SHARE:
Real Estate
International trade and tourism remain strong as the state enters its sixth year of economic expansion. Corporate relocations are continuing, and more than 200,000 people a year are moving to Florida. Both construction jobs and real estate service jobs should grow about 2.3% next year.
But all this good economic news will test the discipline of Florida's developers and lenders. Greater availability of capital and strong investor demand for income-producing properties could result in overbuilding of apartments, office and industrial buildings, as is already occurring in retail properties in some markets.
We are projecting almost 41 million square feet of new office, industrial and retail construction in 1997, about 1 million square feet more than in 1996. Increases will occur in both the office and industrial sectors, while retail construction will decline by almost 1 million square feet.
Demand for commercial space statewide is strong enough to sustain these levels of construction, but each new project must be given a careful analysis. For the development community, 1997 must be a year for caution, not all-out expansion.
Here is a look at Florida's various real estate markets.
Residential
Unless mortgage rates rise unexpectedly or the national economy loses its current momentum, Florida can anticipate another strong year of residential sales. First-time home buyers, corporate transferees and move-up buyers will provide the backbone of the 1997 market, with a strong mix of international buyers in Miami, Orlando and a few other communities.
If Congress enacted a proposal to remove capital gains taxes from home sales under $500,000, more people nationwide would be able to sell their homes without having to buy another home of greater value. That would be a positive factor as Florida's homes are traditionally priced well below comparable housing in major metropolitan areas.
The only sour note is that the state's pre-retirement market, primarily second-home buyers in the 45 to 65 age range, is not measuring up to early 1990s projections. Although the first baby boomers are swelling the ranks of this age band, many middle-aged second-home buyers who traditionally responded to Florida are now opting for Colorado ski resorts, Arizona deserts, Carolina mountains or the New England coast. Others are buying interval ownership (timeshare) properties rather than Florida condominiums.
Richard W. Cope, chief executive officer, Prudential Florida Realty, Clearwater, expects 1997 to be another good year for primary housing. "We have a good inventory of homes in major markets," he says. "Southeast Florida and Naples are red hot right now, Sarasota and Orlando are above average, and the Tampa Bay area is about average."
Cope says the strength of the stock market in 1996, coupled with growing numbers of successful entrepreneurs, will help the state's move-up residential markets in 1997. "Demand for more expensive homes is coming from the entrepreneurs as well as the offshore market. Altogether, about 15% of our total transactions this year will involve foreign buyers."
In South Florida, home sales are running at record levels, according to Michael Pappas, president of the Keyes Company, a Miami-based brokerage firm. "Through September, we were up 18.5% over 1995 in both sales volume and closings," he says. "We think 1996 will even surpass the mini-boom of 1993 created by Hurricane Andrew sales and relocations."
Pappas sees a direct correlation in interest rates and home sales - whenever rates increase, sales begin to slow. "If rates stay low, we should continue to have a strong, steady market in 1997."
In Jacksonville, Bill Watson, president of Watson Realty, a 39-office firm, has a similar outlook. "We feel good about going into 1997, and our only reservation is the long economic cycle," he says. "While 1996 has been a very good year, we feel that economic growth will tend to slow down nationally."
New residential construction should drop off slightly in 1997. Our firm projects about 126,000 housing permits, down about 2%. Homes are becoming more expensive, as builders face higher lot prices, rising impact fees and steeper construction costs. As a result, their profit margins are at a two-decade low.
Rising home costs may force more potential single-family home buyers to stay in their apartments or move to attached townhomes or condominiums. While rental demand will be stronger in 1997, the high level of apartment construction activity will prevent rental increases in most Florida markets.
Planned communities
The pace of large-scale planned community development in Florida continues to slow in the 1990s, primarily because of the high upfront cost and the lack of traditional financing. It's difficult for any lender to offer a stable source of financing for a project that will take 10 to 15 years to complete. While Wall Street has shown tremendous interest in acquiring existing residential communities at discounted prices, its appetite for new community development is much more modest and primarily focuses on smaller golf course communities.
In Florida, smaller planned communities, like Addison Reserve in Delray Beach, are becoming the norm, as many developers look to complete their projects in four to seven years. Traditional community developers, such as Arvida and WCI, are now or soon will be major homebuilders, while large builders, like Lennar, Minto, GL Homes, Levitt and Divosta, are planning and building out their own communities.
Despite the cost pressures, there are several large-scale planned communities due to come on line in 1997, following the opening of Disney's Celebration project in Kissimmee in 1996.
By far the largest is the St. John's Project, a 6,300-acre high-end residential development south of Jacksonville that will feature the World Golf Village Resort and include the World Golf Hall of Fame, International Golf Library and Resource Center. Financed by Barnett and private investors, the development has been on the drawing boards since the mid 1980s, according to Jim Davidson, president of Davidson Development Inc., the site's master developer.
"We plan to capitalize on the 12 million visitors a year who come down I-95, and put in a $250 million world-class destination resort," Davidson says. "Every major golfing organization in the world is a participant in the project."
Construction is now underway, and the first phase of the project is expected to open in late 1997. Altogether 7,200 homes are planned, along with 5.5 million square feet of office, industrial and retail space. "Golf is one of the few amenities associated with a resort that blend with a mixed-use community," Davidson says. "We're really building a new city here."
In northern Palm Beach County, the 2,050-acre mixed-use ABACOA community is designed for 6,073 homes, 2.2 million square feet of office space and 1.1 million square feet of retail space. A new campus for Florida Atlantic University and a spring training complex for the Montreal Expos and St. Louis Cardinals are included in the Jupiter development.
"We expect to have our first model homes up in mid 1997," says George de Guardiola, president and chief executive officer, de Guardiola Development Inc. "We're positioning ABACOA as a moderate family development with the attributes of a traditional neighborhood, such as interconnected streets and small blocks. It will have a higher density than country club communities." Built on land that was part of the MacArthur Foundation's holdings, ABACOA is being financed by an investment partnership and bonds from a special taxing district. "Today, you need distinct cooperation between the landowner and developer to start a project like this which has an overwhelming upfront cost," de Guardiola says. "You need a long-term financial outlook that allows for development to take place at a normal pace."
Office
Suburban office markets continue to outperform downtowns throughout Florida. Vacancy rates are low and expected to continue to fall in 1997 in markets like Westshore in Tampa, Southside in Jacksonville and Maitland/Lake Mary in Orlando.
With lower rental rates, greater parking availability and shorter commutes for employees, the suburbs remain the location of choice for back-office operations, telemarketing firms, healthcare companies and other service businesses that don't need to be in a downtown location.
"All the suburban markets are showing increased occupancy and rental rates and active build-to-suit construction," says Bill Moss, executive vice president and Florida regional manager, CB Commercial, Orlando. The forecast is less bright for the state's central business districts, especially Miami and Tampa, which had 20% third-quarter office vacancy rates, according to a CB Commercial survey.
Only downtown Orlando and Fort Lauderdale had lower rates than the suburbs. "A combination of office, retail and residential in close proximity, along with active investment activity, has created a strong downtown market in Orlando," Moss says.
While downtown Fort Lauderdale has a similar fundamental strength, any optimism for 1997 is tempered by Blockbuster Entertainment's move to Dallas, which will put more than 261,000 square feet of space on the market. Another 50,000 square feet of space will become vacant when SunBeam moves its headquarters to Palm Beach County. "The moves will double the current amount of available space and bring the vacancy rate up to about 17%," says Deborah Page, research and marketing manager, Colliers Lehrer in Fort Lauderdale. "But Broward has a strong economy, and it's not doom and gloom here."
Terry W. Stiles, chairman of the Stiles Corp., is taking a "conservative" approach to future downtown development after completing Las Olas Centre, a 207,000-square-foot Class A building that is 100% leased, "But we're very optimistic about the suburban Broward market and will break ground on a 92,000-square-foot spec building in our Sawgrass Park of Commerce," he says.
In Dade County, demand for suburban space remains strong, especially in Coral Gables and locations near Miami International Airport, where new construction is occurring. "We're seeing most of the activity in the Airport West area, where we anticipate that leasing rates will start to escalate over the next 12 to 18 months," says Bill Biondi, president, KB Commercial Real Estate Group.
John Paul Rosser, senior vice president, Grubb & Ellis, says many office building owners who held on to their properties through the tough times of the last recession are looking to sell, now that values have recovered. "With leasing rates going up, now may be a good time to buy office buildings," he says.
Industrial
Unless retail sales fall off, reducing the demand for warehousing space, Florida's industrial market is headed for another strong year in 1997. Vacancy rates are in single digits throughout the state - Jacksonville's third-quarter rate was a mere 3.8%. Even with substantial construction, vacancy rates are unlikely to rise in most markets. Developers like warehouse construction because tenant improvement expenses are well below the amounts needed for office space, Stiles says.
"Industrial construction is ahead of new offices," says Moss. "We're seeing multitenant development starting up in many markets. In Orlando, for instance, there could be significant new spec space brought to market, which could exceed the demand."
In Tampa's industrial market, supply and demand are in balance, and in Fort Myers, strong job growth, a new university and expanded airport infrastructure are supporting new warehouse construction, Moss says.
Palm Beach County is benefiting from industrial users moving up from Dade and Broward, Stiles says. But the big question mark is marketing the 535-acre campus with 2 million square feet of office and industrial space that IBM vacated in Boca Raton.
Bustling Latin American economies continue to support Dade's warehouse market. "We have not seen any slackening in the demand for space, and international companies are a major factor," says George Hektner, senior vice president, Grubb & Ellis.
While Dade still has plenty of industrial-zoned land near Miami International Airport for future development, rising impact fees and other costs could push future development south to Kendall and Homestead, or north to Broward County. "Rental rates have taken a sizable step upward over the last few years," says Hektner. "Space that was going for $4.75 a square foot is now $6.50, but we don't expect major increases in 1997."
Retail
Retail is the soft spot in Florida's real estate market. A combination of aggressive developers, readily available financing and expansion-minded retailers has led to overbuilding in many markets. "There is a tremendous amount of retail construction all over the state," says Stephen Bittel, president, Terranova Corp., Miami. "Mostly it's larger tenants going into freestanding buildings or power centers. Other than Dade County, most of Florida is over-retailed, and smaller, locally owned businesses are struggling to survive."
Two of the hottest retail markets are Brandon, a Tampa suburb, and Pembroke Pines, southwest of Fort Lauderdale, Bittel says. However, new retail construction often draws tenants from nearby shopping centers, leaving large blocks of empty space.
In contrast, many inner city neighborhoods are short on retail space. Greg Kessel, senior vice president, Grubb & Ellis, Miami, believes that on balance, Florida's retail market is "as close to equilibrium as it's been in 15 years. The supply has really been up and down like a roller coaster."
Volatility characterizes Jacksonville's retail market, according to Collis McGeachy, vice president, CB Commercial. "We have absorbed much of the vacant space from ?big box' retailers who have gone out of business," he says. "But the closing of the Pic 'N Save chain is putting more space on the market."
Hospitality
More hotel development activity is expected in South Florida in 1997 than any time in the past two decades. A new 800-room Loews convention center hotel is under construction in Miami Beach with a nearby 300 to 350-room minority-owned hotel. Another new hotel is coming to Key Biscayne. To the north, Universal Studios is discussing developing two new hotels in Orlando, the state's largest hotel market.
M. Chase Burritt, national director of hospitality consulting services, E&Y Kenneth Leventhal, Miami, expects Florida's hospitality market to remain strong in 1997. "The hotel industry follows the overall economics of the nation," he says. "It seems like next year will be solid. Visitors are still coming to Orlando, Fort Lauderdale, Miami and even the secondary markets like Key West, Naples and Daytona Beach."
Hotel occupancy and room rental rates rose in the first nine months of 1996, according to Chuck Ross, vice president, Smith Travel Research, a Tennessee firm. That combined to create a 10.9% increase in room revenue, higher than the U.S. average of 9.7%. "Barring an unforeseen economic downturn or disturbance, the state should continue to exhibit steady growth in 1997," Ross says. "Demand is strong and the supply side seems to be under control, at least for the next year or so."
