Uncertainty and a weakened economy have resulted in a near static real estate investment sales environment for Miami. After September 11, properties that had just entered or were about to enter the market were put on hold. However, transactions under contract prior to September 11 generally were able to close as lenders agreed to honor commitments made prior to the attacks.

Interest rate cuts have allowed debt capital to remain available at very attractive pricing. However, low LIBOR and Treasury rates have contributed to interest rate floors and stricter lending parameters, especially among balance sheet lenders. Additionally, there is underlying concern with the CMBS market and originators' ability to sell warehoused loans. If upcoming CMBS transactions are withdrawn from the market or have weak demand, spreads may widen on new originations, making debt more expensive to borrowers.

Equity capital is available for investment, and some investors are beginning to believe the current state of the market presents an opportunity to find and create value. Most investors are using more conservative assumptions, such as slower rent growth, and have been very selective about the markets and product types in which they are willing to invest. Buyer-seller expectations were often quite distant from one another in 2001, especially in the third and fourth quarters, and few offerings were kept on the market at the end of the year. "The mood among investors, however, has become increasingly optimistic thus far in 2002, and there is a significant amount of pent-up demand for both equity and debt transactions," notes Lawrence Sullivan, vice president of capital markets at Jones Lang LaSalle.

"Overall, the real estate capital markets are suffering from a lack of quality product," says Noble Carpenter, managing director of Jones Lang LaSalle's capital markets. As most owners are on the sidelines, buyers currently outnumber sellers by a wide margin and are actively searching for product with few near-term lease expirations and stable cash flow. The few deals currently in the market are attracting attention at pre-2000 levels. "Should this investor demand continue through the end of the year, 2002 could prove to be a year to remember," adds Carpenter.

Creating Franchise Value

In the current environment of high bid/ask spreads between buyers and sellers, historically low transaction volume and rising cap rates, owners have been focused on refinancing their properties and finding ways to make their projects more appealing to many constituents: tenant prospects, existing tenants, brokerage firms and potential investors. One of the most successful entities to create a franchise value for itself is Florida Office Property Company, the largest owner of quality office properties in Florida's major markets. "This company has successfully implemented a unique service platform that could translate to a lower cap rate than a more typical landlord might see on an eventual sale of the portfolio," predicts Jones Lang LaSalle Vice President Eric Siegrist. A privately held real estate investment trust, Florida Office Property Company controls 3.5 million square feet in the state's major markets.

The primary attraction for prospective tenants and their real estate brokerage representatives has been the firm's single lease form, single ownership, tenant service orientation and its ability to provide flexible lease terms to tenants with multiple locations in Florida. Florida Office Property Company's model provides the incentive to the Miami leasing broker to lease space not only in Miami but in other markets typically not served by the broker but where the broker's client might also have a space need.

Additionally, the company has created revenue opportunities outside of the underlying real estate, including brokering relationships between tenants and between tenants and third parties. "It's all about the high service levels. When you focus on tenant needs, they stay in your buildings. When you cater to their business development, expansion and contraction needs around the state, they either stay or expand within your portfolio. It is our number one goal to have a tenant never want to leave one of our buildings. When you execute this properly, value falls into placeSç. It's a win-win situation for both landlord and tenant," adds Ty Spearing, Florida Office Property Company's chief operating officer.

Miami's Crown Jewel - The Ultra-Luxury Hotel Sector

"No other U.S. city has as many high-end hotels currently under construction or just recently completed," notes Gregory Rumpel, senior vice president of Jones Lang LaSalle Hotels, which is located in Coral Gables. The city will soon house three Ritz-Carlton hotels. New product will also include a Four Seasons, Setai, Crown Plaza Resort and a Trump Grande Ocean Resort. Luxury Loews, Mandarin Oriental, J.W. Marriott and a converted four-star Shore Club have opened since 2000. "The roster of prestigious operators coming to Miami is really quite significant considering this market had lacked a well-defined luxury presence," adds Rumpel. The opening of such high-end facilities, amounting to $2 billion in investments, has forced many existing properties to spend millions of dollars to upgrade and reposition their operations in order to remain competitive.

As a percentage of total lodging inventory, luxury hotels comprise 35 percent of some top U.S. markets. Miami's new supply of luxury hotels comprises approximately 28 percent of its total inventory. A substantial majority of the city's new hotels are and will be luxury product with this sector of commercial real estate being defined as of this writing. The reputation of first-class hotel names is repositioning Miami's image as a prestigious destination with a respectable inventory of posh rooms.

Strengthening Market Conditions

A blending of market indicators, excellent access to and from Latin America, great weather and beaches as well as spectacular ocean and bay views have enabled the luxury segment of the hospitality sector to prosper. Miami is ranked 10th nationally in terms of average daily room rates. Weekly average occupancy in January was at 69.3 percent, above the state's overall 63.3 percent and significantly above the national 52.3 percent average. Room rates of $131.06 also exceeded the state and national averages of $98.98 and $81.72 respectively.

New supply statistics indicate that nearly 2,600 rooms have opened since 1998, with another 1,635 rooms that are now or will be under construction by 2003. An additional 769 luxury rooms are in the permitting and/or planning stages. Such developments throughout the Miami area have helped boost the image and marketability of this popular and trendy destination, but have also created an underlying supply risk. However, the distinctive nature of Miami's unique market niches such as South Beach, Brickell Avenue, Key Biscayne and Coconut Grove should prevent overcrowding in the long term. "It is expected that the current wave of development will be fully absorbed by 2004," notes Christian Charre, Jones Lang LaSalle's vice president. "The overall Miami market has been experiencing a gradual rebound that is surpassing other urban markets."

Despite this robust development, the capital markets for hotel acquisition and disposition remain virtually unchanged from last year, that is, minimal activity. Charre states, "There still exists quite a wide gap between buyer and seller expectations coupled with difficulty in obtaining financing for this particular investment sector."

Donald B. Cartwright serves as senior vice president/South Florida regional leasing director with Jones Lang LaSalle.


©2002 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.