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The Pain Spreads in Real Estate

Mike Spelcher
STRONG SHOWING: Mike Speicher isn’t surprised that Florida’s hospitality markets are strong this year. As general manager of the new Westin Imagine Orlando, he’s seen a steady flow of hotel guests for the 315-room Intrawest hotel/condominium near the Orange County Convention Center. “In our market, everyone seems to be doing well.” [Photo: Jeffrey Camp]
In a challenging year for most of Florida’s commercial markets — office, industrial, retail and hospitality — the hotel sector continues to be a bright spot. In May, Visit Florida, the state’s tourism agency, announced a 3.4% increase in visitors in the first three months of 2008 compared to a year ago. Miami-Dade ranked first in the nation for hotel occupancy during that quarter at 81.4%. Orlando came in fourth at 74.5%, according to Smith Travel Research statistics. Meanwhile, office vacancy rates are rising. The retail sector has been most affected by the nation’s credit crunch and the state’s slower population and economic growth, as many national and regional retailers have scaled back their expansion plans. Following is a closer look at the state’s main commercial markets:

Hospitality: Sunshine Still Sells

GIVE AND TAKE: Tight credit will stymie hotel growth, but that will benefit existing hotels, including the renovated Foutainebleau. [Photo: Matt Dean]

The Sunshine State’s perennial appeal to leisure and business travelers has supported a modest wave of new hospitality investment throughout the state. In Miami Beach, two oceanfront landmarks — the Fontainebleau and Eden Roc — are scheduled to reopen soon after extensive renovations. Along I-95 to the north, a new Holiday Inn Express opened recently in Stuart with a Courtyard Marriott to follow later this year.

However, tighter lending standards will limit the supply of new hotels in the next few years, says Mark Lunt, principal at Ernst & Young Hospitality Services Group in Miami. “The credit crunch means there will be no surge in supply,” he says. “That will benefit existing hotels and result in higher room rates in cities like Miami, Fort Lauderdale and Orlando, which are enjoying great demand.”

Christian Charre, senior vice president at Jones Lang LaSalle in Miami, says the weakest link in the hospitality sector is the condo/hotel concept, which has declined due to the residential market standstill and general lack of investor interest. “Consumers have found there is no resale market now for their units,” he says. “Then they look at the potential rental income from the room and compare it with their expenses.”

On the other hand, Charre says affluent vacation-oriented buyers still like the fractional ownership concept — purchasing 1/8 to 1/10 of a large unit in a complex managed by Ritz-Carlton or other upscale chains. “In this case, it’s a lifestyle purchase rather than an investment. There’s a limited supply in the market, and it has a definite appeal to second-home buyers.”

Residential: When Will Florida’s Housing Market Start to Recover?

Alan Riley
Alan N. Riley
ReMax Metro

“In the Tampa Bay area, we have seen a slight increase in buyers this year, but it will be another year before we wade through the excess inventory and foreclosure sales and return to a normal market.”

Debbie Da Silva
Debbie da Silva
Prudential Network Realty

“We are already beginning to see the turnaround. Price reductions and seller allowances in the Jacksonville area are leveling out. We are starting to get multiple offers on some properties as well. Between now and the end of 2008, we’ll see the upturn in the market.”

Mike Pappas
Mike Pappas
Keyes Co.

“The market has already bottomed from a sales activity standpoint. Our first quarter 2008 business was up 20% compared with fourth quarter 2007. However, I do not expect price appreciation to return until 2009.”

Charles J. Bonfiglio
Charles J. “Chuck” Bonfiglio
Century 21 AAA Realty
Cooper City; president, Florida Association of Realtors

“I think the bottom of the market is near at hand. If you compare January to February and March, you’ll see each month was better not only in the number of sales, but even in the average price.
This is a great indicator that we are either at the bottom or very near the bottom of
the market.”

Jack McCabe
Jack McCabe
McCabe Research
& Consulting
Deerfield Beach

“All real estate markets are local. ... Gazing into my crystal ball, I see recovery in winter 2009-10 for Naples and Sarasota; later 2010 for Fort Myers/Cape Coral and Tampa; winter 2010-11 for Orlando, West Palm Beach and Fort Lauderdale. Miami-Dade will be even longer.”

Lewis Goodkin
Lewis M. Goodkin
Goodkin Consulting

“I don’t see us turning the corner in the single-family market until late 2008 to the first quarter of 2009, and the condominium market will be fortunate to bottom out before 2012.”

Michael Saunders
Michael Saunders
Owner/principal broker
Michael Saunders & Co.

“Sarasota/Manatee now leads the state in a modest first-quarter recovery.
We have a long way to go, but I feel we have definitely bottomed out.”

Bob Hudgens
Bob Hudgens
Century 21 Coastal
Fort Walton Beach

“We expect the market to be better this winter, especially as about 3,000 military personnel are reportedly moving to the Panhandle.”

Clark W. Toole III
Clark W. Toole III
Coldwell Banker
Residential Real Estate

“There are some areas that have bottomed out and have started to recover. Other areas of Florida will follow.”

“Many people made the mistake of thinking that commercial real estate would pick up the slack after the residential downturn. But there has been an enormous impact on the state’s office, industrial and retail markets.”

— Lewis Goodkin, president,
Goodkin Consulting in Miami and
a Florida Trend contributor

Office: Tenants’ Market

Lonnie Ingram
COMING SOON: World Trade Center Orlando is expected to break ground this quarter. [Photo: Jeffrey Camp]

Throughout Florida, office vacancy rates are rising. Financial and real estate companies are downsizing or going out of business. Tenant demand is tepid at best, and more than 8.5 million square feet of space is under construction.

“On a statewide basis, the first quarter was one of the most difficult ever in terms of office demand,” says Larry Richey, senior managing director at Cushman & Wakefield in Tampa. “It’s all tied to employment growth. While we expect to see the job market rebound in the second half of the year, the high level of construction will lead to higher vacancies around the state.”

“We look at this as a temporary hiccup,” says Tony Landa, senior vice president at Lutz Real Estate Investments, a Farmington Hills, Mich., investment firm that owns 809,000 square feet of office and industrial space in Tampa and recently opened an Orlando office. “Our long-term outlook is very positive, and we plan to buy more properties in the future.”

South Florida’s office market has been cushioned from the economic downturn by its entrepreneurial nature, says William Holly, CEO of Holly Real Estate/TCN Worldwide in Coral Gables. “That’s been the strength of our demand, versus a national company that might decide to close its offices across the board.”

While leasing activity has been slow in the first quarter, Andrew Rudzinski, CB Richard Ellis’ managing director for Broward County, expects an upturn by year-end. “For the entire year, we expect leasing activity to be about the same as in 2007,” he says.
Office construction is occurring at a moderate pace throughout south Florida, including several high-profile “green” projects: Brickell Financial Center in Miami, Lake Shore Plaza II in Sunrise and Lynn Financial Center in Boca Raton.

In Orlando, Skyrise Development Group expects to break ground this quarter on World Trade Center Orlando, a two-tower, $200-million downtown office complex. Overall, demand and supply are fairly well balanced, says Phillip Faircloth, senior agent at Marcus & Millichap’s Orlando office.

Office Space
Market Sq. Ft.
Vacancy Under Construction
Miami 39.8 8.0% 4,131,577
Orlando 36.1 11.4 1,377,133
Tampa 32.7 14.7 975,000
Fort Lauderdale 24.6 12.6 386,000
Jacksonville 24.4 13.3 379,400
Palm Beach County 21.7 16.4 955,000
Saint Petersburg 13.8 17.0 0
Source: CB Richard Ellis, first quarter 2008

Jacksonville’s office market is “stable and healthy,” says Brad Chrischilles, a principal in CNL Commercial Real Estate’s new Jacksonville office. “The velocity of tenant leasing is not as strong as it was two years ago, but there are still users like Fidelity Investments coming to Jacksonville.” New Class A buildings in the Southside market include Butler Plaza III, WaterView II and Lakeside III. “There are several other projects that could come out of the ground if demand picks up,” says Chrischilles.

Industrial: A Mixed Bag

Ron Roberts
STRENGTH: Markets that distribute goods to Latin America are weathering the storm. [Photo:Daniel Portnoy]

While Florida’s industrial sector has been affected by the nation’s economic and housing slowdown, the impact differs from market to market.

In Orlando and Palm Beach County, for instance, vacancy rates have climbed to the 8% range largely because many industrial users supply the slumping construction and real estate trades. In contrast, vacancy rates are lower and leasing activity is stronger in Miami-Dade, Tampa and Jacksonville, where many industrial parks cater to export activity. “South Florida had $79 billion in trade last year, as exports have been helped by the weak dollar,” says William Holly, CEO of Holly Real Estate/TCN Worldwide in Coral Gables. “That supports demand in the region’s industrial market.”

However, Ben Eisenberg, managing director at Transwestern in Miami, notes that many small-space users are re-evaluating their space needs. In addition, major corporate users of industrial space are holding off on their space decisions for now.

Industrial Space
Market Sq. Ft.
Vacancy Under Construction
Miami 228.5 6.3% 1,966,926
Fort Lauderdale 125.2 5.4 1,267,844
Orlando 99.4 8.4 2,481,948
Tampa 93.2 4.5 1,319,676
Jacksonville 92.0 4.9 4,266,045
Palm Beach County 52.9 8.0 1,063,279
44.8 5.1 100,000
Source: CB Richard Ellis, first quarter 2008

“It is the entrepreneurial medium-size tenant, from 10,000 to 50,000 square feet, that is driving the south Florida market today,” says Eisenberg. “The companies that distribute goods to Latin America seem to be weathering the storm and doing very well.”

In Broward and Palm Beach counties, large blocks of industrial space — 100,000 square feet or more — are available for the first time in many years, says Andrew Rudzinski, CB Richard Ellis’ managing director for Broward County.

Retail: Not a Good First Half

Ron Roberts
TOUGH SELL: Many chains are scaling back while others are seeking bankruptcy protection. An estimated 5,770 retail stores will be closed this year.

For Florida’s retail sector, the first half of the year has been dismal: Consumer spending has dropped, home values have fallen, population growth has slowed and major retailers are retrenching.

“Consumers today are facing credit issues, high gas prices, property tax and insurance issues,” says Lewis Goodkin, president of Goodkin Consulting in Miami and a Florida Trend contributor. “The state of the U.S. economy is directly affecting the retail sector.”

Nationally, several retail chains, including Sharper Image and Linens n Things, have filed for bankruptcy. Others, like Foot Locker and Ann Taylor, are closing dozens of stores, while Lowe’s, Office Depot and other chains are scaling back growth plans. The International Council of Shopping Centers estimates there will be 5,770 U.S. store closings in 2008, up 25% from 2007.

“The retail and restaurant chains are very cautious today,” says attorney Thomas P. Angelo, managing shareholder at Angelo & Banta in Fort Lauderdale, whose clients include national retailers. “And the developers are finding it more difficult to access capital for new retail centers.”

However, Angelo expects an upturn in the fourth quarter as consumer confidence increases and financing becomes easier to come by. “If you look at real estate market cycles, the downturn started in 2005 after Hurricanes Wilma and Katrina,” he says. “Since then, higher insurance and reconstruction costs have hit both retailers and their landlords. If Florida has another quiet hurricane season, that will be good news for the retail market.”