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CITY HIGHLIGHT, SEPTEMBER 2005
SOUTH FLORIDA ABSORBS GROWTH ACROSS THE BOARD
The South Florida commercial real estate market is experiencing growth across all sectors, and absorption is high in all markets. The demand for housing in South Florida has led to rising rates across the market; condo conversions are a popular endeavor, and due to this trend, absorption has been affected positively. Naturally, with the high demand for housing, retail currently is a hot investment. The office market also is seeing high activity, especially in the Miami-Dade sector. In addition, due to South Florida’s role as the “gateway to Latin America,” companies that ship to and from South America have been very active in the area’s industrial market.
Multifamily
Condominium conversions grab all of the press in South Florida, but few accounts consider that conversions would not be occurring were it not for robust housing demand driven by favorable demographic trends. The South Florida metros have a population exceeding 5.3 million, and households are expanding by 2.7 percent annually. While providing the foundation for a strong for-sale residential market, the effects of these trends on apartments are just as significant. These effects will emerge clearly in the months ahead as apartment vacancy is projected to fall and rents are forecast to rise.
Vacancy in South Florida is expected to decline 60 basis points in 2005 to 4.9 percent on the basis of significant job and population growth. Renters displaced by condo conversions will account for a significant portion of net absorption for as long as conversions persist. As condo converters move north into Palm Beach County, vacancy in the submarket is likely to trend sharply downward as the relatively small 67,000-unit rental stock is reduced. Vacancy in Miami and Fort Lauderdale will decline 40 basis points in each market to 4.8 percent and 4.1 percent, respectively, by year end.
South Florida apartment owners are expected to raise monthly asking rents 2.4 percent this year to $1,017 per unit. As inventory is reduced and steady demand continues, owners may be less willing to provide concessions to renters; as a result, effective rents are forecast to increase 2.7 percent to $961 per month.
More than $1 billion in deals were either closed or under contract in the first few months of 2005. The median price per unit, which was $75,000 at the end of 2004, was more than $99,000 in early April. Condo conversion deals currently are pricing at a 23 percent premium to the rest of the market.
— Gene Berman, managing director, Marcus & Millichap; regional manager of the firm’s Fort Lauderdale office
Office
The South Florida office market can be described as “stable,” with specific submarkets showing signs of strength, particularly the Miami-Dade market. The most noteworthy occurrences in South Florida are the growing number of condominium office buildings being built, the elimination of most sublease opportunities, and the sale of many downtown sites, previously considered office sites, for multifamily developments.
On a quarterly basis, Broward and Palm Beach counties have shown slight fluctuations in office rental rates and vacancies, with minor upturns one quarter negated by slight downturns the following quarter. Excluding the healthy southwest suburban markets with vacancies in the 8 percent range, Broward office vacancies overall have hovered at 17.5 percent for the past year. Net rents overall for the Broward market are $17 per square foot. However, the Cypress Creek submarket remains in the $14 to $15 per square foot range, which continues to be the highest vacancy in Broward. The Downtown Fort Lauderdale market continues to show slight increases in rental rates and nominal decreases in vacancies. The downtown market will continue to perk up through the remainder of 2005.
Palm Beach County has an overall vacancy rate of 12 percent, with office rents averaging $17 per square foot, triple net. Plans are firming up for development in northern Palm Beach with the entrée of Scripps Research Institute. With it will come a great deal of office, industrial and flex space construction to accommodate the anticipated influx of bio-tech users. The market from downtown West Palm northward will benefit greatly from Scripps’ presence.
Boca Raton in Palm Beach has set the bar very high for prices achieved for Class A office buildings. The 116,000-square-foot 595 Financial Center sold for $320 per square foot and ING Clarion acquired the 115,600-square-foot Bank of America Building for $305 per square foot. Breaking the $300 level is a reflection of the investment community’s demand for Class A buildings in South Florida.
Certainly, the most active of the three markets is Miami-Dade County. The downtown markets have experienced first-half absorption of greater than 200,000 square feet. Due to growing demand for quality office space, gross rental rates for Class A buildings, in the $35 per square foot range at mid-year, are expected to increase $2 per square foot to $3 per square foot for the next few years. Two new buildings of approximately 500,000 square feet each are being discussed for downtown and Brickell. In addition, Burger King recently announced its relocation to a new building in Coral Gables to be built by The Codina Group. Other office developments are being considered in Coral Gables.
— Peter Harrison, senior vice president, Transwestern Commercial Services
Industrial
The Southeast Florida area consists of Miami-Dade, Broward and Palm Beach counties. Miami-Dade (Miami) is most often considered the “gateway to Latin America,” and is now sharing that title with much of South Florida as companies that ship goods to and from South America have a presence in Miami-Dade as well as Broward County (Fort Lauderdale). The region’s growth has been impacted greatly by the expansion of South and Central American economies over the last 2 decades. Just about any company that does business in Latin America has a presence in South Florida. This has stimulated the explosive growth of industrial development and contributes to continued low vacancy factors throughout the region’s industrial properties.
In Miami-Dade County the industrial vacancy rate is 4 percent with almost no sublet space available. These low vacancy rates are a factor in pressuring rental rates to increase with an average gross rental rate paid of $6.87 per square foot — this figure increases for the newer product that was developed recently in the Miami Airport West submarket and along the Turnpike corridor in West Miami-Dade County. The new projects of Flagler Station, Beacon Center and Miami International Commerce Center, all located west of Interstate 826 near Miami International Airport, have seen tremendous success over the past 18 months. The market has absorbed more than 3.2 million square feet since the beginning of 2005.
Due to the overall lack of ground in Southeast Florida, the price of industrial land has skyrocketed to unprecedented levels. When coupled with the dramatic increase of construction costs over the past 18 months, the trend for new development has shifted to industrial condominiums. The numbers for a multi-tenant investment deal no longer work — rent growth has not kept pace with the cost of construction. Because of this fact, most of the new industrial development has been dominated by condominiums. Tenants in Miami-Dade and all of Southeast Florida now are paying upwards of $120 per square foot for raw, unfinished warehouse space. Another factor spurring industrial condominium development is the desire of more users to own their own space rather than lease it due to the relatively low cost of debt, and the general desire to own real estate.
The long-term outlook for industrial properties in Miami remains extremely strong. The continued growth of the entire Latin American economy as a whole is likely as modernization occurs in their infrastructure and socio-political structures. As these economies grow, the demand for more goods will follow and Miami will remain the premier gateway to Latin America.
— Ken Morris, SIOR, president, Morris Southeast Group/CORFAC International
Retail
Currently, the Broward County retail market has an occupancy rate around 95 percent and an average asking rental rate near $17 per square foot. This is the total for neighborhood and community shopping centers combined. Lower rental rates have been a trend as of late, and these lower rates have attributed to the higher occupancy.
Broward County remains one of the premier retail investment locations in Florida. In 2003 and 2004, 20 strip centers were reported sold with sales totaling more than 2.8 million square feet and total value in excess of $332 million.
In the first 6 months of 2005, five transactions have an accumulated dollar and square footage total of roughly 33 percent of the 20 centers sold in the last few years. The total dollar volume this year is $119.71 million and total square footage is just under 1 million.
Noteworthy transactions include Flamingo Pines, a 257,000-square-foot center that sold for just under $44 million, and Plantation Mart Place, a 230,000-square-foot center that sold for nearly $25 million.
The face of retail is changing in downtown Fort Lauderdale. With the residential development boom taking place there, ground floor space that was occupied by the commercial retailer is being filled by the personal retailer — the hair salon, the dentist or the boutique grocer. The residential towers along and near Las Olas Boulevard are targeting service-oriented retail for their ground floors; for example, at The Waverly, a 14-story, luxury apartment complex, tenants include a wine bar, a high-end accessories store and a bank. The challenge for retailers is finding space that meets their parking requirements. Brokers familiar with the area indicate that, within a few years, a big-box retailer could be located in the bottom floor or floors in a high-rise building.
The Miami-Dade County retail market has performed well in recent years. Development in the county has centered for the most part in mixed-use projects in the Brickell and Kendall submarkets, with traditional shopping center building occurring in the extreme western and southern areas. With the rise of new residential subdivisions in these areas, it only makes sense that retail development will follow.
Miami-Dade County continues to be a very active retail investment market. In 2003 and 2004, 14 strip centers were reported sold with sales totaling more than 1.7 million square feet and a total value of approximately $200 million. Although Miami-Dade is the most densely populated of the three South Florida counties, generally it is perceived to be under-retailed. Thus, investor appetite for retail properties in this market results in frenzied buying, which drives prices higher and cap rates lower. For the first 6 months in 2004, Miami-Dade had the lowest strip center median cap rate of all Florida submarkets at 6.02 percent.
In the first 6 months of 2005, Miami-Dade was strong for investment activity. These first 6 months have seen a total dollar volume almost equal to the $200 million in all of 2004. Five centers have sold with a total dollar volume of more than $186 million produced by only around 700,000 square feet.
The large dollar volume generated by only 700,000 square feet can be explained by the most noteworthy transaction in the area, Mary Brickell Village. This 200,000-square-foot center sold for $590 per square foot, with a total sale price of $118 million. The center is only 75 percent occupied but includes anchors Publix, Bally and Starbucks.
Another notable transaction was the sale of Pinecrest Plaza. This 57,000-square-foot center sold for $260 per square foot and includes an Eckerd and Wild Oats Market.
The Palm Beach County retail market has performed well in terms of occupancy. The current occupancy rate is an impressive 96 percent, an improvement over last year. The average asking rental rates have also increased to around $19 per square foot. The Palm Beach retail market has been on the road to recovery after sluggish performances over the last few years.
In 2003 and 2004, 16 strip centers were reported sold with sales totaling more than 1.9 million square feet and a total value in excess of $284 million.
The first 6 months of 2005 have been hot for Palm Beach. Five centers with a total of just over 1 million square feet have sold in excess of $125 million. These numbers are a strong indication of investor confidence in the Palm Beach market.
Noteworthy transactions include Village Commons in West Palm Beach. This center had the highest per square foot, $208, and total sale price of over $35 million. The center is 95 percent occupied and is anchored by Publix.
The Village of Oriole Plaza sold for $148 per square foot. The center was 100 percent leased and includes anchors Publix, Office Depot, Bealls and Walgreens.
— John Crossman, Trammell Crow Company
Retail Market Makers
Broward County
• The Galleria at Fort Lauderdale has undergone a $50 million interior and exterior redevelopment, and has added Capital Grille restaurant to its upscale roster, which includes Neiman Marcus, Saks Fifth Avenue, Burdines and Dillard’s.
• Magna Entertainment Corporation and Forest City Enterprises are working together to develop a mixed-use project adjacent to Gulfstream Park in Hallandale Beach; delivery is expected for fall 2006. The Village of Gulfstream Park will cover 80 acres and contain approximately 600,000 square feet of retail shops, restaurants, a cinema and entertainment facilities.
• On the western end of the county in Sunrise, super-regional mall Sawgrass Mills is getting ready to undergo an expansion and renovation. The Colonnade Outlet at Sawgrass will include a high-end, luxury fashion district at the mall. This expansion will encompass 110,000 square feet of new retail and restaurants adjacent to Sawgrass Mills, with expected completion at the end of 2005.
• Also in Sunrise, Metropica, a mixed-use suburban downtown development, is slated to start construction this summer. The project is being developed by Codina Group and KGroup Holdings. Upon completion Metropica will cover 65 acres and include 500,000 square feet of office space, 363 condominium units, seven restaurants and retail space.
• A free trade zone for Chinese commerce may be coming to Broward County near Port Everglades. The County is working on a memorandum of understanding with the Shanghai Corporation for Foreign Economic and Technological Cooperation that will outline the construction and operation of a 700,000-square-foot to 900,000-square-foot retail/commercial village. The project is estimated to cost $50 million and would include retail shops, restaurants, a furniture gallery, economic development and tourism offices, and offices for Chinese businesses.
• Downtown Davie, a $65 million mixed-use development, recently received site plan approval and a $2.25 million subsidy from the town’s Community Redevelopment Agency. Upon completion, Downtown Davie will contain 100,000 square feet of retail space, 227 condominiums and 18 luxury townhouses.
• Miramar Town Center is being developed by Kimco in Miramar. The center will have 142,000 square feet of retail plus a residential and office component. No anchor has been identified but Kimco is looking for a supermarket.
• Ross Realty has plans for a new town center in Miramar that will include Marshalls, Ross and Office Depot.
Miami-Dade County
• The Buena Vista Yards consists of 56 acres of vacant land and is located south of N.E. 36th Street, north of 29th Street, west of N.E. Second Avenue and east of North Miami Avenue. The land will undergo redevelopment into a mixed-use project and is a partnership between Biscayne Development Partners and Developers Diversified Realty. The retail component, Shops at Midtown, broke ground last May and will include 600,000 square feet of retail space. Midtown Miami will include 3,000 condo lofts and 350 apartment units. Miami is looking forward to the project’s completion, as it will bring 1,700 permanent jobs to the area.
• Bank of America is planning on opening 23 new bank centers in South Florida by year-end, representing a $68.08 million investment for land, construction, personnel and building operations. The first in this wave of expansion is located in Coconut Grove and features an open sales floor and conference rooms.
• Wal-Mart has two parcels in northwestern Miami-Dade County under contract. The sites, which measure 30 acres and 40 acres, are approximately 3 miles apart. Wal-Mart is expected to construct a 203,000-square-foot Supercenter at both locations. The 30-acre site near Pro Player Stadium will be home to the first store in this area, while the 40-acre site should open its store in 2006.
• In South Dade, the Cutler Ridge Mall will undergo a comprehensive remodel and has been renamed Southland Mall. T/S Development LLC, the management for the mall, recently announced Phase I of the project, which includes new shopping attractions and likely will include a multiplex movie theater, scheduled to open in 2005.
• Woolbright is re-doing South Dade Shopping Center with Bed Bath & Beyond. Courtelis is re-doing Deerwood Town Center with The Home Depot and OfficeMax.
• Downtown Dadeland, a “village within a city,” currently is under construction in the Kendall submarket. This mixed-use project will include 416 condominium units and 125,000 square feet of retail space in several low-rise buildings. National retailers such as Pier 1 Imports, Chili’s and Cargo will make Downtown Dadeland home.
• The long-anticipated Mary Brickell Village is finally underway between Brickell Avenue and S. Miami Avenue. The 192,000-square-foot project is intended to support Brickell-area office workers and residents. Publix and Bally Total Fitness will anchor the retail portion. A residential tower including 380 condominium units and 810 parking spaces also is under construction. Brickell City Center and Coral Station on Brickell Way are two other mixed-use projects scheduled for development in the area with a combined 90,000 square feet of retail space and more than 500 residential units.
• Talisman is renovating the Miracle Center. When finished the center will be 250,000 square feet with three levels. PetsMart will occupy the first level and DSW and Bed Bath & Beyond will be on the second and third levels.
• New Plan Excel is renovating the 700,000-square-foot mall at 163 Street. Part of the structure will be demolished to make room for a Wal-Mart Supercenter. Anchor tenants will include Ross, OfficeMax and Anna’s Linens.
• In downtown Miami, the condo craze may adversely affect the retail market, at least in the short-term. If the 10,800 residential units in various stages of planning become a reality in the area, the result will be twofold: displaced retailers making way for condominium development and new retailers moving into these new developments. New retailers such as Whole Foods Market will make their first forays into downtown Miami, locating in new residential buildings. This grocer will locate in Metropolitan Miami, an under-construction project that will contain approximately 150,000 square feet of retail space.
• Borders Books & Music vacated the Streets of Mayfair in Coconut Grove. This exit marks a new phase in the life of this landmark development, which began as a high-end retail center in the 1980s, then morphed into an open-air entertainment complex in the late 1990s and is now poised for life as a mixed-use center.
• Nordstrom announced it would be coming to Aventura Mall. It will build a new two-level store that will contain approximately 167,000 square feet. It is tentatively scheduled to open in the spring of 2007.
Palm Beach County
• Downtown Boca Raton will be home to a $95 million mixed-use redevelopment project. Amera Corporation will develop this nine-story, Mediterranean-style building on 2.4 acres one block east of Federal Highway. The as yet unnamed project will contain 340,000 square feet and will include residential condominiums, offices, ground-floor retail shops and an underground parking facility. The site currently houses a bank and office building.
• Boca Village, the last 54 acres of undeveloped land in Boca Raton’s T-Rex site, will total $100 million-plus in construction costs for a combination of transportation, retail and commercial facilities; development began in the spring of this year. The project will include 35,000 square feet of retail space, 27,000 square feet of office condominiums and 340,000 square feet of Class A office space. This site is well located for this type of project given the proximity to significant transportation arterials as well as supporting residential product.
• Fox Property Venture JV has sold a 24.1-acre site for $8.2 million located west of State Road 7 and north of Okeechobee Road to Target Corporation to be used for a department store. Construction is slated to begin by year end.
• Sembler is developing Legacy Place, a 400,000-square-foot lifestyle center on PGA Boulevard and Atlantic Avenue in Palm Beach Gardens. The Center will be anchored by Best Buy, Linens ’n Things, Barnes & Noble, Loehmann’s, Ethan Allen, Total Wine and Michael’s. The center is across the street from Downtown at the Gardens.
• Downtown at the Gardens is a new retail project under construction in Palm Beach Gardens. This area of the county is now one of the hottest spots for retail development given the desirable demographics, residential growth and availability of land. Several restaurateurs and retailers are making their Florida debuts at Downtown at the Gardens. The most significant competitor to Palm Beach Gardens is Boca Raton; however, Palm Beach Gardens has the room to grow while Boca Raton is mostly built-out.
— John Crossman, Trammell Crow Company |
| 900 Biscayne Bay
Terra Group is developing 900 Biscayne Bay, a 63-story, 516-unit mixed-use tower located directly across from Bicentennial Park and the American Airlines Arena in the heart of Miami’s performing arts district. The project will include approximately 69,204 square feet of retail space and an office-condo component. Luis Revuelta is the architect for the project, and completion is expected in 2008. |
There Goes the Neighborhood
Alan Krischer
With home prices skyrocketing, the housing market in South Florida is moving well beyond the means of many prospective purchasers. Unfortunately, constraints in the supply of land for new housing may make it difficult — if not impossible — for the market to adjust to bring prices back down.
Miami-Dade County rapidly is running out of land for single-family homes. The County planning department has projected that the inventory of potential single-family homes is about 79,000 units, which will be exhausted within a decade. Since the County’s population is expected to continue increasing, this shortfall of single-family inventory is projected to be compensated by increased development of apartments and condominiums — a potential inventory of about 100,000 more units. Building industry analysts believe the inventory of both housing types is even smaller.
Regardless of the total amount, the mix represents a sea change. Throughout the 1980s and 1990s, the County balanced the inventory of single-family and multifamily housing, with a slightly higher reserve of the former (since there is more demand for single-family homes); that now has been reversed.
Shifting from single- to multifamily housing involves increasing density, even within established communities. That may not be politically possible based on recent experiences in the Portland, Oregon, metropolitan area. Portland was the pioneer in limiting land supply for development, resulting in increased density in existing neighborhoods, but those neighborhoods objected to the perceived intrusion of higher density. Unwilling to accept the densities that come from artificially limiting housing supply, these communities revolted against the zoning policies. They forced an expansion of the urban area by more than 18,000 acres, and regulatory limitations on increased density.
It remains to be seen whether a similar reaction will take place in Miami-Dade. Over the County’s 15-year planning horizon, we expect an increase of more than 500,000 people. If all were housed within the current land inventory, we will see a countywide increase in population density of around 22 percent. In some existing neighborhoods, the density increases would be even greater.
Many new multifamily units have been added over the past few years, but largely in communities that already had significant vertical construction: Miami Beach, Sunny Isles Beach, Downtown and Brickell, and the Biscayne corridor. Beyond this low-hanging fruit, increased density is projected to go into neighborhoods that have more traditionally single-family neighborhoods. Cities like Coral Gables, South Miami, Pinecrest, Palmetto Bay and Cutler Ridge may lack the willingness or infrastructure to accommodate increased densities.
Even with increased densities, the availability of new single-family homes will decline. It will be increasingly difficult for new families to find such homes in the neighborhoods in which they grew up. But without such densification, the County simply will not have an adequate supply of housing inventory to meet demand for all types of residential housing, single- or multifamily.
As with Portland, there is no guarantee that the public will be willing to tolerate these consequences in order to maintain regulations limiting the supply of buildable land. There are tens of thousands of acres of land outside the urbanized area that are not sensitive environmentally. Allowing a fraction of these lands to be developed could restore the traditional balance between single-family and multifamily housing stock, providing a more measured transition to greater densities. Since those lands increasingly are being converted from agricultural uses to 5-acre luxury ranch developments, such a change may be more politically palatable than in years past, thus pushing prices up even further and driving away working families.
Alan Krischer is a partner at Holland & Knight LLP in Miami and practices in the firm’s Real Estate Section in the areas of Land Use and Zoning. |
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