CITY HIGHLIGHT, SEPTEMBER 2006

SOUTH FLORIDA CITY HIGHLIGHTS
Ben Eisenberg, Avery Klann and Grant Killingsworth

South Florida Industrial Market

It’s a good time to be involved in the industrial market in South Florida. While Miami-Dade continues to shine, it’s actually Broward and Palm Beach counties and the Treasure Coast that are catching everyone’s attention.

Current vacancy rates in South Florida are at or near 5 percent, which are  historic lows. The combination of the increased cost and scarcity of industrial-zoned land and the significant increase in construction prices have made it difficult to build speculative for lease product. Much of the new construction is for sale product. This lack of new construction has put upward pressure on rental rates and we should still continue to see vacancy rates decrease.

The last few hurricane seasons have had a dramatic impact on Broward, Palm Beach and the Treasure Coast. Look no further than insurance costs, as these markets have seen 30 plus percent increases. Those being hardest hit are the smaller industrial owners who can’t deflect the insurance costs as easily as the large national and institutional owners. The new trend is for the smaller owner to hire national real estate companies to manage and lease their properties. These smaller players are able to leverage off of the national firms’ buying power for many items including insurance.

In addition to the strong domestic and local economies, the industrial markets in Broward, Palm Beach and the Treasure Coast have been one of the beneficiaries of the population boom. These areas are seeing much larger deals than in the past. It used to be that a 100,000-square-foot lease was a big deal in South Florida, and now it’s common to see 200,000-square-foot to 300,000-square-foot deals. It’s no secret that Broward and Palm Beach counties are running out of land. The Treasure Coast is exploding with a population that has grown 37 percent in the past 13 years and is expected to increase another 11 percent in the next 5 years.

Both Broward and Palm Beach counties are seeing condo/office development and creative acquisition of existing products including warehouses. The trend is to buy buildings at below replacement cost and retrofit or renovate versus ground-up development. Since lease rates have not caught up to sales prices, and given the cost to build, in some instances it makes more economic sense to purchase existing non-functional product and spend the money to make it functional. Expect this trend to continue due to the cost of new construction.

Overall, the industrial markets for Broward, Palm Beach and Treasure Coast are expected to continue to grow dramatically in the western suburbs as the eastern areas are mostly built out.

As long as the population continues to grow at this brisk pace, expect to see commercial development follow.

— Ben Eisenberg is senior vice president of Trammell Crow’s South Florida Division.

South Florida Multifamily Market

Strong income characteristics, ample job opportunities and numerous entertainment and recreational activities contribute to Broward and Palm Beach counties’ continual influx of new residents. Between 1990 and 2006, Broward and Palm Beach County’s population increased by more than 40 percent to reach an estimated total of 3.04 million — 17 percent of the state’s total population.

Strong employment, extremely high home prices and lack of new apartment development have helped these two South Florida counties to become some of the nation’s strongest performing apartment markets this year. Combined with the significant condominium conversion activity during the past 2 years, occupancy rates and rental rates have experienced strong upward pressure as they continue on an uphill trend.

Although the conversion market has slowed in comparison to last year’s robust pace, conversions have accounted for a substantial portion of sales in the first half of this year. In a single transaction, a three-property portfolio consisting of Class A assets located in the cities of Weston and Boca Raton traded for a total of $345 million to a foreign-based converter. This sale, brokered by Apartment Realty Advisors of Florida on behalf of Gables Residential, exemplified the strength of the conversion market and the international attraction to South Florida.

For the first quarter of this year, occupancy rates in Palm Beach County reached 98.4 percent, with effective rents growing 10.6 percent during the previous year. The Boca Raton market reported an even higher occupancy of 98.7 percent, and a rental growth rate of 13.5 percent while achieving the highest rental rates in South Florida. In terms of supply, the Palm Beach County apartment inventory actually decreased 12 percent during the year ending first quarter of this year, with only 1,500 new units expected to be delivered by year end.

Currently, Broward County is one of the tightest apartment markets in the nation, exhibiting a 98.8 percent occupancy rate as of first quarter of this year. According to M/PF YieldStar, Broward County was ranked first in the nation for rent escalation, showing a countywide average increase of 12.9 percent in effective rents during the past year. In the Fort Lauderdale submarket, monthly rents reached a record high of $1,295, an increase of 19.1 percent and the highest average rental rates recorded in the county. In terms of supply, Broward County’s apartment inventory experienced a decrease of 11 percent during the year ending March 2006, with a net inventory change of -15,055 units as a result of condominium conversions reducing the overall supply.

Although the condominium market has cooled, with several conversions reverting back to rentals, the increased demand in the marketplace significantly outweighs the supply of apartment product and new deliveries in the pipeline. New commercial development in both Broward and Palm Beach counties is expected to boost demand even more for multifamily housing, with the addition of high wage jobs and corporate relocations. Northern Palm Beach County is one area to keep an eye on in the future due to the development of the new Scripps Research Institute in Jupiter. Cities such as Jupiter, Palm Beach Gardens, West Palm Beach and areas as far south as Broward will benefit from the thousands of jobs and businesses the facility is projected to create in the coming years.

— Avery Klann is a senior vice president of ARA in the Boca Raton, Florida office.

South Florida Office Market

While Coral Gables offers the look and feel of an upscale, slow-paced neighborhood with its tree lined streets and old Florida charm, its business environment should not be under estimated. The Coral Gables office market is the second largest submarket in South Florida, representing 6.15 million square feet of Class A and B space. Coral Gables is home to more than 150 multinational companies such as Kraft Foods International and the future global headquarters for Burger King. In addition, many corporations such as HBO Latin America and Navigators Group choose Coral Gables for their Latin American divisions.

This year has been prosperous for this office market. Vacancy rates among the Class A buildings in Coral Gables are down to 5 percent, the lowest rate record since 2000. To date, the Gables’ Class A market has absorbed 251,000 square feet of its inventory, making it one of the most active leasing markets in South Florida.

Several factors have added to the strength of this market. First, it’s located in Miami-Dade County, which has led the nation in employment with one of the lowest unemployment rates. Job growth in Miami-Dade has resulted from the expansion of existing companies, as well as more companies locating their Latin American divisions in the area.

While the inventory of office space in Coral Gables has increased from 5.29 million square feet in 2001 to 6.15 million square foot today, there is currently a lack of planned office development in this submarket despite high demand. Several sought after office development sites were snatched up by residential developers looking to take advantage of the condominium boom.

Another factor affecting Coral Gables has been office condominiums. Two buildings, 2600 Douglas and 75 Valencia, were recently sold to a condo converter. At this point it’s uncertain what the impact will be on the market

With no new office space coming on line, landlords are well positioned to take advantage of rising rental rates in this high demand, low supply market. Currently, rental rates have risen between $2 to $4 per square foot from a year ago. Tenants in the Coral Gables Class A market are looking at rents between $34 and $36 per square foot.

The rise in rental rates is giving landlords much needed relief from the dramatic increases in property insurance after last year’s active hurricane season. Some owners have experienced insurance increases from 300 to 1,000 percent. Insurance used to cost landlord’s $1.50 to $2 per square foot. Now, some landlords are paying between $5 and $7 per square foot. Tenants have also felt the insurance squeeze, because the majority of leases allow landlords to pass the additional costs directly to their tenants.

The value of a Gables office building has increased more than $100 per square foot from last year. Given these higher prices, institutional owners who have better access to capital have an upper hand in making acquisitions. For example, RREEF recently purchased the 255 Alhambra Plaza building, and several other institutional investors also made bids.

Institutional owners also have been able to leverage the high costs of insurance over their entire portfolio, boxing out several local/entrepreneur investors.      

Overall, prospects for the Coral Gables office market will continue to be strong. Landlords will benefit from raising rental rates and increasing building value. Tenants such as law firms, financial services companies and, as previously mentioned, Latin American divisions of American firms, will continue to be attracted to the market for the Gables neighborhood feel, first class restaurants and shopping, close proximity to downtown and the Brickell financial corridor, as well as to the airport and seaport and some of the areas most coveted residential offerings.

— Grant Killingsworth is a landlord representative with Holly Real Estate.

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