CITY HIGHLIGHT, JUNE 2008

MIAMI CITY HIGHLIGHTS
Charles V. Barton, Kirk A. Felici & Jim Petrarca

Miami Office Market

As the general economy of Miami goes, so goes its office market. This is no different than most metropolitan areas; however, what is different is what drives the Miami economy. During the past 20 years Miami has evolved into a highly international business center which nicely compliments its natural organic growth as a large population center in one of the country’s fastest growing states. Miami is no longer dependent on just tourism and Latin American visitors, but has become a global magnet for business, investors and visitors. This international economy is serving to stabilize Miami’s economic condition as both Europe and Latin America have thus far avoided the business downturn that the United States is experiencing. Evidence of this is the recent wave of acquisitions of Miami-based banks by large Spanish banks which are now focused on the North American market. TransAtlantic Bank, TotalBank and City National Bank have all been acquired with the stated intention to grow their market share in Florida. While Miami is not immune to the country’s economic malaise, unemployment has increased to almost 4 percent, it seems well positioned to avoid the worst.

We may be seeing the beginning of the end of an office market that has been “en fuego.” The market has been red hot for the past 18 months, and landlords have been pushing the envelope in every direction. Relatively moderate new development and a strong economy has kept the vacancy rate for Class A space below 10 percent in most major submarkets and allowed landlords to increase rental rates by 30 to 40 percent during the past 3 years. However, two moderating influences are starting to be felt. First, the overall economy is showing a sign of cooling off as unemployment is inching up and corporate announcements are more about downsizing than growth. Secondly, the healthy amount of new construction in most markets is starting to create increased market competition for the better quality tenants. While current conditions remain healthy, landlords are beginning to recognize signs of weakness and have become more aggressive in order to lock-down key tenants in anticipation of deteriorating market conditions.

The Brickell and downtown Miami markets are good examples of this phenomenon. After years without any new development, three large office projects broke ground within weeks of each other and will deliver almost 2 million square feet of space in 2010. Neither Met 2, 1450 Brickell or Brickell Financial Centre had any pre-leasing. The impact of the new supply in this market will be immense as it adds almost 15 percent to the market’s overall office inventory. Brickell Financial Centre has successfully lured the first tenant with the law firm of Bilzin Sumberg agreeing to relocate from Wachovia Center and lease 115,000 square feet. While rents in existing Class A buildings remain at historical highs  with mid $40’s per square foot for full-service, it is expected that softening conditions will exert downward pressure in the not to distant future.

Similarly, the suburban submarkets, which are enjoying relatively high occupancy rates of 88 percent to 93 percent, are experiencing continued new construction in conjunction with flat leasing activity. This is a growing concern for landlords. These suburban markets have been negatively affected by the downsizing of both large corporations and tenants in the residential real estate business such as home builders, like Lennar, and mortgage brokers. Industries that have been growing include healthcare, entertainment and the cruise lines. Recent examples include Baptist Health South Florida’s 75,000-square foot-lease, Sony Latin America’s 35,000-square foot-lease and Humana/CarePlus’ 55,000-square-foot lease.

Despite the slowing market, it is expected that overall office building costs will remain high in Miami. Land prices have risen due to the scarcity of available land, which has led to the increase in redevelopment of existing sites, and construction costs have been influenced by buildings codes with strict hurricane regulations. Also, operating expenses attributable to spiking real estate taxes, insurance and labor costs have contributed to the cost increase. The bottom line is that although we are starting to see some rent moderation and expect that by the third quarter we will start to see more competitive pricing in most of the submarkets, Miami is still a relatively healthy market and has comparatively become a more expensive market.

— Charles V. Barton, located in Miami, is a founding principal of CresaPartners.

Miami Multifamily Market

So far this year in Miami-Dade County, the vacancy rate is in the low 4 percent range, and rents are rising, albeit at a minimal pace. Unsold and unoccupied condos will be the greatest supply-side force for the next several months, and the market’s strong performance measures may waver a bit as a result. Some aspects of the Miami-Dade market, however, may limit the deterioration of rental property performance. Specifically, nearly 75 percent of all rental properties are Class B/C assets, compared with an average of about 60 percent in each of the other five primary markets in Florida. Subsequently, rental property performance in Miami-Dade is dependent on the typical Class B/C tenant, for whom apartments are the only affordable housing choice. Unless unsold or unoccupied condos are rented out at less than the current Class B/C asking rent of $1,013 per month, there will not be a significant migration of lower-tiered tenants out of rentals. Overall, the market’s low rate of housing affordability, coupled with a recent spike in foreclosures, has created a large pool of prospective renters.

By the numbers, local employers will add 1,500 jobs this year, a 0.1 percent gain, led by projected increases in educational and health services employment, along with steady growth among firms with ties to foreign economies. Last year, 6,000 jobs were added. This year, developers will complete 500 rental units, compared with no new projects delivered last year. Unsold or unoccupied condos will clearly present a possible source of new rental supply. A reduced rate of job growth and competition from unsold or unoccupied condos entering the renter pool will lead to an 80 basis point rise in the vacancy rate to 4.8 percent. In 2008, asking rents are projected to increase 1.1 percent to $1,129 per month, and effective rents are expected to add 0.6 percent to $1,069 per month.

Tighter credit continues to reduce investment activity in Miami’s apartment sector. Opportunistic investors are stirring, searching for failed conversion deals or distressed properties, perhaps overlooking solid investments in strong rental properties. Indeed, many older Class B/C properties held over several years and may provide a quick upside for a new owner simply by raising rents to market rate. Many investors are scouring the market for such deals and anticipating that prices will fall further, perhaps waiting for the optimal time to buy rather than accepting that a good time to purchase may be at hand. Cap rates are currently in the 7 percent to 7.5 percent range based on existing fundamentals and may inch up slightly in the months ahead. The current median price of $86,500 per unit is 14 percent less than the peak attained in 2006. Investors may want to consider properties located near Tri-Rail stations. Ridership on the system, which has five stops in Miami-Dade County, rose 10.5 percent to 3.5 million passengers last year.

—Kirk A. Felici is the regional manager of the Miami office of Marcus & Millichap Real Estate Investment Services.

Miami Retail Market

Fueled by high residential growth, tourism and a strong employment base, Miami-Dade County has, historically, offered retailers an opportunity to open some of their highest performing stores in their respective chains. The diverse culture and varying degrees of socio-economic classes encourage a broad spectrum of retailers to make their initial Florida entry into Miami-Dade County. These characteristics have enabled retailers to open multiple units throughout the county of nearly 3 million people, with many retailers servicing different demographic segments of the population and experiencing high levels of success within the same Miami-Dade County market.

In February, Turnberry Associates completed a 250,000-square-foot expansion of Aventura Mall enabling Nordstrom Department Store to join other high-end retailers such as Bloomingdale’s, Coach, Armani Exchange and Hugo Boss. While, a “stones throw” from the six-anchor, 2.8 million-square-foot mall, value oriented retailers, such as Ross Dress For Less, Marshalls and Target enjoy similar success. Another example would be the Village of Merrick Park in Coral Gables, developed by Rouse Company in 2002 and currently owned by General Growth Properties, which is home to high-end retailers such as Nordstrom, Neiman Marcus, Burberry, Jimmy Choo and Gucci. Within a mile of the 740,000-square-foot, open-air mall, Talisman Companies is redeveloping Miracle Marketplace, a multi-level, 250,000-square-foot development just down the street from retailers with highly successful units such as Sears, Ross Dress For Less and Big Lots. Miracle Marketplace is schedule to open in the fourth quarter and will be tenanted by Marshalls, Michaels, Bed Bath & Beyond, DSW Shoe Warehouse, Bally Total Fitness, PetsMart, Payless Shoe Source, Ulta Cosmetics and Sweet Tomatoes first Miami-Dade restaurant.

Extreme growth and record sales has come at a cost. Rising land and construction costs in conjunction with the housing crisis, which has hit Miami-Dade County harder than the national average as evidence by its 2.5 percent foreclosure rate, has had a slowing effect on the local economy, reducing the demand for new store growth from many retailers. A couple years ago during the pre-development phase, there was extremely high retailer demand for London Square, a 450,000-square-foot Costco, Ross Dress For Less, T.J. Maxx, and HomeGoods anchored project in West Kendall. As the project is nearing completion and retailer’s expansion plans have cooled, leasing has become more challenging, which parallels the state of activity countywide. The developer, Woolbright Development, one of the most active retail developers in Florida, has been able to overcome these obstacles with strong retailer relationships and simply producing a superior product in construction quality and location.  

The importance of the level of experience and sophistication of the developer during an economic downturn is also evident with Cleveland, Ohio-based Developers Diversified Realty (DDR). DDR completed The Shops at Midtown Miami last year, a 630,000-square-foot urban power center in the Design District, just north of downtown Miami. Similar to London Square, retailer demand during the pre-development phase was strong enabling DDR to land anchor retailers such as Target, Ross Dress For Less, Marshalls, Linen ‘n Things, Circuit City, Loehmann’s, PETsMART and West Elm. As the nearby Miami skyline has been filled with numerous high rise luxury condominiums, many of which remain unoccupied, DDR has drawn upon an aggressive marketing campaign, relationships with retailers and the local brokerage community to fill the non-anchor space with stores such as Famous Footwear, Payless Shoe Source, FedEx Kinkos, T-Mobile, Sport Clips, Subway, Footlocker and Five Guys Burgers and Fries’ first Miami-Dade location.

DDR is also developing Homestead Pavilion, which is under construction in Homestead. The 399,000-square-foot powercenter is scheduled to open throughout the fourth quarter and first quarter of next year. It will be anchored by Kohl’s first Miami-Dade location, as well as Ross Dress For Less, Michaels, Sport Authority, Circuit City and Staples. Additionally, Kohl’s will join Marshalls and Publix at Kendall Town ‘N Country in West Kendall in the fourth quarter, a 750,000-square-foot redevelopment. Best Buy will continue its expansion in Miami-Dade County with planned locations in Florida City, Pinecrest and Doral, and LA Fitness is under construction with two new sports clubs in West Kendall and North Miami.

The importance, of well-planned, positioned and anchored projects by experienced retail developers is magnified while the economy slows. As the economic cycle turns positive, these projects should be in high demand for decades to come.

— Jim Petrarca is a partner and an agent/tenant rep in the Miami office of The Shopping Center Group.

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