South Florida Real Estate: Boom & Bust - Reflections on the Past and Realistic Perspectives on the Future
“On the residential side, when you have people who are driving a taxi cab and talking about the condo that they just bought and aren’t living in, you know that you are in a frothy environment."- Matthew Shore, Director of Acquisitions, DRA Advisors
“There is plenty of square footage to absorb and I think [office] vacancies are going to go up a bit, but overall the health [of real estate] in South Florida will be there long term."- Matthew Allen, Executive VP and COO, The Related Group
“There are a lot of great companies that were building one particular product over the last few years that ran into a very bad situation, a lot of great companies that aren’t going to be around anymore because of that."- Charles Bohl, Director, Masters in Real Estate Development and Urbanism, University of Miami
The fundamentals look good in many areas of the South Florida real estate market, but some sectors will continue to feel pressure in the near term from issues ranging from unemployment to tight credit markets and developer impact fees. That, according to many of the industry leaders participating in the April 2008 forum South Florida Real Estate: Boom and Bust – Reflections on the Past and Realistic Perspectives for the Future. The forum, sponsored by the University of Miami School of Business Administration, provided an opportunity for a frank and open discussion on the state of the South Florida real estate markets among many of the industry’s key players.
Participants included Matthew Allen, executive vice president and COO of The Related Group; Charles Bohl, director of the Masters in Real Estate Development and Urbanism program at the University of Miami School of Architecture; John Dellagloria, general counsel for the Community Development Agency of the City of Palm Bay, Fla.; Matthew Greer, CEO of the Carlisle Development Group; Andrea Heuson, professor of finance at the University of Miami School of Business; Manuel Lasaga, president and co-founder of Strategic Information Analysis Inc.; Julian Perez, a senior program manager and urban planner; Rafael “Ralph” Sanchez, president of Ponce Circle Developers LLC (developer of Old Spanish Village in Coral Gables, Fla.); Matthew Shore, director of acquisitions at DRA Advisors; Scott Sime, managing director at CB Richard Ellis; Richard Swerdlow, founder and CEO of Condo.com; and Clay Wilson, executive vice president of commercial real estate at BankUnited.
State of the Office, Industrial and Retail Sectors
“The fundamentals are strong in commercial real estate,” said Scott Sime of CB Richard Ellis in a presentation that opened the forum. “The economic drivers for the industry group are totally sound. The commercial sector, unlike a lot of the residential sector, is positive right now and as a result of that, we are seeing new development.”
Sime pointed to positive data in the office, industrial and retail sectors, noting both the office and industrial sectors are experiencing increasing rental rates along with decreasing vacancy rates. He pointed to Miami-Dade County’s office vacancy rate of 8.6 percent, the third lowest in the nation. Sime also noted that there is more than 4 million square feet of new office space planned for Miami-Dade including one new building in downtown Miami and two new buildings on Brickell Avenue. But Sime’s view was not unanimous in the panel discussion that followed.
“You know Scott has some very interesting data. But I’m not sure that I would build a brand new office building in South Florida today,” said Matthew Allen of The Related Group. “I think unemployment going up is a factor that you have to look at; you have to look at some of the downsizing that’s happening in the banking industry, the downturns in the real estate markets, where a lot of jobs are created here. There is plenty of square footage to absorb and I think [office] vacancies are going to go up a bit, but overall the health [of real estate] in South Florida will be there long term,” added Allen.
Sime believes the office market will remain strong, in part, because of the multinational companies that have offices in South Florida. He pointed to a recent study, conducted by the Beacon Council along with WorldCity Business magazine, and co-sponsored by CB Richard Ellis and the UM School of Business. The study found that the revenue generated from the 1,200 multinationals located in Dade, Broward and Palm Beach Counties tops $200 billion.
“To put that into perspective, the GDP for countries like Chile and Colombia is less than that. It is $161 billion in Chile and the Columbian GDP is $172 billion,” said Sime. “So South Florida, as a sole entity, represents revenue greater than some Latin American countries.”
As for the industrial sector in South Florida, Sime noted that the vacancy rate of 6.3 percent is also one of the lowest in the nation.
“The multinationals occupy office space, but they also occupy our warehouse space,” said Sime. “The cruise lines, the air cargo trade companies, and many of the Asian freight companies have set up shop here as their center point for distribution to Latin America.”
“Another interesting user of warehouse space is the perishable industry, the flower companies. Two-thirds of all fresh-cut flowers that come into the U.S. come through Miami International Airport. There are 75 companies that occupy warehouse space in and around the airport. They occupy 1.4 million square feet, so the perishable industry is important to Miami,” added Sime.
On the retail side, Sime believes Miami-Dade County is underserved, pointing both to the low vacancy rate of 3.3 percent and the fact that on a square-foot basis, South Florida is at 50 percent of the national average. Retail space makes up just 18 square feet per capita compared to around 36 square feet per capita nationally.
The Impact of the Weak Dollar
In a second presentation that opened the conference, Andrea Heuson of the University of Miami School of Business pointed to the declining dollar over the past year as putting pressure on both commercial and residential real estate.
“…the dollar lost 12.5 percent of its value versus the yuan and 15 percent of its value versus the euro, which puts a crimp in everybody’s plans,” Heuson said. “And that’s got to have an impact on foreign investment growth here in the real estate market, into commercial, into residential, into vacation real estate. And I think what we are seeing is that with foreign investment, the rate of increase has started to slow.”
Manuel Lasaga of Strategic Information Analysis raised even more concern about the dollar, predicting the worst is yet to come.
“I predicted two years ago that the dollar will reach $1.50 to $1.55 against the euro. Right now I think that there is a possibility the dollar will reach $1.70 to $1.75 against the euro, again, probably temporary,” said Lasaga. “And of course, the ticking time bomb is the Chinese yuan. After the Olympics and after the elections in the U.S., that time bomb will have to be let off, and believe me in irrational times, the most rational never act rationally. So that time bomb will go off, and the yuan will be revalued at 40 to 50 percent. Run that through your analysis.”
International Challenges and Opportunities
Lasaga also raised concerns about the impact of new security regulations on South Florida’s ability to attract and retain international business. He said that while Homeland Security is well-intentioned, it is “suffocating international business.” “It’s already done irreparable damage to the banking community in Miami,” said Lasaga. “International banking is basically closing accounts; they don’t care to open accounts. These investors that you are counting on may just lose sight of Miami and go to Europe and other locations.”
Despite the challenges, Lasaga is confident that South Florida will retain a competitive edge when it comes to international business. “…Miami, as was said by the other speakers, will continue to have a real competitive advantage in international business. We are the experts in moving goods to Latin America and to the rest of the world, and now Asia is becoming a dominant link in that trading pattern.”
Sime said there is clear evidence of South Florida’s international expertise. He said the international money coming into the region and the drivers of the economy are substantially different than they were even a few years ago, but South Florida has successfully adapted, which bodes well for the future.
“There was a time when we were dependent on Eastern Airlines, for example. Where Eastern went, is where our local economy was going,” said Sime. “Then shortly after that Venezuela became a very significant trading partner…We have matured as an economic engine. We are not dependent on one country [or] one industry…”
The Importance of Diversification
In the third and final presentation that opened the forum, Charles Bohl of the University of Miami School of Architecture, said a key issue that has hurt many in the real estate sector was their lack of diversification.
“There are a lot of great companies that were building one particular product over the last few years that ran into a very bad situation, a lot of great companies that aren’t going to be around anymore because of that,” said Bohl. “If you look at any industry, if you build just one single product all day long, year after year, you are not diverse and you are very vulnerable to any market fluctuations that impact that product.”
Matthew Shore of DRA Advisors agrees diversification is important. And he said his company does more than just diversify among product types.
“What my firm has done to distinguish itself is tried to diversify as much as possible,” said Shore. “We don’t just go into South Florida; we have assets all across the country. We have offices, we have retail, and we have multi-family properties.”
Shore blamed a lot of the problems in today’s real estate markets on the fact that many did not appreciate the differences between geographic markets. For example, he said investors were looking at investments in Miami and Tampa in the same way, expecting the same return, when in fact that does not make sense.
Bohl pointed to mixed-use development and building in different sectors as a good way for developers to reduce risk. He said mixed-use, which mixes retail space with office and/or residential space, is becoming an industry trend and is performing well. He pointed to a number of examples, including Columbus, Ohio’s Easton Town Center, which has a big retail component and urban residential next door. Another example is Orenco Station in Portland, Oregon.
“Orenco Station town center has lofts above restaurants and retail and there was no such residential product in the market…and these have done very well, as have a lot of these urban housing types,” said Bohl. “In a lot of these cases there simply was nothing to compete with them, and they were all able to come in at a pretty high end of the market because of that.”
Adapting to Market Changes
Bohl said it is important for developers to understand how markets have changed, and then respond to those changes in order to be successful. He pointed to the aging baby boomer population as having significant implications, especially on the housing market.
“Demographics change, costs change, other policies change, and therefore our paradigms have to change with that,” said Bohl. “If we just base future development on what has sold in the past, taking a "rear-view mirror" approach to development, we are going to have trouble.”
“Mr. Bohl’s presentation is almost exactly what we have done,” noted Raphael Sanchez of Ponce Circle Developers, the firm behind the Old Spanish Village project just south of Miracle Mile in Coral Gables. He reflected on real estate’s troubled times of the past, noting that the industry has always recovered by adapting to changing times, as his company has with the Coral Gables project.
“My perspective on the future is yes, we have some bumps on the road, but we are able to overcome those [bumps],” said Sanchez. “You have to learn to adapt.”
The Old Spanish Village project is an example of the mixed-use development cited by Bohl. It includes town homes, condominium units in a mid-rise building and retail space. Sanchez explained that his firm has changed the project since it was started four years ago because of changing market patterns.
“The desires of buyers that we saw four years ago were units of around 1,200 to 1,400 square feet. Now they want a lot more square footage,” said Sanchez. “So we started to redesign our units, combining units and cutting the density from 400 plus [units] and we are now just below 200.”
Outlook for the Future
Sanchez, like many on the panel, is optimistic about the future. He shared evidence that the commercial sector is especially strong, at least from where he is sitting.
“Commercial, like Scott said, we don’t even push it [because] they knock your door down,” said Sanchez. “Right now we have someone who has given us a deposit for about 7,000 square feet for $750 per square foot. So those are big numbers. Location, location, location.”
“…on the commercial side, as Rafael mentioned, there are aspects to real estate that are doing well,” added Shore. “That is the key point and why we are still investing, and we are doing a project right now and we’ve been doing projects, and we are expecting a strong year.”
Most of the panelists agreed that the residential market faces lingering challenges, ranging from too much inventory to affordability. Matthew Greer of the Carlisle Development Group noted that the median income for a family of four in Miami is $45,000.
“We heard that half of [the entire] infrastructure, half of all the housing and buildings built by 2030 is going to be built between now and then,” said Greer. “I query who is going to pay for that? If people are getting poorer and they are getting hit with more and more aggressive taxes, how are they going to afford new construction, which for me has tripled in the last six years on a per-square-foot basis.”
The difficulty in obtaining financing was also cited as a key challenge in the residential market. Allen noted that banks had been lending 80 to 100 percent on a mortgage. And while he indicated that may have been too much, today it’s gone the other way.
“Well now they are not even lending 70 or 80 percent, and people who have decent credit can’t get a mortgage,” said Allen. “I think it is going to take a little bit longer to clear itself up and I agree we have not seen the worst locally on the residential side.”
Richard Swerdlow, who runs Condo.com, a Web site that helps developers, builders, brokers, financial institutions and others sell or rent their condos, lofts and town homes, agreed that financing is a big problem.
“The biggest problem we see is if people are coming to the site and finding things that they want to buy, they can’t get financed, even if they are willing to put up 50 percent,” said Swerdlow. “A lot of financial institutions, a couple of them, issue black lists of these condos.”
Other general industry challenges cited by the group include declining infrastructure, South Florida’s water supply and the statewide property tax cut initiatives, which many believe will lead to higher impact fees for developers.
“In the 1980s, a lot of us were saying ‘come and build it – water will never be a problem in South Florida,’” said Julian Perez. “Well, folks, water is a problem in South Florida, like it or not, it’s a very, very, very serious problem.”
“The recent tax constitutional provision that passed and the upcoming one, are going to devastate the municipalities and the counties,” said John Dellagloria, general counsel to the Community Redevelopment Agency in Palm Bay, Fla. “In North Miami, where I was the city attorney, the city is now contemplating an impact fee ordinance which would raise the cost of building a single family home by $12,000. That is an impossible situation.”
Despite the present challenges, most of the panelists agree that the long-term outlook for South Florida is good. Swerdlow noted that Condo.com has 29,000 condo listings in Miami-Dade alone and expects 15,000 to 20,000 new listings to come up in the next two years. Despite the inventory and the financing issues, he’s optimistic.
“…we are very bullish on what can happen in South Florida and we believe that all things can get absorbed based on the things we are seeing on the site,” said Swerdlow. “We see month after month, increased traffic, people looking, people generating leads and people thinking there is a bargain here somewhere because they keep hearing the media say how bad things are and it’s a buyer’s market.”
“Aside from the fact that the population growth has been significant and it’s been the top five in the country in population growth, you have baby boomers who are retiring, you have weather that is still great, and you have natural barriers – the Everglades and the ocean,” added Shore. “There is only so much land [on which] you have to build.”