By most accounts, the US economy has emerged from recession and many agree that the economy will start growing slowly over the next several quarters. Unfortunately, according to the Federal Reserve Beige Book, commercial real estate is the weakest sector of the economy in most markets. Our respondents appear to agree with the Fed and indicate in this quarter's survey that several factors will hinder the recovery in real estate markets in Florida including capital availability and unemployment. In fact, the real estate markets in Florida can be categorized by one term, uncertainty. As one respondent stated, "uncertainty is the most dangerous market condition delaying recovery." Unemployment continues to rise in Florida which now has a seasonally adjusted unemployment rate of 11% as of the end of the third quarter. That is the highest recorded rate since 1975. The uncertainty in the job market will continue to put pressure on real estate markets, both commercial and residential.
Another factor looming large in the real estate markets is the continued turmoil in the capital markets. On the positive side, our respondents indicate that they are seeing an increase in private capital entering the marketplace particularly from foreign sources. Continued weakening of the dollar should increase the foreign investment as they can buy more with their funds. Additionally, financially sound community lenders are increasing their appetite for commercial lending opportunities. On the negative side, the large banks continue to be reluctant to lend and when they are the terms are very conservative. Adding to the uncertainty is the cloud of foreclosures in the commercial real estate markets. Banks have been slow to bring REO to market and there continues to be a large gap in bid/ask between distressed debt investors and the banks. Additionally, no one is certain about how the CMBS refinancing risk is going to play out. All of these factors continue to cause our respondents to
be skeptical of the current state of the real estate markets.
Highlights
The general investment outlook for Florida real estate continues to be a volatile measure but remains mixed.
Expectations for single family residential absorption remain positive in light of low interest rates and government incentives.
The investment outlook for is mixed for all property types but increased this quarter in industrial properties.
The outlook for rental rates continues to be negative across all property types.
The outlook for occupancy is mixed over the property types with most expecting no change. However, there continues to be negative pressure on retail and office properties.
Cap rates continued to increase over most property types this quarter with an outlook of continued increases.
The Survey of Emerging Market Conditions targets the experienced leadership and professionals of Florida's real estate development and investment community to gain insights and market intelligence on matters of fundamental importance to real estate practitioners and policy-makers across Florida.
The Survey of Emerging Market Conditions is the only Florida-centered survey of leaders and professional advisors in the real estate industry. It analyzes prospective data to produce extensive forecasting information pertinent to 37 of the state's 67 counties. The survey is administered by the Bergstrom Center for Real Estate Studies at the University of Florida.
With the highly fragmented nature of real estate, no survey can encompass all aspects of the real estate industry. To face this challenge, the Survey of Emerging Market Conditions employs a quarterly sounding from multiple groups of market leaders and professional groups advising them.
It is important to understand the unique strengths and limitations of the Survey of Emerging Market Conditions.
Like virtually all surveys of investment real estate markets, this survey gathers opinion. Thus, it distills complex judgments, and amounts to a carefully controlled and structured conversation with truly qualified real estate experts. The survey asks questions carefully designed to avoid ambiguities, a major problem in collecting complex information.
The survey screens respondents at two levels of refinement to assure truly expert opinions. First, only persons with established real estate credentials are invited to participate. Second, each respondent is asked to respond only for those localities and property types where he or she is an active expert.
The result is that all the data collected can be regarded as authoritative, no matter how small the sample of responses for a property type-locality "cell." (We maintain a minimum of at least four respondents for any market cell to guard against response mistakes.) In short, even data from the least actively covered markets that we report have value as an additional expert opinion. In the more actively reported market cells, our data represent an extraordinary consensus of the experts.
Survey results are anecdotal findings about required returns and investment objectives of owners and investors contemplating acquisitions or deciding about the timing of dispositions. Therefore the survey is a measure of current and prospective market perceptions, including the confidence levels exhibited by leading real estate professionals and market participants. In other words, the Survey of Emerging Market Conditions is a report of anticipated returns, business outlook and other forecasting views, rather than an analysis of actual or historical performance. The most valuable benefit for many may be interpretation of survey results over time to better comprehend market trends and shifts.
Cap Rates: Capitalization rates are the ratio of expected net operating income to actual transaction price. It is regarded as important that cap rates be based on actual transaction price rather than an appraised value.
Yield: For the Survey of Emerging Market Conditions, yield is before income taxes (pre-tax), and without debt financing (unlevered). It is the rate of interest that discounts all future property cash flows back to a present value equal to the original equity investment (acquisition cost).
Absorption Rates: Refers to the number of additional units of housing, office space, etc. that can be sold or leased in a given market area over a given period of time. For the purposes of the Survey of Emerging Market Conditions, the exact time interval, market area and measure of units are not of concern. Respondents are asked only to comment on the direction of change in the absorption rate.
Occupancy Rate: Two notions of occupancy rate are the percentage of a building's leaseable space that is occupied and the percentage of a building's leaseable space that is under lease. (Note that some leased space may not be occupied.) For the purposes of the Survey of Emerging Market Conditions either notion is acceptable since we are asking about direction of change in occupancy rather than levels of occupancy.
Rental Rate: The meaning of rental rate is extremely complex. In residential, it can include furnishings and utilities, or it can be net of all furnishings and utilities. With commercial property it can range from full gross rent, including janitorial services to "triple net," which excludes all operating expenses. Fortunately, for the Survey of Emerging Market Conditions this variation is a minimal issue. The survey asks respondents only about the qualitative direction of change in rental rates, however defined. Generally, the direction of change will not depend on the definition of rent.
Property: A property is an individual asset that may include one or a collection of buildings (e.g., a business park or apartment complex). Parks, complexes, and neighboring buildings are considered one property.
The Survey of Emerging Market Conditions covers five broad property types: residential (single family, condominium and apartments), office, flex/industrial, retail and hospitality. Each property type is further divided into two or more sub-types.
Industrial: Primarily for industrial use, such as distribution, manufacturing or warehouse facilities. Flex refers to properties with a mix of office and industrial uses. Usually a single story, Flex space may be research facilities, technology/telecom facilities, or similar uses.
Office: Primarily used for office space. Office properties may have a small retail component (especially in CBDs on the street level), or a parking garage, or other attached uses.
Apartments: Includes all rental residential properties with more than four units.
Single Family: Includes single family detached, individually owned residences in structures with up to four units, and individually owned townhouses.
Condominiums: For the Survey of Emerging Market Conditions, includes all individually owned residences in structures with more than four units, and with facilities owned in common. Note that this excludes many townhouses.
Retail: The Survey of Emerging Market Conditions utilizes the ICSC's definitions of retail assets as either shopping centers (strip or enclosed malls) or free-standing stores.
Condo Conversion: Property that was purchased with intent of converting individual units to condominium ownership.
The Survey of Emerging Market Conditions aggregates 37 of Florida's 67 counties into the top 13 Florida markets. Counties comprising each major Florida market as follows:
Miami-Dade County
Broward County
Palm Beach County
Treasure Coast (Indian River, Martin & St. Lucie Counties)
Southwest Coast - Southwest Florida area (Charlotte, Lee & Collier Counties)
East Central Coast - Daytona Beach, Melbourne-Titusville-Palm Bay (Volusia & Brevard Counties)
Orlando - Central Florida area (Seminole, Osceola, Lake & Orange Counties)
Lakeland-Winter Haven (Polk County)
Tampa-St. Petersburg - Tampa Bay area (Hillsborough, Pasco, Hernando & Pinellas Counties)
Lead Researcher and Analyst: Dr. Wayne R. Archer, Director
University of Florida Bergstrom Center for Real Estate Studies
Professor of Real Estate and Wachovia Fellow,
Warrington College of Business Administration
Survey Research Analyst & Designer:
Scott Richards, M.A., Research Analyst,
UF Bureau of Economic & Business Research
Survey Website Design & Support:
ITSP Web, Data & Communication Services,
Warrington College of Business Administration
Graduate Student Production Assistants:
Ben Scheick, PhD student
Patrick Boileau, MSRE Class of 2007
Dan Carlson, MSRE Class of 2007
UF Real Estate Survey Podcast
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