CITY HIGHLIGHT, SEPTEMBER 2004

TIER-1 CITIES: MAKE ROOM FOR MIAMI

Sophisticated real estate investors are sending a message to the famed Tier-1 cities around the country with their wallets: start making room for Miami, your counterpart of the future. This proud city is making bold moves on several fronts to position itself for tremendous prosperity in less than 5 years. First, strong leadership in local government has created an improved image of Miami as a preferred location for business and travel. This repositioning has been legitimized in numerous tangible ways, including upgraded bond ratings and growing post-9/11 hotel occupancy rates. Secondly, the city’s sustained standing in trade circles ensures its viability as a hub for companies seeking to do business in Latin America. The state and major Florida cities have supported Miami's designation as the permanent home to the Free Trade Area of the Americas (FTAA) Secretariat; this support is but one sign of the esteem in which the city is held in the region.

Downtown Miami skyline

No longer considered a “banana republic,” Miami has enjoyed success in drawing sizable investments into local operations from world-class companies including HSBC (60,000 square feet on Brickell Avenue), Citicorp North America (140,000 square feet in a single building in Downtown Miami) and Kraft Foods Latin America (40,000 square feet in Coral Gables). In fact, Miami’s central business district and its top two suburban office submarkets have enjoyed 750,000 square feet of combined Class A net absorption since mid-year 2002 — an indicator of the resiliency of this market in the midst of a prolonged national recession.

Still, ask anyone familiar with Tier-1 cities why higher honors evade this metropolitan area of more than 2.3 million residents and a typical response might be, “Miami lacks a 24/7 vibrancy — the place is dead after 7 o’clock.” In an effort to draw more business and leisure travelers into the CBD and surrounding areas, major hoteliers such as Mandarin Oriental, Marriott and Ritz-Carlton have made feet-first commitments to the future of this city.

However, the hospitality industry alone cannot drive the required change because the real difference-maker in a New York City, Chicago or San Francisco is the presence of year-round residents of the urban core. So now, national and local developers from Millenium Partners to The Related Group are building thousands of condominium units with supporting retail and amenities in the CBD — and in the Downtown submarket in particular — in a move that will positively transform the concrete landscape that becomes barren and lifeless after the close of business into an energetic, round-the-clock cityscape.

In a time when lifestyle priorities increasingly dictate the type and location of a business’s office space, very few CBDs in North America will rival the immediate proximity among commercial and residential high-rise buildings and all of the amenities supporting this mix of consumers. Riverwalks will highlight the waterfront nature of the development, and a brand-new performing arts center will open only a few blocks to the north, examples of the bonafide commitment the city is making to elevate the livability of its downtown.

The significance of this residential development in Miami’s core will be the growth in commercial real estate values of well-positioned office and retail properties. Skeptics will say, “Miami is too small and it does not attract enough credit tenants.” True, Fortune 1000 companies rarely choose Miami for their corporate headquarters or corporate campuses. And naysayers are correct in that one does not need all of the fingers on two hands to tally the number of 100,000-square-foot office tenants in the major submarkets. But these facts have not dampened the interest of institutional investors in Miami as nearly every trophy property in the CBD has changed hands, many at record prices. With rent growth forecasted and substantiated in the underwriting of these assets based on the market dynamics already in place, it is pivotal to note that most of these trades occurred prior to the onset of full-scale residential development in Downtown, suggesting that the upside in these investments has likely been underestimated and, quite possibly, by a sizable margin.

On the subject of demand, we wrote nearly a year ago that “law firms — an often undervalued tenant category — are responsible for sustaining demand for Class A office space in Miami’s CBD.” This trend will clearly continue through 2005 as most of the major transactions that have been finalized, or are now under negotiation, have been with law firms. It seems clear most firms are expanding or planning expansions. White & Case renewed its lease for 85,000 square feet in Downtown for 10 years. Shutts & Bowen also elected a 10-year term for its 60,000-square-foot renewal at Miami Center, also in Downtown. Existing law firms representing another 300,000 square feet are currently considering their options and it is fully anticipated that the majority of these firms will follow the lead of White & Case and Shutts & Bowen and elect to be a part of this transformation of the CBD.

We also commented a year ago that “Miami retains its luster in the eyes of many investors because of its strong supply-demand fundamentals,” explaining that developable land is always in short supply and Miami’s preeminence as the “Gateway to the Americas” creates steady demand, even if it presents itself mostly in requirements under 5,000 square feet. These observations ring especially true for the Miami CBD, considering the immeasurably uplifting effect that a soon-to-be-unveiled residential component will bring to an otherwise bland Downtown. The countdown to Miami’s induction into Tier-1 status begins soon.

— Eric Siegrist, senior vice president – leasing and management, Jones Lang LaSalle Americas, Inc.

Multifamily

Job growth and a concentrated effort toward urban redevelopment bode well for multifamily investment in South Florida, as the area is expected to be one of the leading local economies in the country. Employers are expected to add 53,000 jobs in 2004, with 25,000 in the Fort Lauderdale metropolitan statistical area.

In addition to condominium conversions, multifamily development remains very active in South Florida, with construction of dense, mixed-use space in urban centers and larger complexes in the suburbs likely resulting in a short-term surplus of units. We project the completion of 7,200 units in 2004, a 3.5 percent increase from last year. West Palm Beach alone should account for 2,650 units.

Despite rapid population growth, vacancy is moving steadily higher in South Florida as a result of recent overbuilding and a spike in demand for condo conversions. By year-end 2004, vacancy should increase 70 basis points, to 7.5 percent. At 5.6 percent, Fort Lauderdale has relatively low vacancy due to strong economic growth combined with an older, more stable population.

South Florida’s asking rents have demonstrated a tendency to rise steadily and should improve by 2 percent, to $981 per month, this year. The trendy South Beach submarket will see the highest asking rent, which, at $1,439 per month, is up 4.4 percent from 1 year ago.

Owing to robust employment gains, in-migration and tenant demand, we envision another strong year for apartment property sales in South Florida. The median sales price in South Florida is forecast to exceed $68,000 per unit by year-end 2004, posting an annual increase between 6 and 9 percent. A recent theme across South Florida is the sale of assets in or near employment centers as more tenants demand rental property in close proximity to offices and away from tourist spots.

— Gene Berman, senior vice president and regional manager, Marcus & Millichap’s Fort Lauderdale office

Industrial

After a few rough years, Broward County’s industrial market shows signs of improvement, illustrated by positive absorption in recent months. North Broward led the resurgence with a net absorption of approximately 125,000 square feet, primarily due to leasing activity at Atlantic Business Center and Park Central Business Park. Significant announcements include GA Telesis Turbine Technologies’ move from Opa-Locka (Miami-Dade) to Fort Lauderdale; New Town Holdings’ purchase of Newtown Commerce Park, a Davie flex park, for $20.25 million, or approximately $137 per square foot; and the selection of Butters Construction & Development to develop the 45-acre Carver Homes site in Pompano Beach.

Average rentals in Broward increased slightly for both the warehouse and flex sectors, by 1.4 percent and 5.1 percent, respectively. At the midpoint of 2004, the direct vacancy rate for flex buildings had dipped by 3.4 percent, while available warehouse space declined by 5.3 percent. Currently, only 350,000 square feet are under construction in the county, so the supply of both warehouse and industrial space is projected to remain stable for the foreseeable future.

Meanwhile, Miami-Dade emerged as one of South Florida’s most vibrant industrial markets, with more than 30 million square feet of inventory and vacancy rates relatively consistent at just under 12 percent. Institutional investors, in particular, have been drawn to Miami-Dade’s Airport West market, which serves as the gateway to Latin America. New investment by institutions and public companies continues to be quite impressive here, most significantly by Principal Real Estate Investors, with its $45 million purchase of the Dolphin Commerce Center, as well as Keystone Property Trust and AMB. Additional advisory investment during the first half of 2004 occurred when the Canyon-Johnson Urban Fund, backed by former NBA star Magic Johnson, acquired the Miami Free Zone, a duty-free warehouse complex that ships goods to Latin America from European and Asian exporters.

Overall, the Miami-Dade industrial sector is a target market for institutional investment, with some of the most prominent investors focusing on this area. We expect that trend will continue throughout the balance of 2004.

— John Bell, senior vice president – investment sales, Trammell Crow Company\

Retail

The Miami/Dade/Broward/West Palm Beach area is one of the largest and fastest growing demographic regions in the United States. The U.S. Census Bureau recently released statistics that show that Miramar, located 17 miles northwest of Miami, is the third fastest-growing city in the nation for municipalities with more than 50,000 residents. With a current population of just over 96,000 residents, the city is expected to boom to 145,000 residents by 2020.

Despite a sluggish national economy and consolidation in the retail industry, the Broward County retail market is showing signs of improvement. The overall vacancy rate dropped from 9.67 percent in 2000 to 7.93 percent as of May 2004. Average asking rents grew to $18.78 per square foot as of May 2004, up 26.6 percent from 2000. The strongest rent growth has been in the Pompano Beach/ Deerfield Beach market.

Another sign of economic growth and activity is a 19 percent increase in the number of passengers at the Fort Lauderdale-Hollywood International Airport during the first 6 months of 2004. Domestic travel was up 18 percent and international travel was up 26 percent, placing Fort Lauderdale among the fastest-growing airports in the nation.

Land use patterns in South Florida are changing significantly. Over the last 4 years, Broward County has lost 47 percent of its agricultural land to residential and commercial development. Rising land prices, savvy developers and growing demand for housing have driven the changes. The Airport West submarket, encompassing the area west of the Miami International Airport, is seeing a conversion of industrial land to residential and commercial, given its proximity to the airport and its ease of importing and exporting to Latin America.

Magna Entertainment Corporation and Forest City Enterprises have entered into a predevelopment management agreement concerning the planned development of The Village at Gulfstream Park, an 80-acre retail, entertainment and residential project in Hallandale, Florida. The planned first phase of The Village at Gulfstream Park will integrate a lifestyle shopping and entertainment environment with Magna Entertainment Corporation’s thoroughbred racetrack, Gulfstream Park. The first phase is expected to incorporate approximately 600,000 square feet of lifestyle retail shops, restaurants, a cinema and entertainment facilities.

The mayor of Plantation is hoping to bring free concerts and increased vitality to the midtown business district by building an open-air amphitheater. A site on the eastern edge of Pine Island Park, just west of Broward Mall, is proposed. Central Park, west of midtown, is an alternate proposed site. A state grant application to help fund the project has been approved by City Council.

An ice rink for recreational skating and hockey is in the negotiation and planning stages in Weston. City officials have suggested a joint venture between the Florida Panthers and a Cleveland-based company and hope an agreement will lead to a proposal to the city.

Ram Realty Services wants to revitalize its Intracoastal Mall, the once-booming waterfront mall in North Miami, by adding residential towers. The 234,000-square-foot mall suffers from high vacancy and is considered underutilized. A residential component is proposed to bolster existing tenants T.J. Maxx, Winn-Dixie, Old Navy and Sunrise Cinemas, as well as the surrounding North Miami Beach community.

The Seminole Tribe of Florida now owns and operates two Hard Rock Hotel & Casinos in Florida, one in Tampa and one in Hollywood. The $279 million, 135,000-square-foot Hollywood casino opened in May and is expected to attract jobs and boost the economy of South Florida. The Seminole Tribe is said to be interested in investing in water parks, theme parks and shopping malls.

In an off-market deal in August, Colonial Properties Trust bought three South Florida retail properties from Ross Matz Investments for $81.7 million. The transaction included Deerfield Mall, a 371,000-square-foot mall in Deerfield Beach anchored by Publix, T.J. Maxx, Marshalls, Sports Authority, Sunrise Cinemas and OfficeMax. Also included were College Parkway Center, an 82,000-square-foot Office Depot-anchored center in Fort Myers, and Office Depot Plaza, a 68,000-square-foot center in Pembroke Pines.

In July, Sterling Centrecorp bought a 50 percent interest in the 800,000-square-foot Mall of the Americas in Miami. The $51 million deal was completed through a joint venture with an affiliate of Kimco Realty Corporation and other private investors. Mall of the Americas is anchored by The Home Depot, AMC Theatres, Foot Locker and Old Navy.

Also in July, Equity One sold Plaza Del Rey, a 50,146-square-foot Miami shopping center, for approximately $9 million. Batista Investment Corporation bought the center, which was 100 percent occupied at the time of the sale.

Early in the year, Weingarten Realty Investors acquired T.J. Maxx Plaza, a 161,900-square-foot center located in Kendall (Miami), Florida, for $23.7 million. Anchored by T.J. Maxx and Winn-Dixie, the center was more than 95 percent leased at the time of sale. T.J. Maxx Plaza was one of a portfolio of four centers that Weingarten acquired from a partnership comprised of Trammell Crow Company and Granite Properties for more than $160 million.

— Lynn Leonard, vice president of marketing, NewBridge Retail Advisors


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