florida investment monitor first q 2012

8/2/2019 Florida Investment Monitor First Q 2012

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Investment Monitor

LEADERS IN COMMERCIAL REAL ESTATE

Q1 2012

Q1 2012 ECONOMIC AND COMMERCIAL REAL ESTATE TRENDS REPORTNATIONALAND FLORIDA MARKET UPDATES

FLORIDA

All Sperry Van Ness offices independently owned and operated


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has lagged the broader recovery. The

unemployment rate remains stubbornly high, not

only because of challenges in the private sector

but also as a result of cutbacks in state and local

government payrolls. The outlook is slowly

turning more positive, however. As recently as

last summer, employment in the state wasessentially flat as compared to a year earlier.

Hiring has picked up since then; between July and

November, Floridas private businesses created

more than 60,000 jobs. As a result, total

employment increased by 1.6 percent during 2011,

outpacing the national trends with the Sunshine

States best result since 2006. Education and

healthcare and the leisure and hospitality sectors

have been the primary contributors to the long-

awaited improvement.

Floridas improving jobs picture is clouded by the

challenges facing the state government and the

negative impact of an unnerving pipeline of

foreclosures. Last summers projections of a

balanced budget have been revised down

Increases in tax rates are unlikely, but state

programs are likely to face further cuts. Helping

to close the gap over the next several years,

Florida stands behind just two other states Texas

and California in attracting new residents and

spending. By 2016, it will be the third most

populous state in the union, overtaking New

York. Most of those gains are in older age cohorts,

principally retirees. A strong recovery in tourismand household refinancing into record-low

mortgage rates are also supporting the increase in

sales tax revenue.

Orlando and Tampa both experienced very sharp

job losses during the recession but have been

recovering at a slightly faster pace than peer

markets.

Tampas gains

have come

late. With a

2.7 percent

increase in2011, Tampa

Bay

accounted for

almost one in

four of

Floridas new

jobs during

the last year.

NATIONAL ECONOMY

National and Florida Economic Update

One-Year Change in Employment

('000) %

Florida 113.9 1.6%

Fort Lauderdale 5.9 1.0%

Fort Myers 4.0 2.5%

Gainesville -0.2 -0.2%

Jacksonville 9.9 1.9%

Miami 18 2.1%

Ocala 1.8 2.5%

Orlando 8.3 0.9%

Sarasota 2.3 1.1%

Tallahassee 0.1 0.1%

Tampa 25.8 2.7%

West Palm Beach 7.8 1.8%

Following a loss of momentum in the third

quarter of last year, the national economicrecovery showed signs of strengthening in the

final months of 2011. Measures of business and

consumer confidence have improved. Most

important, a steady decline in new claims for

unemployment benefits and a corresponding

increase in job openings suggest that labor

markets are finally firming. Investors have been

cautious in their response to the improving data,

reflecting that the recovery remains susceptible to

spillovers from the European debt crisis,

challenges in the domestic policy environment,

and continued weakness in the single-family

housing market.

A Firming Job Market

While corporate profits now surpass their pre-

recession levels, the frustratingly slow

pace of hiring has been a major

shortcoming of the recovery thus far. A

more robust labor market is a necessary

condition for sustained increases in

consumer spending and a range of other

economic outcomes. While the monthly

data on net hiring show that firms are

ramping up slowly, complementary data

on job losses and new job openings are

leading indications of trends in 2012.

Confidence Improves

As business confidence in the recovery

begins to improve, employment is

projected to rise. The most current data

on business sentiment show that while

sentiment remains weak by historic

standards, the outlook is brightening. As

of its January 2012 update, the NFIB

Small Business Optimism Index has been

improving for four consecutive months.

The Conference Boards CEO

Confidence measure improved in the

fourth quarter, as well.

Floridas Prodding Recovery Picks Up

With parts of Florida still grappling with falling

house prices and construction job losses, the state

-8%-6%-4%

-2%0%2%4%

2007 2008 2009 2010 2011

Year-Over-Year Change inNon-Farm EmploymentSource: Bureau of Labor Statistics

FloridaNational

80828486889092949698

100

2007 2008 2009 2010 2011

US Small Business Optimism IndexSource: National Federation of Independent Business


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Page 3 NATIONAL REAL ESTATE

While the pace of investment activity slowed in

the third and fourth quarters, the years final tally

easily surpassed sales activity during 2010. Salesvolume reached $160 billion in 2011, up more than

30 percent from a year earlier and more than three

times the markets nadir in 2009. The gains remain

uneven, however. Extending the investment

recoverys overarching theme, transaction volume

has been skewed to larger core assets in gateway

markets. Sales in other parts of the country,

including Florida, have been recovering more

slowly as investors have waited for a occupancy

rates and rents to stabilize.

Investors Looking Outside Gateway Cities

Competition for trophy assets in gateways likeNew York City and Washington, DC have pushed

cap rates lower at the top end of the market. The

most coveted CBD office towers and mid- and

high-rise apartment buildings were trading at cap

rates below 5.0 percent in the fourth quarter. In

the most extreme cases, a small subset of

buildings has traded at higher prices than in 2007.

As prices have outpaced cash flow, the value

proposition has weakened in these markets. As a

result, prospective buyers have begun to explore

acquisitions elsewhere, balancing the risk of

investing in less active markets against theirsignificantly higher yields.

Spillovers into secondary markets and trading in

smaller properties have been increasing slowly.

As the outlook for the economy brightens and

investors reach for value, sales activity is still

constrained in these segments of the market by a

lag of cash flow inflexions and limited access to

financing. In some cases, investors also cite a

dearth of distressed assets and high quality

properties both performing and value-add

available for sale.

Apartments Fundamentals Strengthen

Bucking the trends of slow recovery in cash flow

and credit availability, the apartment sector held

its place at the fore of the investment recovery in

the fourth quarter. Five years into the housing

crisis, young households show a strong bias to

renting. For those who are ready to make the

transition to homeownership, the need for larger

down payments and higher credit scores are

limiting their access to financing. Even as

Apartments Lead National Investment Recovery

residential mortgage rates fell to their

lowest levels in history the 30-year

fixed mortgage rate dropped below3.9 percent in January home sales

and price trends remain weak,

dragging on the national and Florida

economies. The recalcitrance of the

housing downturn continues to

power gains in apartment

fundamentals. Axiometrics reports

that national apartment rents jumped

4.4 percent in 2011 and projects a 5.5

percent increase in 2012. The sectors

falling vacancy rates and robust rent growth have

prompted an increase in development activity and

development land sales. As new properties begin to

come online in 2013, the pace of rent growth will

moderate.

Banks Start Lending But

Outlook for CMBS Remains Uncertain

While the apartment sectors investment and

development activity benefits from the strong support

of Fannie Mae, Freddie Mac, and the Federal Housing

Administration, other sectors have depended on

private sources of financing. The

largest net buyers in 2011, REITs

raised more than $50 billion in equityand debt, setting a new record.

While the largest REITs have put

their money to work in gateway

markets where life companies and

international banks have also been

active, investors in other markets

have depended on banks and CMBS.

Banks entered the fourth quarter

with significantly lower default rates

than a year earlier. While many banks

are still pulling back from real estate,a larger number reengaged with the

borrowers by making new loans in

the third and fourth quarter. Bank

lending remains critical to the health

of the industry since the outlook for

CMBS is uncertain. CMBS issuance of

$32.7 billion in 2011 fell short of early

expectations; projections for 2012 do

not anticipate a significantly stronger

level issuance.

0 10 20 30 40 50 60 70

2007 2008 2009 2010 2011

Thousands Rental Apartment Construction StartsSource: Census

$0$10$20$30$40$50$60

$70

2003 2005 2007 2009 2011

Billions Hisorical Offerings ofREIT SecuritiesSource: NAREIT, Chandan

$0$10$20$30$40$50$60$70$80

2007 2008 2009 2010 2011

Billions CMBS Issuance by QuarterSource: Chandan


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Page 4 FLORIDA ECONOMY

Gains Across Floridas Apartment Markets

FLORIDA APARTMENT

Florida Apartment Rent and Vacancy Rate Trends

2011

Change in

Asking

Rents

Q4 2011

Vacancy

Rate

2011

Change in

Vacancy

Rate

Fort Lauderdale 2.5% 5.4% -0.4%

Fort Myers 2.4% 8.5% -1.0%

Gainesville 2.0% 8.5% -0.3%

Jacksonville 2.5% 9.0% -1.8%

Miami 4.5% 4.3% -0.6%

Naples 2.9% 7.9% -1.3%

Orlando 2.8% 7.0% -1.9%

Palm Beach 1.0% 7.2% -0.3%

Sarasota 1.8% 5.1% -0.8%

Tallahassee 2.0% 8.0% -0.1%

Tampa 3.0% 6.5% -1.0%

Among the states hardest hit by the housingdownturn, tentative signs of stability emerged in

Floridas single-family markets during the fourth

quarter. Even so, rental demand is improving,

pushing occupancy rates and rents higher.

Vacancy rates fell across the board in 2011, albeit

only by 10 basis points in Tallahassee. Orlando

and Jacksonville both saw vacancy rates fall by

almost 200 basis points. That is a welcome trend in

Jacksonville, which opened 2011 with vacancy

above 10.0 percent. By the end of the fourth

quarter, vacancy rates were below 6.0 percent in

Fort Lauderdale and Sarasota and just 4.3 percent

in Miami.

The favorable trends are expected to hold, even as

housing affordability in Florida reaches historic

highs. Similarly, the positive outlook is largely

unaffected by new Federal Reserve proposals that

would repurpose foreclosed home as rental

properties, threatening to expand the supply of

available rental options.

Higher Occupancy Rates But Slow Rent Growth

Apart from a limited supply of new purpose-built

apartments, job growth trends in Florida are an

important factor in driving rental demand.

Workers finding jobs in hospitality and

healthcare, which have dominated Floridas

employment recovery, are more likely to rent thanto buy. In Jacksonville and Orlando, the two

Florida markets that have seen the least progress

in the single-family housing market, the relatively

stronger uptick in occupancy reflects challenges in

obtaining mortgages and concerns that prices may

fall further. The downside of an employment mix

weighted to lower income occupations can be seen

in slower rent growth. Even in Miami, which

boasts one of the lowest vacancy rates in the

country and where condos are being snapped up

by cross-border buyers in all cash-deals, average

rent growth was 4.5 percent.

Apartment Sales and Development

Investment activity in Floridas apartment sector

has been surprisingly strong, supported by its

favorable cash flow trends and low-cost financing.

As compared to gateway markets, however, cap

rates averaging 6.6 percent in the fourth quarter

are relatively high.

This combination of improving cash flow and

higher yields, coupled with a positive long-termoutlook for population growth and available

financing, supports a positive investment outlook

for cautious buyers. Fort Lauderdale, in

particular, has seen a strong uptick in price

discovery and sales of properties trading below

$10 million. As in other markets, investors in Fort

Lauderdale must watch for potential overbuilding

that would undercut gains down the road.

6.3%6.4%6.5%6.6%6.7%6.8%6.9%7.0%

Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11

Florida Apartment Cap Rate Trends


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Grappling with an absence of new jobs in office-

using occupations, net absorption remained weak

or negative in Floridas office markets during the

fourth quarter. The vacancy rate at the end of the

year was 20.0 percent or higher in six of the eleven

reporting metros.

Only one market, Miami , reported an observable

increase in rents. The small gain reflects the

movement of tenants to other, better properties

offering generous incentives rather than an uptickin net absorption. The increase in the market

average has been helped along by the completion

of three new buildings in the last year and half,

even as the new properties have pushed the

market vacancy rate higher. Overall, Floridas

office vacancy rate could trend higher through the

second or third quarters of 2012.

If firms hiring plans offer any indication,

occupancy gains in 2012 will benefit some of

Floridas hardest hit markets. A small but growing

net share of businesses in Fort Myers, Sarasota,

and Tampa are reporting plans to increasepayrolls in 2012. While many of the new jobs will

be in healthcare and hospitality, corporate

employers will contribute to the overall

improvement.

FLORIDA OFFICE

Florida Office Rent and Vacancy Rate Trends

2011

Change in

Asking

Rents

Q4 2011

Vacancy

Rate

2011 Change

in Vacancy

Rate

Fort Lauderdale 0.0% 19.0% 0.1%

Fort Myers -1.3% 23.8% 1.0%

Gainesville -0.8% 20.2% -0.4%

Jacksonville -6.5% 18.9% -0.9%

Miami 1.7% 19.7% 0.7%

Naples 0.5% 22.0% 0.4%

Orlando -2.1% 18.3% -1.0%

Palm Beach -4.0% 22.0% -0.4%

Sarasota 0.2% 20.4% 0.3%

Tallahassee -1.0% 14.5% -0.2%

Tampa 0.2% 20.0% -0.6%

In Jacksonville , a single fourth quarter lease

signing by EverBank Financial stabilized the CBD

office market. Looking to move roughly 1,500

employees from its suburban headquarters,

EverBank took 270,000 square feet and naming

rights at the AT&T tower in a December lease

signing that will increase CBD employment by as

much as 8 percent.

Even with concerns about weak fundamentals

weighing on office valuations, investors showed a

new readiness to buy assets at a discount in the

fourth quarter. Recent trades in Brevard County

and a spate of sales in Tampa, including the

January sale of the Pointe office building to

Parkway Properties, reflect a departure from the

disappointing levels of activity reported earlier in

2011. Underperforming assets are trading at deep

discounts. Palm Springs Center, which defaulted

on its mortgage in early 2011, sold in December

for less than half of the outstanding principal

balance on the mortgage.

Medical Office Buildings Capture Upside

Medical office property investment activity

slowed in the fourth quarter, but investor demand

in the niche remains strong. Floridas projected

population growth is weighted heavily towardsseniors, who will account for almost half of new

Floridians over the next two decades. These

prevailing demographic trends support long-term

demand for medical services in the state. At the

same time, buyers are finding a relatively deep

pool of acquisition opportunities. Regulatory and

compliance changes are motivating hospitals and

health systems to dispose of tenanted properties

or undertake sale-leasebacks.

Healthcare reform and its impact on doctor

reimbursement rates are ever-present

considerations for this sector. The outlook forphysician practice reimbursement is dim given

constraints on the federal and state purses.

Seeking to redeploy equity, reduce overhead, or

unencumber themselves of mortgage debt, a

larger number of physicians may bring properties

to market in 2012. A sudden increase in supply of

small assets for sale, and the potential for defaults

by doctors who levered up during the real estate

boom, could hurt prices. But investors with

reasonably long-term investment time horizons

will look past the immediate pressures on value.

Florida Office Struggles; Niche Opportunities in

Medical Office


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Page 6 FLORIDA OFFICE

Tourism Spending and Discount Retail Both

Benefit from Floridas Imbalanced Recovery

FLORIDA RETAIL AND

INDUSTRIAL

Ports, Trade Boosts IndustrialWarehouses and Distribution

Floridas industrial fundamentals and investment

activity carried gains from prior quarters into the

fourth quarter, outpacing the recovery in the

office and retail sectors. Managing to avoid the

spotlight that has accompanied highly visible

office sales, several recent trades of well-located

warehouses and research and development

facilities have allowed investors to secure stable

cash flow streams at favorable prices. Avoidingfunctionally obsolete space has been a key

consideration since these assets are trading at the

deepest discounts.

Investment opportunities in the $2 million to $10

million range are abundant, charting a path to

portfolio diversification for buyers that may have

focused on retail or office space up to now. Within

this subset of the market, warehouse and

distribution centers located near major ports are

benefiting from healthy year-over-year gains in

trade volume. In 2010, waterborne trade in and

out of Floridas ports jumped 22.6 percent on the

prior year.

Apart from container traffic, the Ports of Miami,

Everglades, and Canaveral have held their

positions as the top three cruise ports in the

world. In its 2011 fiscal year, Canaveral reported

its best year ever for cruise passenger traffic. The

Brevard market faces drags on container traffic if

the surrounding businesses cannot replace the

jobs lost upon the sunset of the Space Shuttleprogram or prospective cuts in military budgets.

Port authorities in Brevard still report

overcrowding at existing cargo facilities on

account of the rise in container traffic. Canaveral

completes development of a new pier in 2012 and

will kick off construction of another facility in the

coming months. Liberty Property Trusts fourth

quarter acquisition of 126 acres in Miami presages

the development of the 1.6 million square foot

Miami International Tradeport.

Florida Retail Rent and Vacancy Rate Trends

2011

Change in

Asking

Rents

Q4 2011

Vacancy

Rate

2011

Change in

Vacancy

Rate

Fort Lauderdale -1.8% 10.9% -0.4%

Jacksonville 0.1% 12.1% 0.3%

Miami 1.0% 6.9% -0.7%

Orlando -2.1% 10.0% -0.3%

Palm Beach -1.1% 11.0% -0.3%

Sarasota -5.8% 19.0% -0.5%

Tampa -2.9% 9.6% -0.4%

At the other extreme, retail spaces along major

tourist corridors, including parts of South Beach,

have seen vacancy rates fall on a sustained

increase in tourism and related spending. A recent

South Beach trade commanded a valuation in

excess of $800 per square foot. Value-add deals for

big box retail centers are also contributing to sales

volume and, as part of repositioning efforts,

marginal improvements in occupancy.

Floridas retail sector has struggled during the

states housing crisis, weighed down by

joblessness and anemic consumer confidence.

Street-level retail in CBD office properties has

faced particular headwinds given the high office

vacancy rate. While most markets had lower

vacancy rates at the end of 2011, Miami and

Tampa are alone in reporting single-digit vacancy.

The recent uptick in service jobs and

lackluster wage growth in other

sectors have afforded some upside.Discount retailing has been one of the

few retail subtypes to capture the

downturns silver lining. Land sales in

support of discount retail

development, such as the January

acquisition of a Port Charlotte site that

may become home to a Dollar General,

are indicative of Florida consumers

cost-conscious mood.-15%-10%-5%0%5%

10%15%

2007 2008 2009 2010 2011

Year-Over-Year Change inTaxable Florida Tourism SalesSource: Florida Office of Economic &

Demographic Research


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Page 7

0%2%4%6%8%

10%12%14%

2009 2010 2011

Multifamily Default Rates3%

4%

5%

6%

7%

2009 2010 2011

CRE Default RatesSource: Bank Call Reports, Chandan

FloridaNational

10%12%14%16%18%20%22%24%26%

2009 2010 2011

Construction Default Rates

The recovery in Florida tourism spending and the

return of large conventions that had avoided the

state during the recession has parlayed into

improving fundamentals and transaction activity

for high-quality hotels, restaurant spaces, and

other hospitality venues.

Improving fundamentals have not kept hotel and

hospitality owners that levered up prior to the

recession from defaulting on their debt. In fact,

several recent trades have involved funds

acquiring notes and foreclosing on borrowers. In

Florida Hospitality Buoyed by Tourism

FLORIDA HOSPITALITY

AND DISTRESSED

Distressed Opportunities Increase asCMBS Loans from 2007 Reach Maturity

Investors frustrated by a thin set of opportunities to buy distressed properties are

understandably skeptical of whether 2012 will see a shift in banks and special servicers

handling of non-performing loans. Sales of distressed properties increased in the 2011. The

underlying trends fueling the increase in activity will persist well into 2012 and beyond.

As delinquency and default rates for bank-held mortgages have declined from their peaks,

banks and their regulators have been increasingly inclined to liquidate non-performing

loans and offload real properties from their balance sheets. Florida banks holdings of

multifamily properties have become prime candidates for disposition as investor demand

has strengthened and recovery rates have improved. Banks have been parting with REOassets in other sectors, as well. Roughly half the retail property trades in Orlando in 2011

were through banks or special servicers. Amongst the sales, Washington Shores Plaza was

acquired in the fourth quarter for less than $40 per square foot.

The outlook for failed construction projects remains uncertain, as default rates in Florida

have diverged from the national trend, leaving almost one in every four loans in this

category in default. Bank losses on these loans generally remain high. This January, PNC

Bank internalized a loss of more than 70 percent on a stalled development project in

Jupiter, south of Port St Lucie.

CMBS represent a potentially larger source of distressed investment opportunities in 2012

and 2013. Five-year interest-only loans made at the markets peak in 2007 begin to mature

in the first quarter. Hundreds of loans will fail to meet prevailing criteria for refinancing,

requiring injections of new equity or new sponsorship.

The mix of properties runs the gamut from the traditional to the unusual. In December,

Zions First National Bank offloaded a former Montessori School in Boca Raton, recouping

$1.5 million against a 2006 mortgage. Legacy Bank of Florida funded the current

acquisition. Distressed industrial properties are often trading at deep discounts, as well.

Also in December, SunTrust Bank sold a flex condominium unit in Venice, just south of

Sarasota, for $195,000. The new price is roughly 40 percent of the $468,700 paid by the last

owner in 2006.

December, the Traymore Hotel in South Beach

was sold for $17.5 million. In this case, the new

sale exceeded the principal balance on the

defaulted mortgage significantly, demonstrating

that the best-positioned distressed assets can

command healthy investor attention.

In another fourth quarter South Beach trade,

Hersha Hospitality Trust acquired the Courtyard

Miami Beach Oceanfront for $95.0 million, more

than $360,000 per key.


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FLORIDAInvestment MonitorQ1 2012

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