CB Richard Ellis Reports Miami Commercial Real Estate Market Dynamics

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(News Source: CB Richard Ellis)

(MIAMI, FL) -- CB Richard Ellis (NYSE:CBG) reports that Miami continues to be one of the most dynamic real estate markets in Florida. With a high density population, diversified economy, a natural barrier to entry, Latin American influence, and access to two of the most active ports in the United States, Miami's fundamentals help it to weather the economic storm better than other markets in the state of Florida.


Leasing Markets

Office Properties - The Miami office market remains relatively healthy compared to the rest of the nation. At the end of 2008, the vacancy rate was 10.8 percent, placing Miami with the fifth lowest overall vacancy rate in the United States. With many Latin American operations and typical tenant sizes for domestic regional operations in the 10,000 to 25,000 sq. ft. range (relatively small compared to markets like New York), Miami's market has not seen the same amount of downsizing on office space from the economic downturn as other markets across Florida.

Notwithstanding, vacancy rate increases over the past year, direct asking lease rates have increased by $1.74 per sq. ft. Class A space has seen the greatest increase, with $2.34 per sq. ft. This can be attributed to prime buildings in key submarkets, such as Brickell, Downtown Miami, and Coral Gables, placing more space on the market in the latter part of 2008, but not lowering asking lease rates.

Landlords and tenants are closely monitoring the market's pulse as a shift from the past several years of a landlord's market has turned to a tenant's market. Tenants are reluctant to move to new locations while the market is in flux and landlords are hoping to keep tenants in place. As a result, concessions have returned to the market in the form of tenant improvements, free rent, and moving costs. With construction on more than 3 million sq. ft. due to be delivered over the next 24 months and a still uncertain economic environment, vacancy rates will increase over the short term. Miami, however, has a resilient office market with strong fundamentals that will ensure long term vitality.

Industrial Properties - The Miami-Dade industrial market, while it benefits from foreign trade, is not immune to the economic downturn and saw vacancy increase 2 percentage points from last year to 8 percent, prompting landlords to decrease overall average asking lease rates by 5 percent over the same time period. Landlords looking to attract or retain tenants increased concessions and incentives. Speculative development decreased by nearly a third compared to 2007 as supply outpaced demand. This was evidenced by the 4.7 million sq. ft. of negative absorption in 2008.

While sales and leasing activity decreased by over 50 percent from 2007, some significant transactions did close in 2008. Access to a skilled labor pool and proximity to the Port of Miami and Miami International Airport lured companies to industrial real estate in Miami.

Paper wholesaler LagasseSweet signed the market's largest lease transaction of the year and will move from its Hialeah location to Medley upon completion of their new property.

Other corporations confirmed their confidence in Miami with expansion and re-investment in the market in 2008. Among these corporations were NNR Global Logistics, Goya Foods, Gold Coast Beverage, Hyundai Mobis, Ingram Micro and Iberia World Foods.

Despite the tumultuous 2008, the future for the Miami industrial market is poised for a strong rebound. Miami's industrial real estate market will depend on its fundamentals as the gateway to Latin America to bring the market through difficult economic times.

Retail Properties - Miami's retail market felt the effects of an economy in which consumer demand dropped significantly in 2008. According to a Commerce Department report, consumer spending fell to its lowest level in 47 years. The result was an increase in vacancy of 2.4 percentage points to 5.6 percent, a 5.5 percent decrease in asking lease rates to $28.16 per sq. ft. NNN, construction dropped by 70 percent to 637,738 sq. ft., and 172,929 sq. ft. of negative absorption since their 2007 recorded rates.

National chains Linens 'n Things and Circuit City exemplify the struggles facing the retail market as both have closed their doors in 2009. Midtown Miami, a 630,000-sq.-ft., mixed-use power/lifestyle center completed in 2007, boasted both as anchor tenants, but are now marketing the vacated spaces.

Midtown and other vacated retail spaces will cause a glut of available space, leaving landlords in precarious situations as they face the challenge of filling their vacancies with credible tenants. In some cases lease rates have dropped by 30 percent from their peak levels in 2006. In addition to filling the available big-box space, landlords are faced with their smaller tenants exercising co-tenancy clauses as they are asking for increased tenant allowances and concessions, such as free rent.


Investment Properties

Miami-Dade investment activity was down significantly in 2008 mainly due to buyer and seller pricing and value discrepancies. The credit crunch and re-pricing of the risk reward scale have led to asset depreciation of approximately 15 to 30 percent off their peak levels in 2007. Many owners chose not to trade at the depreciated asset values, or were not willing to lower pricing expectations to those of buyers, leading to a stagnant and inactive transaction environment. Buyers are now demanding lower risk investments or higher risk premiums leading to higher initial return requirements, or an increase in cap rates. When coupled with revenue decreases, "double" value depreciation occurred during 2008. Investors have struggled to procure financing in the wake of the credit crunch as they are being asked to come up with 35 to 45 percent equity as opposed to two years ago when 10 to 20 was percent sufficient. These discrepancies shelved deals as the market saw sales transactions drop by over 50 percent with the majority of the deals being purchased by users.

Due to the lack of available land and high costs of construction, limited new development will occur in Miami and what is already a tight market will become constrained once the economy recovers and demand increases. Lack of available financing continues to be a challenge for investors. However, as the credit markets thaw and pricing corrections complete, there will likely be pent up demand for product causing key pieces to trade towards the middle of 2009 and through 2010. Market professionals project that values will find the trough by mid to late 2009 and values will trade sideways, kept low by distressed assets brought to the market.

Office Investments - Forty-two properties traded in 2008 for a total transaction volume of $1.4 billion, a decrease of 36 percent from 2007. Activity decreased as well as the average price per square foot, decreasing by 0.6 percent to $257. Some of the limited activity that occurred involved the transfer of several trophy properties in Miami-Dade County's CBD. 1401 Brickell Avenue sold for $114 million, or $606 per sq. ft. The transaction between the seller, Spanish bank Testa Inmuebles en Renta, and the buyer, Spanish bank Banco Santander, set a record for price per square foot in an all cash transaction.

With the decrease in property revenues and cap rate increases ranging from 50 to 200 basis points or greater, asset values for non-core office properties dropped in some instances in excess of 30 percent. Market professionals forecast 2009's pool of investors to shift in profile as the traditional players have been hurt by mark-to-market accounting, maturing debt, lack of capital and an over-allocation of real estate in their portfolios. While the traditional players will remain in the market, it is forecasted that private REITs and foreign investors will claim a larger market share in 2009 as their structures and cash heavy balance sheets will allow them to acquire key assets at opportunistic prices.

Industrial Investments - Sales transactions for investment properties declined by over 50 percent in 2008 compared to the previous year. With $262 million in transaction volume, the market saw a drop in sales by dollar volume of 62 percent. The price per square foot increased by 11.3 percent to $89, carried mostly by user sales and industrial/flex assets trading in 2008. Gold Coast Beverage's purchase of the 328,000 sq. ft., former Dole Fresh Flowers headquarters in the Airport West submarket for $32.5 million was an example of a user/buyer paying a higher price to purchase a quality property, resulting in a higher purchase price for the property in a declining market. Investment values dropped approximately 10 to 30 percent from their 2007 peaks, caused mostly by cap rate increases and property revenue decreases. Pension funds and other institutional investors remained on the sidelines waiting for seller pricing to drop to financeable levels and adequate returns. In 2008, vacancy climbed to 8 percent, with negative absorption of 4.7 million sq. ft., causing lease rate decreases of upwards of 20 percent in softer submarkets.

Cap rates changed dramatically throughout 2008.Investment grade industrial properties traded at cap rates as low as 6.75 percent towards the beginning of the year but expanded in some instances in excess of 250 basis points as the market shifted due to the economy and credit markets. The implied strike cap rate is approximately 8.5 percent but could trade on either side of that figure pending the quality of the real estate and creditworthiness of the tenant base. Cap rates are expected to find a period of stability in mid 2009, possibly returning to a pre-2003 level ranging between 9 and 10 percent.

Retail Investments - After several years of increased transaction and sale volume, the capital market conditions and economic crisis resulted in an almost 73 percent decline in sales volume and 46 percent decline in the number of transactions in Miami-Dade County's retail investment market in 2008. However, this decline fell short of those for the state and Southeastern United States.

The price per square foot of retail space saw an increase to $238 per sq. ft., which can be attributed to the low number of transactions and a few prime sales on Miami Beach, a high-end retail area which benefits from a strong domestic and international tourism base. The sale of 521 Lincoln Road for $1,299 per sq. ft. to Altonstar LLC, a foreign investor, is an example of a single sale of a highend private investor transaction that weighted the average price per square foot higher in 2008. With the drop in the number of transactions and the uncertainty in the market, the full impact of the market change has not taken complete effect on cap rates in 2008. Since 2007, average cap rates have increased by 100 basis points to 7.1 percent. With less transaction volume, this number, while statistically true, is not entirely reflective of the marketplace. From 2003 to 2007, cap rates declined by 200 basis points and as debt returns to the market and transaction completions adjust to the true market conditions, cap rates will reset, possibly to the 2003 cap rate of 8.1 percent.

Miami's strong market fundamentals would suggest that retail product will see less of a decline in values than other markets in Florida.

Multifamily Investments - South Florida's traditional apartment sector continues to grow more competitive with net move outs occurring throughout 2008. Despite the supply of new rental and condominium product slowing, the overall occupancy levels in South Florida continue to decline as the economy slows and the population shifts to less expensive areas of the country. The downward trend in multifamily sales in excess of 100 units per property was evident as only 3 deals closed in Miami in 2008. Put into perspective, the Miami market averaged 36 closed deals per year from 2003 to 2006. While deal volume decreased, the average price per unit increased by 3.6 percent to $114,808 due to the transfer of 50 Biscayne Boulevard for $252,500 per unit. The property was previously developed as a luxury condominium building and is now being operated as a rental property. A combination of investor-owned units, unsold developer units and high foreclosure rates are resulting in a large amount of shadow inventory, which is contributing to the increase in vacancy in the traditional rental market.

The vacancy rate for apartment rentals in Miami-Dade County rose in 2008 by 1.5 percentage points. The Doral/Westchester  submarket has the highest vacancy rate of 6.3 percent in Miami-Dade, but is down 116 basis points from last year. Rental rates for the county average $1,083.94 per unit, a decrease of 1.2 percent from 2007. With more competition in the market, 885 units completed in 2008 and 693 units completed in 2007, nearly every submarket has seen an increase in concessions to remain competitive. As the cost of living begins to decline in Miami-Dade County, the market will begin to attract people to the area again and remain a competitive market.

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