SOUTHEAST SNAPSHOT, JUNE 2009

Miami Retail Market

Retail properties in Miami-Dade County recorded negative net absorption in the first quarter as accumulating job losses stymied retail spending and forced merchants to vacate the market. Additional increases in vacancy are expected through the end of 2009 as more tenants close and others reduce planned store openings. Higher vacancy will induce a further decline in rents, which dropped for the second successive quarter in the first 3 months of this year, and a slowdown in new store openings will undermine support for marketwide rent growth in the months ahead. In addition, tenants seem to be gaining the upper hand in negotiations on lease extensions or renewals. As a result, concessions will rise over the remainder of the year as owners attempt to retain traffic-generating merchants. While the demand side is decidedly weaker than it has been recently, a decrease in construction will mitigate the extent of the projected rise in vacancy and set the stage for a steady recovery in property fundamentals.

A look at the numbers indicates that employment in Dade County will decrease by 43,000 jobs (4.2 percent) in 2009, compared with a loss of 36,400 positions last year. Due to the decline in employment, retail spending is projected to fall approximately 10 percent this year. In construction, developers have projects totaling 600,000 square feet slated to come online in 2009, which will expand retail stock by 0.8 percent. In 2008, nearly 2.2 million square feet was completed. Demand will remain soft, leading to a 180 basis point increase in the vacancy rate, bringing it to 8.5 percent. Vacancy rose 160 basis points last year. Waning demand will produce a 4.1 percent decrease in asking rents in 2009 to $23.59 per square foot, compared with a 1.4 percent rise last year. A 5.6 percent decline in effective rents to $20.36 per square foot is projected; this is only 1 year after effective rents slid 1.7 percent.

There has been limited investor activity in the Miami-Dade market so far this year. For prospective buyers, though, a lack of velocity and a small investor pool could signal that now may be an opportune time to buy. In addition, local sellers have become more realistic and flexible in their assumptions, indicating a possible uptick in activity by the end of the year. Many recently completed deals in the county, for example, included either seller financing or an assumable loan. Buyers are focusing on assets with solid tenants in place and verifiable income streams that are priced at less than replacement cost. Areas with impediments to development, such as Miami Beach and South Beach, will draw increased attention in the months ahead, as will established locations with strong demographics, including Coral Gables, Aventura and Pine Crest. Although buyers are focusing more on cash yields as a valuation metric, cap rates for top single-tenant assets start at about 7.5 percent. Multi-tenant product is being offered at first-year returns beginning around 8 percent.

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

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