Real estate: the outlook for 2003 - South Florida's real estate market

South Florida CEO, Feb, 2003 by Richard Westlund

While the rest of the nation is having problems, South Florida's resilient real estate markets are expected to improve this year, in almost every sector -- unless a few nasty curves come our way. That is the double-edged sword of an economy that is both local and global.

Tourism may be weak and trade may be down, but South Florida's real estate markets are entering 2003 in much better shape than the rest of the nation. Continued population growth, a stable job market and the flow of foreign investment have all helped insulate the region from the nation's problems.

Having said that, there are three potential threats from the outside world:

* A significant rise in interest rates. "The strength of our overall market is very dependent on interest rates," says Ezra Katz, chairman of The Aztec Group in Miami. "If rates spike up, that will lead to a major downturn in every sector of the real estate market. Is that likely? I have no idea."

* War or a serious terrorist incident. A sudden drop in air travel or a slowdown in tourism would directly impact South Florida's hospitality, retail and second-home markets. "Tourism plays a key role in our residential market, by introducing potential buyers to South Florida," notes Lewis M. Goodkin, president of Goodkin Consulting, a PricewaterhouseCoopers Strategic Alliance based in Miami.

* Greater turmoil in Latin America. Weakness in the major South American economies reduces demand for warehouse facilities, office space, hotels and residential real estates. Hospitality, retail and residential sales are also impacted by Latin downturns. "Chaos in certain Latin American economies makes it difficult to forecast the coming year", says Michael Y. Cannon, managing director of Integra Realty Resources -- AREEA/South Florida. "The picture today is very complex."

Keeping these disclaimers in mind, the forecast for 2003 is still surprisingly strong for most sectors. Steady absorption of space, combined with relatively low levels of new construction, is likely to boost occupancy rates in most commercial markets. Now is a good time to be an owner of real estate," says David Dabby, president of Coral Gables-based The Dabby Group. "Prices for most types of commercial products will continue to rise."

Low interest rates, combined with Wall Street's weakness, make commercial real estate of all types an attractive investment. "There has been a clear exit out of stocks and into real estate in the last two years," says Katz. "There is a lot of money chasing deals, and when you combine that with low interest rates, the result is a sense of frenzy in the market. If a good property comes up for sale, there are multiple bids and aggressive prices. I believe that will continue in the near future."

South Florida's office market is slowly working its way through a glut of sublease space that resulted from the collapse of the technology sector (read: dot-coms) in 2000 and 2001. Now, that space has largely been absorbed. "The competition among landlords is still keen -- tenants still have a wide choice," says Cannon. "[But if] absorption continues, we should see a stabilized market for the office sector in 2003."

The same can be said of the industrial sector: extra space from the boom years has largely been absorbed, and construction levels are low. "We're seeing a trend in certain locations to condominium warehousing, as a result of demand from smaller-space users and import/export distribution firms," says Cannon.

If there is any softness in the commercial sector, it will be in certain retail and hospitality segments. Retail real estate tends to be chronically overbuilt in South Florida, says Goodkin, noting that, "The new developments that succeed usually do so at someone else's expense." As for hospitality, the biggest concern is Miami-Dade's explosion in luxury hotel rooms in the past few years, and a resulting decline in occupancy rates.

On the residential side, demand remains strong for both single-family homes and condominiums. "We expect 2003 to be another good year for housing' says Goodkin. Only in the luxury condominium market is there a concern about oversupply -- as prices go up, the market gets thinner. Well-designed, well-located and well-priced projects will continue to sell, says Goodkin, though depth of demand remains uncertain.

South Florida's apartment market, meanwhile, has more vacancies than usual because low interest rates have turned renters into buyers. That should improve. "I think the multifamily market will probably change for the better in the next 24 months," says Katz, "and rental apartment communities have a good future in South Florida."

The consensus, then, is that 2003 should be a better year than 2002 -- which was overall a good year to begin with (see charts opposite). What remains cloudy is the longer-term forecast. "National economic conditions are troubling," says Dabby. "When you look at the problems the nation and the world are facing, it's not a healthy environment for growth. Ultimately, those global issues will affect everything, including South Florida real estate."