FEATURE ARTICLE, MAY 2006

MAJOR MARKETS DOING WELL IN THE SOUTHEAST
Job formation in the Southeast leads nation and has paved the way for a healthy regional market.
Gene Berman

While most other regions of the United States expect moderate population and job growth, the Southeast can expect significant expansion, which will translate into sound commercial property market fundamentals this year. Bolstered by these promising demographic trends, the apartment, retail, office and industrial markets will post measurable gains in 2006. As for the investment sales market, investors would be wise to keep a close eye on the potential for stabilized returns and low prices on all property types in less-heated submarkets, such as Charlotte and Jacksonville.

There are many nuances in the major Southeastern submarkets, but in the major metropolitan markets of Florida, a few key factors reign. Housing affordability is largely out of reach and construction costs will help to moderate the amount of new development in the region. The precipitous improvement in occupancy during the past 4 years in apartment, office and retail should continue this year, though at a more moderate pace than last year.

Job Growth to Outpace Nation

Job formation in Atlanta, Charlotte, Fort Lauderdale, Jacksonville, Miami, Orlando, Tampa and West Palm Beach will account for approximately 241,000 new jobs in the Southeast. Meanwhile, Fort Lauderdale, Orlando and Tampa expect job growth rates above 4 percent in 2006, making those metropolitan areas some of the fastest growing in the nation. Many of the new positions created in the professional and business services sector are expected to keep condo conversion transactions among the most popular, as investors and developers target sales of these units to affluent young professionals. This is especially true in markets such as Tampa, where, despite dramatic property value increases during the past 2 years, median unit prices remain relatively low. 

Multifamily Market Highlights

While investors still clamor to acquire well-located apartment properties in South and Central Florida, investment trends will vary throughout the Southeastern region, particularly in Charlotte and Atlanta. In South and Central Florida, investors will continue to buy properties ripe for condo conversion, even though lenders will keep a careful eye on the deals they underwrite. This is not to suggest financing will be difficult to attain, but lenders are likely to scrutinize deals more closely than they did in the previous 2 years.

Continued demand among all end users, declining housing affordability and the cost of new construction has sent cap rates plummeting in some Orlando area markets (Metro West, Lake Buena Vista) to as low as 4.5 percent. Yet local research reveals that Class B/C assets in suburban locations may yield rates of 7 percent, still above many national markets. Due diligence during submarket research will uncover many excellent properties poised to outperform the national average. 

By the end of last year, Orlando’s median apartment unit price rose 15 percent to $60,000 per unit, still relatively affordable compared to West Palm Beach ($107,000 per unit); Miami ($87,500 per unit); and Fort Lauderdale ($102,000 per unit). Prices in the Greater Tampa area, however, are more comparable to prices in Orlando, averaging roughly $60,000 per unit for all properties and $85,000 per unit for institutional-quality assets.

In Atlanta, buyers repositioning underperforming assets to Class A properties will bode well for investors. These value-added plays are expected to present investors with tremendous upside potential in the future. While overbuilding was a concern among investors and developers in such submarkets as Buckhead, Atlanta/Fulton and North DeKalb, new construction is expected to moderate by year’s end. Even though this will result in short-term vacancy increases, Buckhead and Midtown are expected to be among the strongest submarkets in the long term. 

Atlanta’s lackluster job numbers of last year should improve in 2006. With 12,000 new professional and business services positions anticipated, demand for luxury apartments in Atlanta’s urban lifestyle segment is projected to be high.  Professionals who put a premium on their time are tired of long commutes and show increasing willingness to pay top-dollar for Class A apartments located in close proximity to their work places. Beyond this Class A demand, Class B/C properties in suburban Marietta and Clayton/Henry submarkets also have definite upside potential as select companies expand to the suburbs.

Charlotte presents optimistic investors opportunities in the multifamily sector which run counter to conditions in most Florida markets. As tenant demand rebounds in reaction to the anticipated 3 percent employment increase (24,000 jobs), the East Charlotte/Albemarle Corridor submarket should draw investors seeking bargain median unit prices of less than $30,000 per unit. These low prices are appealing, especially when compared to Charlotte’s Downtown and Fairview North submarkets. In one recent transaction, a Denver-based firm paid $98,000 per unit for a 280-unit property. 

Increased Commerce Drives Office, Industrial Sectors

The general expectation for office and industrial properties in the Southeast is a region-wide decrease in vacancy as professional and business services jobs begin to drive up demand for space. Each metropolitan market in the Southeast offers its own array of interesting submarket conditions.

Atlanta’s suburban submarkets, specifically the Northeast Gwinnet/Interstate 85 and Roswell/ Alpharetta areas, are expected to post business revenue growth in excess of 4 percent this year. Office investment activity will likely broaden to include a larger number of Class B/C properties, even in the suburbs where cap rates are averaging in the low 8 percent range.

Relatively high vacancy in Charlotte may present investors with the perfect opportunity to reposition occupancy-challenged properties in the East submarket. With the submarket lagging behind the metro area in terms of price appreciation, some exceptional opportunities may be discovered. Jacksonville also shares Charlotte’s high-vacancy opportunity profile. Gross revenue is expected to improve more than 12 percent in Jacksonville’s Downtown South submarket. Investors may do well to look at these properties with significant upside potential.

High building costs and a lack of available land should combine with solid job formation in Fort Lauderdale to tighten office and industrial property market conditions. Though the Downtown submarket has had the highest vacancies in the metro area, a recovery is expected due to the lack of new construction projects and the conversion of sites once planned for office space into residential projects.  Downtown joins Deerfield Beach, Pompano Beach and Cypress Creek as Fort Lauderdale submarkets poised to outperform the rest of the metro area this year, in terms of decreasing vacancy rates, rising rents and improving absorption.

While the prices of many Miami office properties are out of reach and returns continue to shrink, investors should still see ample opportunity for acquisitions in Coral Gables. In that burgeoning submarket, there is an ample supply of property in virtually every building class. 

Increasing rent rolls for owners in Orlando should attract investors, resulting in some significant property value gains. The Maitland submarket is particularly attractive as large, vacant spaces are still available.

Tampa investors will shift their gaze from Class A spaces to Class B/C this year.  Suburban areas and downtown St. Petersburg should shoulder a majority of tenant demand overflow this year and may give investors strong new options.

West Palm Beach is beginning to see rent growth again, specifically in the medical office properties sub-sector. As the metro area population grows approximately 2 percent annually (with a significant portion of aging retirees) the demand on the healthcare system is reflected in rising occupancy levels in medical office properties. Medical office properties have a wide array of specialized requirements, generally relating to the space and physical capabilities, including electricity, ventilation and infrastructure required to house and operate expensive medical equipment. 

Retail Sector Buoyed by Employment Gains

Much like its multifamily counterpart, the retail sector will stand to benefit  from robust increases in employment.  All major markets in the Southeast are expected to improve, with certain South Florida areas demonstrating even further reductions in vacancy. While condo conversion opportunities dominate the headlines, another big story in Florida this year will be told by the number of out-of-state buyers interested in acquiring Sunbelt retail properties.

In the sizzling city of Miami, demand for space by a variety of different retailers remains quite strong. Some owners of strip centers and storefronts have reported waiting lists for space, indicating that several quarters of low vacancy and rising rents are on the way. This year, interest should get white hot from investors from other areas of the country. Strip centers and storefronts should garner strong bids as should single-tenant net-leased properties in well-trafficked urban areas.

Orlando and Atlanta will continue to attract investors who have grown disenchanted with the ultra low cap rates in the Northeast and California. As a result of those regions’ investment climates, Atlanta’s thriving suburbs will see a steady increase in prices and transaction volume through this year.

Gene Berman is a senior regional vice president and managing director based in Marcus & Millichap’s Fort Lauderdale office.

©2006 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.