The Future of Real Estate

The Future of Real Estate

Real estate by Jean Gruss | Editor/Lee-Collier

A gathering sponsored by the Urban Land Institute in Fort Myers yields some surprising outlooks.

Developers have Charlotte County firmly in their sights.

It's easy to understand why: Charlotte County sits between the booming areas of Fort Myers and Naples to the south and Sarasota and Tampa to the north.

"The bull's eye is Charlotte County," says Todd Gates, president and CEO of Naples-based construction company Gates McVey. The firm is the third largest construction company along the Gulf Coast based on revenues.

Charlotte County's relatively lower land costs and greater availability are drawing developers. Gates says his research has found that workers can find less expensive homes in Charlotte County and some residents now commute to work as far as Naples and Tampa.

Charlotte County's not the only hot spot.

Further away, Gates says he recently traveled to Panama with a group of investors who are eager to take advantage of the widening of the Panama Canal. Panamanians recently voted to widen the canal, which will benefit ports along the Gulf Coast and on the East Coast as shipments from Asia bypass overcrowded West Coast ports.

Once the canal is widened, port cities such as Miami and Tampa are sure to benefit from the increased traffic. Gates says he's received more calls from venture capitalists in the last six months about investing in Central America than he has his entire career in construction.

These and other opportunities were among the hot topics Gates and other developers and builders discussed as part of their outlook for 2007 at a recent meeting of the Urban Land Institute in Fort Myers.

Commercial real estate outlook remains positive

Mark Raudenbush, president of Bonita Springs-based Idyll Construction, polled a dozen fellow builders who reported positive sales despite a deluge of negative headlines. Idyll builds commercial buildings as well as luxury custom homes.

"Some custom builders are having their best year ever," Raudenbush says.

The biggest obstacle now is to overcome rampant pessimism in the residential market and make sure it doesn't seep into the commercial market. "Creating optimism in the market will turn things around," he says.

Gates says government fees are strangling new developments for commercial space. In particular, Gates says Collier County's impact fees have raised construction costs to the level that tenants can't afford the rent in new buildings. "I have eight projects in Collier that are dead," Gates says. "The numbers don't work with impact fees."

Gates says an unnamed Collier County commissioner told him recently that every job Gates helped create represented an additional housing burden. "Quality of life is having a job," Gates says.

Halfway through

Michael Timmerman, managing director of the Florida market for the residential research firm Hanley Wood Market Intelligence, says there are positive signs that point to an eventual recovery in the residential market.

For example, fewer new homes are coming on the market and builders are pulling fewer permits, which will help reduce the abundance of homes for sale. "There are positive things happening," he says.

In addition to reducing inventory, builders should work hard to make sure buyers don't cancel their contracts to buy a house once it's built. Some buyers have forfeited their deposits because they think prices will drop further. "The risk has shifted from the individual to the builder and developer," Timmerman says.

Timmerman says a typical residential downturn lasts 18 to 30 months and he estimates the Southwest Florida market is about halfway through a 30-month cycle. "Inventory excess will be gone by 2007," he says.

Still, Timmerman is concerned that many risky adjustable-mortgage loans will come due in 2007, forcing homeowners and speculators alike to dump more homes on the market. "It's going to come back to bite us and it may come back to bite us more than we think," Timmerman warned. "I think 2007 is not going to be fun."

Best bets for 2007

In a nationwide survey conducted by consulting firm PricewaterhouseCoopers, more than 400 investors, developers, lenders and brokers provided their 2007 outlooks for real estate investment, development and property acquisitions. "This is where the herd's going," says Peter Korpacz, director of global real estate research for Pricewaterhouse Coopers. "Some people do the opposite because it's a contrarian play," he noted.

Gentlemen, place your bets.

Best investment bets

• Hang onto core commercial buildings. Sit tight and enjoy increasing cash flows from improving supply and demand fundamentals as they push up net-operating income. You cannot replicate your investments in today's overpriced acquisitions market. "We're not going to get outlandish total returns," Korpacz says.

• Sell the dogs. Dispose of marginal properties while sellers still have the upper hand. "Investors should focus on performance," Korpacz says.

• Stay in cash and wait for deals to come. For example, busted condos will present opportunities as developers capitulate. Buy residential properties on the dip as buyers bail out over rising mortgage bills.

• Coastal cities with global trade will be the best places to invest. Trade, finance and educated workforces gravitate to these areas. The Midwest will sag.

Best development bets

• Be cautious. Focus on smaller projects with less risk exposure. Demand for commercial property is improving, but it may be not enough to score acceptable returns. "If we overbuild, it could ruin the party," Korpacz says. "Demand does not justify much new supply."

• Redevelop existing areas and build projects with a mixture office, retail and residences. Downtown and mid-town areas are getting reenergized by people who want to live close to work, shops and leisure activities.

• Buy homebuilder stocks. Publicly traded homebuilders' stocks have been pummeled on Wall Street and have more room to fall. But this cyclical business will recover and so will homebuilder shares.

• Build green. Tenants are becoming more environmentally cautious and want to reduce energy expenses. "It's going to be huge," Korpacz predicts.

Best property sectors

• Buy warehouses near port cities. West Coast ports can't handle all the shipping traffic from Asia, so ports along the Gulf Coast and East Coast will pick up the overflow. "Everyone wants those portfolios," Korpacz says.

• Buy moderate-income apartments. Rents spike in coastal regions where there is strong demand for affordable housing.

• Hold office. Although rents are moving higher, landlords need to lock in credit-worthy tenants and raise occupancies as the economic expansion starts to get long in the tooth. Only first-out-of-the-ground developers will do well.

• Hold or sell hotels. Hotel owners will continue to reap solid gains in 2007, but slowing economic growth signals lower hotel demand just as new hotels are being built. Investors should monitor hotels closely and sell before room rates decline.

• Sell or hold retail. People forget that retail ranked as an investment outcast during most of the 1990s. Expect a period of more middling consumer demand. Cash out of weaker properties and retain stronger shopping centers.

-Jean Gruss