Annual commercial real estate report: great expectations: after two years of high vacancies and rent concessions, the South Florida commercial real estate markets appear ready for a rebound. How soon and how strong depends on he sector—and even more on the neighborhood. But the fundamentals, as they say, are looking good - Annual Commercial Real Estate Report

South Florida CEO, Sept, 2003 by J.P. Faber, Rochelle Broder-Singer

South Florida is not normally considered a conservative part of the country. Compared to more established metropolitan areas, South Florida is a brash upstart.

All the more surprising, then, that the area's commercial real estate markets are doing better than most in the nation, precisely because local developers have acted cautiously and not flooded South Florida with loads of new space during the last few years.

"There is some softness in certain product types in certain areas," says Clay Wilson, executive vice president of commercial real estate for BankUnited. "But my take on the commercial markets is that we are in balance relative to new construction."

That's not to say there is no new construction, or new growth. BankUnited, for one, has done $925 million worth of commercial lending in the last four years. It's just that new development is keeping pace--more or less, depending on the submarket--with demand. In BankUnited's case, their lending has tended to be greater in Broward and Palm Beach, where continued population growth has spawned demand for new commercial infrastructure.

"I can tell you that we learned some lessons from the early 1990s [real estate] debacle," agrees Robb Hilson, Bank of America's president for South Florida. "We are more selective now."

Having said that, there is little doubt that South Florida has been in the midst of a commercial real estate slowdown that began in early 2001. According to figures from Cushman & Wakefield, overall office vacancy rates across South Florida had shrunk to between 10 percent and 12 percent in late 2000. By the second quarter of this year those vacancies had reached the range of 17 percent to 20 percent. The pattern was similar for industrial space: according to Codina Realty Services, Miami-Dade's 5.9 percent vacancy rate in the first quarter of 2001 reached 8.8 percent by mid 2002, while Broward's vacancy rate went from 8 percent to 10.6 percent in the same period.

"In the last decade we've had considerable new office building development, and when tenant absorption was on the rise, all those projects were successful," says William Holly, president of Holly Real Estate. ,'What you're seeing now is the hangover of the last building cycle. The market slowed down while many buildings were still in progress."

The good news is that vacancy rates have changed little in the last year--actually going down slightly in some markets--largely because of slowing construction.

"I recently took a look at where we were a couple of years ago and where we are today, and what is very interesting to see is that the market has adjusted gracefully," says Terre Blanca de Ulloa, senior managing director for Cushman & Wakefield in South Florida. "The market has had some vacancy, but it's not been a devastating economic impact for South Florida."

The other good news is that leasing rates have slipped only slightly in the past year, for all types of commercial property. At the same time, the buying and selling of buildings has moved forward briskly, with price records being set in all sectors. "What has happened for some time has been a schizophrenic split between the lean conditions on the leasing side and the enormous appetite among investors for commercial real estate," says Ken Morris, president of Morris Southeast Group/CORFAC International. "The tenant demand isn't there to justify the prices at which these buildings have been purchased. It's driven instead by low interest rates and equities market flight."

The lack of new inventory has also impacted demand, notes Ezra Katz, chairman and CEO of real estate investment banking firm Aztec Group, which is currently marketing the SunTrust tower in downtown Miami. "There is a great deal of demand for investors to own major office buildings, but there are very few, if any, on the marketplace," he says. "Whenever something big comes on the market, there is almost a quasi-frenzy to buy it."

Katz and Blanca de Ulloa also agree that South Florida enjoys a unique advantage over other US markets, thanks to demand from Latin America. "I think we are in a relatively strong market," says Katz, "because we have so many factors outside the US economy that drive us, particularly the Central American and South American communities that we service." Says Blanca de Ulloa: "In the '80s, Latin Americans came and bought vacation homes, but did not look at South Florida as a permanent residence. Now they do. We've had a lot of small and medium businesses [established here] in the last 18 months."

All told, the consensus seems to be that South Florida has weathered the national commercial real estate slowdown rather well, with the worst behind us. How fast we will climb up the other side of the valley is a matter of opinion. In the meantime, how well any developer or landlord is doing depends on which neck of the woods they are in.

The Office Market: Global Impact vs. Local Demand

Miami Dade's largest office submarket is also one of its weakest: Airport West. There, a rush of new product poured onto the market in the late 1990s, when corporate America was enjoying robust expansion and trade levels with Latin America were soaring. The result: more than 10 million square feet of product, with an overall vacancy rate of 22.2 percent as of second quarter 2003.