The outlook for real estate markets in Florida continued to improve in the first quarter. UF’s Commercial Real Estate Sentiment Index, an outlook on our respondents’ own businesses, increased for the second consecutive quarter to its highest level since the third quarter of 2007. Respondents’ outlook reflects the improving economic picture in Florida, particularly in employment growth.
Florida’s seasonally adjusted unemployment rate dropped almost a full percentage point in the first quarter, from 9.9% in December to 9% in March. Despite losing approximately 21,000 people from the labor force, the state added almost 66,000 jobs over the quarter. Additionally, the job growth was widespread with unemployment dropping in each of the major markets over the quarter. Continued improvement in employment is raising expectations among respondents on occupancy and rental levels in every property type.
In addition to improvements in employment, respondents commented that capital markets improved with banks becoming more active over the past quarter. This represents a shift from previous quarters, which is corroborated by our lenders’ own business outlook. The lenders sentiment reached its highest level since the first quarter of 2007, reflecting an improving lending environment.
The improving economic conditions are having a positive effect on property fundamentals. Respondents indicate that occupancy and rents are improving in almost every asset class. The largest increase in occupancy expectations is in the office market where respondents’ expectations for Class A space increased to a survey high. With an improving employment outlook respondents believe that occupancy will increase over the next year.
Despite the increased optimism and improving economy, respondents remained concerned about risks posed by the presidential elections and the state of the federal government’s fiscal condition. Most believe that meaningful policy will not be passed prior to the November elections. Unfortunately, several key issues need to be resolved prior to the end of the year without risking severe economic consequences, including the expiration of the Bush era tax cuts, expiration of the payroll tax break and the implementation of the $1.2 trillion in automatic, across the board spending cuts that kick in starting at the beginning of 2013. In addition to these issues, respondents remain concerned over
artificially low interest rates and the effect of inflation over the next few years. Increased gas prices and their impact on other goods is already having an impact on Floridians as evidenced by the consumer confidence survey conducted by the University of Florida Bureau of Economic and Business Research which has declined over the past three months in light of higher gas prices.
Overall the future is looking brighter for Florida real estate, however uncertainty remains. Expect a continued slow and sometimes sluggish recovery until after the presidential elections in November.
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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