Market Shift

Market Shift

TRENDS by Jean Gruss | Editor/Lee-Collier

The long-anticipated slowdown in residential real estate is now at hand, though some experts aren't sure how significant any downturn might be or what impact it might have on commercial real estate.

At a recent meeting of the Urban Land Institute in Estero, Michael Timmerman, managing director of Florida for the Naples office of Hanley Wood Market Intelligence, predicted the residential real estate contraction that began in earnest this year will continue until at least 2008.

"The music's stopped, folks," Timmerman says.

Supply of homes has increased dramatically while the number of buyers has dwindled. Builders are offering incentives such as granite countertops, maid service and flat-panel televisions to attract buyers.

"It's not pretty," Timmerman says, "but it has to happen."

Meanwhile, the contraction in residential real estate is often the precursor to a slowdown in commercial real estate. Indeed, land sales seemed to have slowed down dramatically in the last few months.

At a recent meeting of about 50 Southwest Florida commercial real estate brokers, no one raised their hand when moderator Frank D'Alessandro asked the gathering whether they had brokered any land sales lately. D'Alessandro is a partner of Fort Myers commercial brokerage D'Alessandro & Woodyard.

"It's amazing to me the drop-off in land sales," D'Alessandro says. Land sales have slowed dramatically in just the last three or four months, he notes. Similar anecdotal tales of land sale slowdowns have been told in the Greater Sarasota area, too.

Residential cools

The residential slowdown actually started showing up in Timmerman's data in the first quarter of 2005. As demand peaked, developers and builders started more residential projects. That sowed the seeds of today's slowdown: "We've introduced twice as much product as we've had sales," Timmerman says.

The oversupply will likely take 18 months to be absorbed. What's more, Timmerman bases his forecast on the assumption that builders will cut the number of new homes they build by 50% each quarter.

In addition, people in northern states are having trouble selling their homes. That makes it harder for them to buy in inflated markets such as Southwest Florida. "If you thought this season wasn't fun," Timmerman says, "next year will be worse."

In April, the Florida Association of Realtors said sales of previously owned homes fell 28% in Fort Myers-Cape Coral, 45% in Naples and 44% in Sarasota compared to the same month in 2005. Oddly, median sales prices rose modestly in all three areas. Timmerman says average prices have remained high because there's a glut of lower-priced condos that aren't selling.

"When I'm talking to developers out there, their biggest concern is the resale market," Timmerman says. Investors who bought homes in new developments are now selling them at big discounts, competing directly with the builders who are building in the new developments.

"We'll continue to see people reduce prices," Timmerman says.

However, Timmerman advises developers and builders not to be too quick to reduce prices. That's because discounting makes prospective buyers believe they might get a better price if they wait.

Builders are going to have to wait out the soft market for some time. "It's not going to be over this summer," Timmerman warns. "It's not even going to be over by the end of the year."

There is a silver lining to the slowdown, however. For one thing, a cooling market will allow road building to catch up with the last few years' development growth. And slower construction could slow increases in the cost of labor and materials.

Commercial starts to ease

The slowdown in residential real estate has already led to a slowdown in residential and commercial land sales. "Land prices are going down [in Collier County]," notes Fred Kermani, partner with CB Richard Ellis in Naples.

And Pat Neal, head of Lakewood Ranch-based Neal Communities, says he's waiting for prices to keep dropping before he buys any more land.

Lenders are growing more cautious, too. "Banks are starting to take a harder look at land sales," says D'Alessandro, who is on the board of Colonial Bank.

Meanwhile, the costs of building and owning commercial buildings are still rising. "Insurance rates are going up tremendously," says Jim Garinger, principal and managing director of investment and land sales with Colliers Arnold in Fort Myers. "That's making deals real difficult."

Elevated land prices, high costs of construction and rising insurance and tax rates translate into higher asking rents for new offices, shops and warehouses. Some prospective tenants now balk at the rates, many of which have doubled in the last few years.

Still, in tight markets such as Cape Coral where the office vacancy rate is near 1%, developers should still do well, although some brokers worry there will soon be too much inventory. "First guys out of the ground will be good," says Jack Britton, a broker with Professional Realty Consultants in Cape Coral. "After that, watch out."

On the retail front, two new malls that will bring about 3 million square feet of shops have some brokers and developers nervous. It's not clear what the impact of the two new Estero malls will have on the region's retail market.

Meanwhile, warehouse tenants are moving to lower-cost areas such as Charlotte County for space because rents have doubled or tripled in the last few years in Lee and Collier counties.

BY THE NUMBERS

A slowing market

The number of sales of single-family existing homes in the Gulf Coast fell in April compared to the same month a year ago, according to the Florida Association of Realtors. Naples showed the biggest percentage decline.

Market April 2005 Sales April 2006 Sale % Change

Fort Myers-Cape Coral 1,266 916 ?28

Naples 496 274 ?45

Punta Gorda 448 299 ?33

Sarasota-Bradenton 1,218 685 ?44

Tampa-St. Petersburg-Clearwater 5,105 3,197 ?37

The number of existing-condo sales also dropped in the Gulf Coast area in April versus the same month a year ago, the FAR reports. Punta Gorda registered the steepest percentage drop.

Market April 2005 Sales April 2006 % Change

Fort Myers-Cape Coral 625 259 ?59

Naples 578 255 ?56

Punta Gorda 81 2 ?98

Sarasota-Bradenton 575 299 ?48

Tampa-St. Petersburg-Clearwater 1,459 904 ?38

RESIDENTIAL REAL ESTATE

Market Trends

Michael Timmerman, managing director of Florida for Hanley Wood Market Intelligence, outlined his residential real estate forecast for the Urban Land Institute Florida District Council. Here's the highlights:

1. Home-resale inventory is growing;

2. Speculators and investors are getting nervous and offering incentives, including price reductions;

3. Rising interest rates, taxes and insurance may cause some homeowners to default on their mortgages;

4. Appraisals are starting to reflect softening prices, forcing buyers to cancel contracts for new homes;

5. Real estate brokers are advising clients not to list properties for sale if they don't have to;

6. Slower pace of construction could ease costs for labor and materials;

7. Slower demand for new homes could slow land sales and reduce land acquisition costs;

8. The cycle will last until the first quarter of 2008, but it will allow road construction to catch up with recent developments and may ease the pressure on workforce housing.