth is forecast to decline to a more normal pace. Recent improvements in market fundamentals have been attributable to vigorous demand for Class A space in areas such as the Westshore and North Tampa submarkets, but demand-side momentum was receding as 2007 ended. In North Tampa, Class A demand will be tepid for the next several quarters due to the adverse effects of a soft housing market on employer expansion and the creation of new office-using businesses. In the metro’s Class B/C sector, meanwhile, recent improvements in the vacancy rate are partly attributable to a reduction in for-lease inventory, presumably for conversion to owner-occupied space. In Pinellas County, for example, a vacancy decline of more than 400 basis points since 2005 can be explained to some degree by a 7 percent loss in the amount of for-lease stock. Slower marketwide job growth, though, will curtail purchases of Class B/C space for occupancy and stem the flow of inventory reductions in the near term. This trend could be beneficial, however, as some businesses that would have purchased space may remain renters instead.

Retail

Despite lingering softness in the Tampa housing market, retailers continuing to take on additional space and net absorption will remain positive in 2008. Additionally, demand in some specific areas of the market is robust, and these submarkets are expected to post above-average results in the near-term. South of state Route 60 in Pinellas County, for example, heavy traffic volume on established corridors will sustain retailer demand. Elsewhere, the effects of a softer housing market on retail spending and traffic will be most conspicuous in communities such as Brandon, Riverview and Ruskin in Hillsborough County. Significant annual fluctuations in retail supply and demand are not uncommon in these quickly growing communities, and the coming year will be no exception, with average vacancy projected to climb to the mid-8 percent range.

— Gene A. Berman is the group managing director of the Florida offices of Marcus & Millichap Real Estate Investment Services.  He wrote this article in conjunction with Marcus & Millichap’s Steve Ekovich in Tampa.

MIAMI

Apartments

This year will mark a period of transition for the Miami-Dade County apartment market. Renter demand is expected to taper off somewhat in response to slower economic expansion and more restrained population growth than in recent years. A lack of affordable housing, however, will curb the projected increase in vacancy, especially in the market’s Class B/C segment. Vacancy in Class A properties, though, will be susceptible to the effects of shadow-rental stock likely to emerge from a considerable pool of unsold condos. Accordingly, rents for Class B/C assets are projected to grow at a slightly faster pace than the marketwide average this year. Also, concessions are expected to rise in Class A complexes, particularly within the Airport West and Kendall Lakes submarkets, where many conversions occurred. No notable new apartment projects are due to be delivered in 2008, although supply may expand more than currently anticipated if some projects originally planned as condos enter than market as apartments. Still, it would take several years of construction to replace the approximately 25,000 units that have been removed for conversion during the past four years.

Office

Softer demand will result in a higher vacancy rate and a more moderate pace of rent growth in Miami-Dade County this year, although conditions remain relatively healthy. The Class A sector, which is concentrated in areas such as the Airport West submarket, Coral Gables and Downtown, may not weaken as much as the market’s lower tiers due to a more stable tenant base. Still, the recent accumulation of Class A sublease space, which currently represents 10 percent of all vacant high-end space, could temper rent growth. In the Class B/C sector, a slower rate of local economic growth will delay expansion plans of young firms and discourage the formation of new companies, resulting in reduced space demand. For all classes of properties, an increase in completions will place additional strain on vacancy and rent growth. Only a few quarters ago, demand generated by a robust local economy would have absorbed the more than 1.6 million square feet of for-lease space and office condos scheduled for delivery this year. Vacancy will rise this year, but the long-term outlook is positive, as demand is expected to rebound sometime in 2009.

Retail

Despite the realignment of supply and demand fundamentals in the housing market, retail properties in Miami-Dade County are expected to post solid operating results in 2008. Retailer demand is forecast to grow only gradually in response to reduced residential retail spending, leading to a modest rise in vacancy. Spending by international visitors, however, will take up some of the slack, helping to support space demand, especially in areas such as Miami Beach and South Beach. Elsewhere, strip centers measuring less than 30,000 square feet likely will record the greatest decline in demand as expansion by local merchants slows and fewer new retailers emerge. Subsequently, the vacancy rate in small strip centers will rise from 2.5 percent at year-end 2007 into the still-tight mid-3 percent range this year. Vacancy is expected to increase to varying degrees in other segments of the market, but overall, the uptick will not be so great as to significantly undermine rent growth. Still, owners and investors should expect rents to climb an average of 3.5 percent this year, compared with a nearly 5 percent jump in 2007.

— Gene A. Berman is the group managing director of the Florida offices of Marcus & Millichap Real Estate Investment Services.  He wrote this article in conjunction with Marcus & Millichap’s Kirk Felici in Miami.

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