Commercial real estate roundtable; With a group, of the region's top commercial property owners, developers and brokers around one table, SouthFloridaCEO probed for the state of the industry: where the money is going, where it is not—and who has the most to gain

South Florida CEO, Sept, 2005

SouthFloridaCEO: I want to hear from you all who have either developments or investments or have business in Broward County. What are you watching and what are you looking at right now?

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Donald B. Cartwright: One of the things that we've seen is that Broward County, Fort Lauderdale in particular, has been very, very high on most economists' lists as far as job growth is concerned, so that has attracted a ton of interest from investors. That being said, the office occupancy, particularly, while it's certainly improving, I think overall is still not quite caught up. You would think the demand would be much greater. As far as various sub-markets, the I-75 corridor is very attractive. You've seen more new development occurring between Plantation and Miramar than any other area in Broward County from my perspective, and it's been leasing well.

Kenneth E. Morris: I don't think it's shocking that much of the development is concentrated around the corridor, because the population is there. But I'm still getting effectively the same [rent] rates that I did 15 years ago in Plantation.

Duane J. Stiller: Well, I'll contrast from the retail side. At Woolbright, we're now acquiring a billion dollars a year in retail projects in Florida's metro areas. Our Broward projects have been experiencing, from the retail side, double-digit growth.

Right now in the retail segment in Florida, there's a consolidation going on. REITs are buying 10 times what they're selling. This is getting to be a business where billion-plus-dollar firms are going to dominate the industry because we have the economies of scale to do that.

But back to Broward. Two of the centers we own in Broward are on A1A. Who's investing in A1A? I mean it looks like a pretty good spot for shopping centers--there are towers coming up everywhere around us, people are shifting to be year-round residents, so our population is exploding east of I-95. Along the ocean we have had as much as a 50 percent increase in rent. Why? Because our dry-cleaner can pay 10 percent of the sales volume in the form of rent and still make a great profit. That sales volume has gone through the roof as the population [has], and there's no opportunities for new dry-cleaners to come in.

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So the infill world--now the question gets to be: In places like A1A, what do you do?

Stiller: [answering himself] You'll see more and more vertical development. What we're seeing in Broward on the retail side is tremendous demand in the infill areas, tremendous rent growth, essentially no vacancy.

Steven E. McCraney: What kind of rent growth are you seeing?

Stiller: I'm seeing double digit on the year-in, year-out, but I've given you some examples where we could raise rents 20 percent. We could raise rents essentially [at the rates at which] the prices for houses are going up, and we're still 100 percent leased.

Cartwright: I'd like to go back to your comment about rent growth. Office net rents and office space, basically, have been staggering for 15 to 20 years. Office tenants don't realize the bargain they've had. I mean, you'll renew a lease today and they still think that they're paying a lot of rent.

McCraney: And they want free rent.

Cartwright: They're still used to concessions, but, you know, operating expenses have increased dramatically, the cost of construction has increased dramatically--every other benchmark has gone up.

McCraney: Don, what kind of margins are you seeing for landlords? What kind of returns are you seeing?

Cartwright: On new acquisitions, cap rates [the expected income from a property's leases relative to its purchase price] are at historic lows. They're coming down.

Stiller: Property [prices] are inflated by 15 percent.

William R. Holly: Not only have cap rates been compressed because of cheap debt, but also because people look at it--especially the larger money players--and they're saying, "Look, where construction costs are today, I know rents are going to move." So they're buying in anticipation that it moves, which they haven't really done in the past.

Cartwright: You know, after 2000, we had a lot of fall out, business failure, etc. But as the supply starts to tighten, and it will, that's the opportunity to raise the rents.

Morris: But we're not there yet. And it's going to take some time. Retail, you're spoiled. Retail is on fire. On the office side, it's different. But let's talk about the cap rate phenomenon across all property classes. I think, No. 1, it's a function of chasing returns. The stock market's not giving any real returns right now, so institutional money is looking for someplace to park. So they're saying, "Hey, I'll take a 6 percent return. That's a lot better than taking a zero return or a negative return." There's a lot of capital flowing into South Florida. A lot of capital that I facetiously call suitcase money, but in essence, those investors are saying, "I got to get my money out of my own country before it devalues, and I've got to buy something here in America, and even if I'm overpaying, I'll be OK." That provides upward pressure on pricing.