Remarks by Scott Sime

Managing Director
CB Richard Ellis



                     
We have a lot to be proud of in the tri-county market, in Dade, Broward, and Palm Beach counties. 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, particularly in the office sector and in the retail sector. The fundamentals are strong in commercial real estate.

View Presentation (PDF)

State of the Office Sector

Miami is the 29th largest office market in the country. Broward County is the 43rd and Palm Beach County is the 46th largest office market in the United States. The South Florida market combined has a vacancy factor of 11.4 percent. Miami-Dade’s 8.6 percent vacancy factor is the third lowest in the nation, so the office market is strong. You are going to see on the next graph (SLIDE 3) how the trends of rental rate increase and vacancy decrease warrant new development in the market. The other significant factor on this graph is the 4.1 million square feet of new office projects that are planned for Miami-Dade County. That is over 10 percent of the overall market.

Fundamentals Look Good

One might ask “Why are we developing now?” Well, the fundamentals of being in the office sector are positive. If you compare the 4.2 million square feet in the fourth column over new construction planned for Miami-Dade County, that’s on par with Chicago which is a substantially larger office market. Chicago has 121 billion square feet of office product, but we added 4.3 million square feet. Boston is the fifth largest office market in the country, Chicago is the third, Los Angeles is the fourth, and New York City is the largest office market in the U.S. What are the drivers? Who are some of the tenants in the market? We track active tenants in the market.

In Miami-Dade County we’re tracking 1,432,000 square feet of active tenants in the market. Law firms represent about 32 percent of those active tenants in the market, financial institutions – bank, life [insurance] companies – represent another 13 percent, and then finally the entertainment sector – companies like Sony BMG, take up space in the Mayfair. For law firms, there’s not been a large office deal done in Miami-Dade County in a long time, but we are happy to report that Bilzin Sumberg recently executed about a 115,000 square-foot lease at one of the new buildings being developed at Brickell Financial Centre. Three new buildings, two on Brickell and one downtown, consummate 2.2 million square feet of new office product.

Increasing Rental Rates and Decreasing Vacancy Rates

If you look at this graph (SLIDE 3) this is the tri-county summary of where rental rates have grown since 1999. The thin lines represent the vacancy factor, as you can see, the downward trend in Dade and Broward.  Palm Beach has not fared as well. It’s a little softer in Palm Beach in the office market. But the combination of the increasing rental rates which is the bar graph, and the decrease in vacancy rates, makes a perfect mix for new development. So consequently, we go back to that four-plus million square feet of office space that is coming online. If you are an investor and you want to know how you would have performed if you had invested in an office building in the tri-county market, this graph (SLIDE 4) will show you the price per square foot on average, the appreciation of the beginning of 2002 to 2007. In just rough numbers, if you look at the percent return on the past investment beginning in 2002 and selling in 2007, you would see a 34 percent return on your equity. This is an unlevered not a leverage –type of vehicle to sustain cash through the asset. That is 7 percent annualized growth per year. If you were to invest in 2005, over a two-year run, you would have had an annualized 26.5 percent return from 2005-2007. This $247 per square foot, although it is substantially higher than the pricing in 2004 and 2005 relative to cities like New York where there is a recorded sale recently of $1200  per square foot, I would propose shows that we are still in a growth market and that there is still room for these numbers to move. Although some of the sales that have taken place in Coral Gables and on Brickell Key have approached $400 to $500 a square foot, those would be the higher end sales. Again, $247 is an average.

The Impact of Multi-National Firms in South Florida

So who’s in our market, where is the money coming from, and what kinds of tenants occupy our space? I know many of us have heard the term “South Florida is the gateway and the capital of Latin America.” I’ve been in the business 22 years and I have heard that almost every year since I started in South Florida real estate, but no one really put a number behind that, and it was a great phrase. That is until this past year, when a study was conducted by the Beacon Council, along with WorldCity Business magazine, and sponsored by CB Richard Ellis. The study found that when you take the revenue generated from the 1,200 multi-national firms that have their offices in Dade, Broward, Palm Beach Counties and you add the revenue from these multi-nationals, you come with $202 billion in revenue. 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. So South Florida as a sole entity represents revenue greater than some Latin American countries.

The graph on the bottom (SLIDE 5) shows in some detail who is here. It is interesting to see the bulk of the highest percentage - 30 percent - are European countries. Latin America is No. 2, behind European groups. In the European groups, the U.K. represents 12 percent of our occupants in South Florida. This graph symbolizes new multi-nationals entering into the South Florida market. But if you forget the graph and go back to 1958 and 1961, the Cuban revolution, there was a migration to South Florida. You can also see the effects from the U.S. Free Trade Agreement, and you can see where in the height of the dot com era we had many new starts. After 9/11 there was a drop in new multi-nationals setting up business here.

The State of the Industrial Market

The fundamentals of the industrial [market] are also very strong and very favorable. The vacancy rate, 6.3 percent, is one of the leading vacancy rates in the U.S. Very few markets have that low of a vacancy factor. One of the drivers is who is occupying industrial warehouse space. The multi-nationals occupy office space, but they also occupy our warehouse space. 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. Companies like Himatsu and Toyota Latin America will set up their headquarters here, bringing their inventories into South Florida as their staging point or off-loading point to Latin America, and they are all occupiers of industrial warehouse space.

The two-way trade numbers that are fourth have gone up year after year and we are happy to report that they were up again in 2007. The top five trading partners are Brazil, Venezuela, Colombia, the Dominican Republic, and China. China is moving up on that list. 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. The biotech and life sciences industries are very significant users of industrial space in the Palm Beach market.

Increasing Rental Rates and Decreasing Vacancy Rates

This graph (SLIDE 8) mirrors the office market. We have decreasing vacancy factors, and increasing rental rates. We did have an increase in the vacancy rates right after the hurricanes. Right after 2005 we saw some firms move north as some companies elected to move out of South Florida into the Orlando area, where the rates were less expensive and they were less vulnerable to hurricanes. Again, if you had invested in the industrial market in 2002 and you sold in 2007 you would have had an annualized 11.66 percent return on your money. That is a 58 percent gross return. If you would have invested in the last two years, you would have a 7.5 percent annualized return. The industrial market, again, has been a good place to be.

The State of the Retail Market

There are 5.5 million people living in South Florida. One-third of the entire population of Florida resides in South Florida – in Dade, Broward, and Palm Beach Counties. However, these three counties occupy 7 percent of the total land in the state of Florida. These odds speak to the density of South Florida. We are a very dense region in South Florida. The retail vacancy rates are the lowest in the nation. Miami is at 3.3 percent. You are going to hear from some other presenters about vertical retail. We are running out of land. Miami-Dade County is underserved from a retail perspective. Per square foot basis, we are 50 percent of the national average. We occupy about 18 feet per capita; the national average is around 36 square feet per capita. You will see that we are under-served and you are going to see on the next slide (SLIDE 12), the returns on the retail sector. Actually, this is a mirror image, but more pronounced and more favorable.

Other factors affecting the retail sector are the 30.7 million visitors in the South Florida region, and these numbers continue to grow. These people are international visitors who stay overnight and with the weakness of the dollar, they are spending more. This bodes well for all sectors of real estate, but particularly the retail sector.

An investment over a five-year period from 2002 to 2007 yields the highest percentage return: 102 percent over that time period, which was a 20 percent annualized return. And then again, that is unleveraged, not placing any type of debt on this investment, this is a straight cash investment. Had it been leveraged, the return would have been substantially higher. If someone had invested in 2005, and sold in 2007 they would have received a 34 percent return, almost 72 percent per annum.

This is a population graph (SLIDE 13), just showing the consistency of the population growth in the tri-county market. Again, population growth is the driver of retail.  This graph simply shows the limited supply of retail and as the population grows, the growth of the available retail product is really not growing at the rate of normalized circumstances.

Changes in the South Florida Market

In conclusion, the international money that is coming into this town and the drivers of the economy in South Florida are substantially different than they were even a few years ago. There was a time when we were dependent upon an Eastern Airlines, for example. Where Eastern went, is where our local economy was going. Then shortly after that Venezuela became a very significant trading partner. We were dependent upon Venezuela for many reasons. We have matured as an economic engine. We are not dependent on one country, one industry, we have seen industries come and go. We’ve seen countries have their ups and downs but South Florida continues to do well. The commercial market is strong. We have had an increase in visitors. The amount of money being spent by these visitors has increased.

The residential housing – you’re going to hear a lot about that today. That is both a positive and negative that’s being perceived by many as too costly for major corporations to come in. We’re going to hear about the realtor’s problem in the condo sector, and how that is going to change potentially.

Outlook for the Future

Life science sector – the UM has plans for a 1.4 million-square-foot life science project, just east of the Jackson Memorial complex. This is one of the most exciting happening that I’m aware of for Miami-Dade County. We did some research that shows the impact on the local community. Consumers are going to have disposable income and that’s going to have significant impact on the real estate sector.

Retail housing, that’s going to be a new economic driver in Miami-Dade that is going to change the landscape significantly. So keep your eyes on that. Our cultural infrastructure – the language that this embedded labor force is very unique and desirable. You are going to hear about sustainable building. The building I mentioned, Brickell Financial Center, is 600,000 square feet on Brickell Avenue, which is the first pre-certified silver LEED building in South Florida. And again, import-export business continues to be strong.

Some of the challenges are the public school system, skilled work force, traffic, and transportation. We have the 15th largest public transportation system in the U.S. But 13 percent of our people use it. I think that we will hear from some of our other speakers about how public transportation, and increases in energy costs, and through the desire, like that show Cheers, you know “where everybody knows your name”, there is this social interaction component that is missing down here. Those three factors are going to drive business back to the central business districts, back to areas like Brickell, where you can work, live and play. We are going to see a migration back to the inner city. In South Florida there is a scarcity in land. If you look at it geographically, to the east we have Biscayne Bay, to the west we have the Everglades, and we are holding the line as far as development. The reality is that there is a scarcity of land in South Florida, so again those three factors will force people back into the city.