Bumpy ride, hazy finish

Bumpy ride, hazy finish

Optimists say the future for commercial

real estate looks much more positive a

year out. Pessimists worry about what

can go wrong before then.

Just four months ago, 2009 looked like the perfect bottom to the lingering residential downturn, if not the statewide recession.

Real estate experts were predicting a bounce in the housing market and with that trouble behind it, an end to many of the state's problems. A recession was a still a strong possibility nationally, but Florida was one of the first ones in and it was primed to be one of the first ones out. Commercial real estate had started experiencing some troubles, but by itself with a healing residential market it was only a matter of time before it turned around.

Today, everyone knows how wrong those forecasters were. As the recent dustup of the credit crisis hit in September, it left a chill on the commercial real estate market and has many people scratching their heads about 2009. Those that aren't uncertain tend to be worried.

Conditions along the Gulf Coast's commercial real estate market weren't good to start. Industrial space across the region faced growing double digit vacancy rates led by large empty spaces in flex buildings, according to reports from the real estate research firm the Costar Group and various other local and brokerage based reports.

Office vacancies are on the rise as well, doubling in just a year in most counties. Of the big three commercial categories, retail is the best performer, but its vacancy rate has been moving higher as well.

Plus, retail users tend to suffer greatly when rooftops decline so as a type it's on shaky ground. Multi-family properties have seen larger vacancies as competition from unsold homes drives rents and occupancy rates lower, which has in turn led to lower sale values.

In general, the commercial market gets progressively worse moving southward along the Gulf Coast, with the exception of Naples - likely because of its affluence and its limited developable land market -outperforming Lee County. Consumer confidence also has fallen both nationwide and statewide along with consumer spending.

Now, the entire market has to make due with less money. National banks have killed most financing for speculative ventures and those borrowers with less than stellar credit.

"Income producing property is the only type that will typically find financing in this market," says Randy Mercer, a founding partner of CB Richard Ellis, Fort Myers-Naples. "Speculative ventures are not financeable in the current market...Banks are going to make very sure that it's the right type of property. Many buyers are dealing 100% in cash."

Developer Brent Virkus, president of Triton Cos. LLC, agrees. His Triton Cos. is co-developing the Hyatt Siesta Key Beach, a 44-unit, six-story luxury fractional ownership hotel with The Carlyle Group.

"Fortunately, this [financial tightness] could actually help us," he says. "Our project is doing very well and construction is ahead of schedule. We might be the last project to get out of the ground before the financial crisis. That's not absolutely set in stone, but it is very tough out there. There is no capital to get anything out of the ground right now."

Breaking the credit dam

Real estate experts point to the flow of credit to the commercial real estate market as the key to its recovery. Without available capital - even if they aren't from traditional sources - no recovery is going to happen. Fortunately, most feel for that very reason that credit will return.

"Credit will trickle back in," says Jerry Lamb, Coldwell Banker commercial regional director for Tampa and Sarasota Bay. "Already we're seeing people lining up other sources of money, including seller financing. We're going to get through the hump."

However, even when credit is available from banks it's requirements will be tighter, sources say, and down-payment requirements will be much tougher.

Barring those credit problems hampering the market, several market research firm predictions, surveys and economic model predictions dovetail for the start of the recovery in the commercial real estate market in late 2009 or early 2010.

One of Florida's most prominent forecasting firms, Fishkind & Associates Inc., is now predicting that the national recession will last until roughly the fourth quarter of 2009, with a recovery extending through 2010 and 2011.

Two exemptions to its prediction, however, are if energy costs rise sharply further financial panic enters the picture. The firm predicts that Florida will be less attractive to potential future residents, but will still remain the fastest growing state east of the Mississippi.

The firm predicts that soon there will be what it calls "massive failures" of commercial banks and thrifts, but that the Federal rescue plan will ultimately be successful in instilling support for mortgage loans and securities.

For commercial property, Fishkind & Associates suggests that capitalization rates will have to rise to encourage buyers because of the market risk. Non-residential property is also predicted to not appreciate through 2011, while land prices will continue to decline.

Fishkind & Associates saves its most negative forecast for condominium properties, which it suggests are still overbuilt in much of the region.

State take

The long-range financial outlook developed by the Senate Fiscal Policy and Calendar Committee, the House Policy & Budget Council and the Legislative Office of Economic and Demographic Research reports a similar challenge for the state.

The most recent outlook, which looks at the economy to help the Legislature manage budget decisions, covers the years from 2009-2012. It is important to note however that as of press time the newest outlook was last updated Sept. 10, well before some of more recent financial twists.

Overall, the report suggests that normal economic growth in the state will not return until the first part of 2010, and that many of the same risks still remain.

"...[T]he latest forecast reveals an economy burdened in the short run by national and state fiscal shocks, but still showing underlying resilience in the longer-term. Population growth – while slowing – continues to be the state's primary engine of economic growth, fueling both future employment and income growth."

The financial outlook reports that in 2007, Florida's gross domestic product (2.5%) dropped below the national GDP (4.7%) after outperforming it nine of the past 10 years.

While the report suggests the start of a recovery next year, in the short-term its says nominal personal income will grow at only 2.5% in fiscal year 2008-09, significantly lower than the 3.6% projected for the entire United States. But, it projects that by fiscal year 2010-2011, nominal personal income statewide will be growing at a much more respectable 6.7%.

Employment in Florida is projected to decline another 0.1% in 2008-09 and then increase by 1.7% in the following fiscal year 2009-10, 2.5% in fiscal year 2010-11, and 2.6% in 2011-12. The unemployment rate is expected to hit an annual high of 6.03% in fiscal year 2009-10 before returning to more normal levels.

The construction sector, which led to most of the job loss, is not projected to have much strength the next few years, but is expected to grow in fiscal 2010-11.

Population growth, which typically runs between 2.0% and 2.6% since the mid 1990's is expected to slow to a high of just 1.64% for the forecast period.

Nationwide, the Emerging Trends in Real Estate 2009 study produced by the Urban Land Institute and PricewaterhouseCoopers LLP, calls for the overall real estate market to hit bottom in 2009 and then flounder for much of 2010.

That study is based on interviews and surveys of landlords and other real estate experts foresees ongoing drops in property values, more foreclosures and delinquencies and a limping economy.

Residential canary

In the end, most studies and experts point to the need for the same value repricing that hit the residential market. Vulture capital groups have started accumulating cash, but so far prices - or the perception of lower future prices - have kept them out of much of the Gulf Coast market.

"Unfortunately, landlords are going to have to put up with the lease [rate] levels of five to 10 years ago," says Ian Black, president of Ian Black Real Estate, a commercial real estate brokerage in Sarasota. "There's a lot of competition and downward pressure in rents. In Sarasota, we're seeing nearly 100,000 square feet of sublease space. Hopefully in 2009, we will eat into that space."

Brian Kennelly, president of Lakewood Ranch Commercial Realty backs Blacks assessment.

"I think the mom and pop business, the smaller merchants are the ones that are struggling the most in this economy with limited resources," Kennelly says. "Landlords need to be more in tune with their tenants needs. I think throughout '09 we will be working toward absorbing existing new product that has recently been brought online. I don't perceive any new development of any substantial size next year."

Black expects that even in a global recession - and in a lot of ways because of it - investment money will to continue to flow in to the United States and the dollar as a safe haven.

"The market is getting back to the way things used to be," says Dan Creighton, president of the Fort Myers-based a commercial development firm Creighton Commercial Development, a construction firm and real estate brokerage.

"Developers never used to buy and close on land quickly," he says. "They would put down money contingent on permitting and entitlement. So that when they close they can immediately commence construction. This should reduce the cost of every project greatly."

Creighton says that unlike the early '90s there isn't a very large oversupply of commercial projects. So with the credit markets limiting new building, natural commercial growth should eventually absorb the space.

BY THE NUMBERS

GULF COAST ECONOCAST

Noted Florida economist Hank Fishkind offers his economic and demographic projections for each county along the Gulf Coast through 2011, even in these perilous times for making predictions.

Charlotte COUNTY

2006 2007 2008 2009 2010 2011

Population 160,315 164,584 165,389 166,297 169,421 173,419

Population Change 6,285 4,269 805 908 3,124 3,998

Employment 43,656 42,328 40,675 40,774 41,022 41,418

Employment Change 3,683 (1,328) (1,653) 99 248 396

Per Capita Income* 31.611 33.370 33.094 35.180 37.266 39.352

Unemployment Rate 3.47 5.24 6.35 5.59 4.69 3.92

Total Housing Starts 3,181 1,318 352 478 735 1,951

Single Family 2,343 945 338 424 641 1,819

Multifamily 838 373 14 54 94 132

Commercial Construction** 235,334 149,938 136,368 212,734 520,539 1,025,490

Local Retail 56,658 50,578 43,152 26,822 41,522 182,347

Regional Retail 53,102 40,000 30,000 29,490 157,661 413,669

Office 36,620 0 5,513 5,507 49,764 115,400

Industrial 3,339 5,044 4,606 4,385 3,626 7,584

Warehouse 43,780 16,127 10,390 15,271 97,539 175,558

Hotel 0 0 10,000 20,000 75,000 0

Hospital 0 0 0 25,000 50,000 100,000

Inst./Govt. 41,835 38,189 32,706 86,259 45,427 30,932

Collier COUNTY

2006 2007 2008 2009 2010 2011

Population 326,658 333,858 338,589 343,315 347,932 355,888

Population Change 8,870 7,200 4,731 4,726 4,617 7,956

Employment 134,875 130,795 125,161 125,103 126,244 130,931

Employment Change 5,543 (4,080) (5,635) (57) 1,141 4,687

Per Capita Income* 52.742 54.562 54.601 56.721 58.841 60.960

Unemployment Rate 3.14 4.38 6.15 6.34 5.15 3.40

Total Housing Starts 4,187 2,009 754 1,438 2,476 5,789

Single Family 2,820 1,086 555 1,332 1,520 3,934

Multifamily 1,367 923 198 106 957 1,855

Commercial Construction** 1,498,574 970,457 1,999,160 1,316,554 2,262,762 2,177,811

Local Retail 193,725 134,147 255,050 157,449 216,709 173,359

Regional Retail 204,741 117,425 192,434 181,055 206,103 284,105

Office 222,160 84,237 198,715 89,550 230,241 197,039

Industrial 48,155 21,262 39,389 51,653 66,730 32,056

Warehouse 126,733 237,443 411,995 345,505 453,211 407,252

Hotel 90,726 12,674 27,990 20,814 21,792 31,144

Hospital 0 0 0 33,000 44,000 57,127

Inst./Govt. 612,335 363,268 873,587 437,528 1,023,976 995,730

Hillsborough COUNTY

2006 2007 2008 2009 2010 2011

Population 1,164,430 1,192,860 1,207,510 1,222,140 1,237,210 1,257,520

Population Change 32,880 28,430 14,650 14,630 15,070 20,310

Employment 639,921 643,922 632,502 635,743 642,035 652,264

Employment Change 14,713 4,000 (11,420) 3,241 6,292 10,229

Per Capita Income* 34.326 35.716 36.127 37.179 38.231 39.282

Unemployment Rate 3.27 3.97 5.44 6.05 5.58 4.64

Total Housing Starts 10,215 6,288 2,198 2,692 5,444 8,459

Single Family 8,442 4,105 1,667 1,808 4,062 6,734

Multifamily 1,773 2,183 531 885 1,382 1,726

Commercial Construction** 6,169,321 4,393,260 3,459,134 3,071,759 3,363,944 3,676,638

Local Retail 864,229 665,642 460,861 464,570 556,850 503,848

Regional Retail 625,435 398,826 395,367 325,682 425,357 345,232

Office 919,733 677,659 222,571 170,096 399,036 595,732

Industrial 92,293 103,123 102,613 92,330 70,147 26,741

Warehouse 1,063,324 838,100 682,218 713,744 658,171 712,168

Hotel 390,918 286,790 184,628 141,072 97,114 297,263

Hospital 222,708 198,842 197,610 172,796 144,268 47,133

Inst./Govt. 1,990,682 1,224,278 1,213,267 991,468 1,013,002 1,148,520

Lee COUNTY

2006 2007 2008 2009 2010 2011

Population 585,608 615,741 625,285 634,456 643,379 658,531

Population Change 36,166 30,133 9,544 9,171 8,923 15,152

Employment 223,987 221,540 210,561 207,377 210,965 217,995

Employment Change 10,323 (2,447) (10,979) (3,184) 3,589 7,030

Per Capita Income* 38.451 39.972 40.622 42.147 48.672 52.197

Unemployment Rate 2.98 4.72 7.12 7.05 5.75 4.23

Total Housing Starts 17,590 5,828 1,377 2,104 3,749 8,126

Single Family 14,253 4,487 1,258 1,991 3,446 7,243

Multifamily 3,337 1,341 119 113 303 883

Commercial Construction** 8,964,334 3,747,611 3,811,063 3,267,007 4,288,069 4,063,789

Local Retail 789,882 561,423 403,568 305,537 418,820 330,157

Regional Retail 834,799 177,555 277,251 351,345 398,323 541,070

Office 905,822 352,543 400,874 173,776 444,974 375,255

Industrial 196,344 88,985 79,461 100,235 128,965 61,051

Warehouse 1,638,002 993,733 831,130 670,468 875,894 775,601

Hotel 64,119 53,044 56,465 40,390 42,115 59,312

Hospital 0 0 0 0 0 25,000

Inst./Govt. 4,535,366 1,520,329 1,762,316 1,625,257 1,978,977 1,896,342

Manatee COUNTY

2006 2007 2008 2009 2010 2011

Population 308,325 315,890 318,651 321,269 324,019 330,826

Population Change 3,961 7,565 2,761 2,618 2,750 6,807

Employment 127,762 124,185 122,931 123,960 125,545 128,166

Employment Change 5,483 (3,577) (1,254) 1,029 1,586 2,620

Per Capita Income* 37.860 39.614 39.509 40.721 41.932 43.143

Unemployment Rate 2.99 3.96 6.20 6.35 4.97 3.29

Total Housing Starts 3,957 1,488 1,431 1,504 1,536 3,366

Single Family 3,140 1,122 1,218 1,245 1,139 3,017

Multifamily 817 366 213 259 397 349

Commercial Construction** 1,476,082 510,391 470,247 581,008 1,107,592 1,241,000

Local Retail 242,657 117,682 110,556 78,392 216,323 282,681

Regional Retail 190,609 51,353 45,756 50,853 191,373 262,605

Office 276,685 119,703 111,577 96,397 132,635 121,914

Industrial 35,401 28,110 27,071 18,731 16,970 56,626

Warehouse 447,827 105,598 92,446 86,949 214,676 221,317

Hotel 17,119 13,593 13,090 59,058 58,206 51,718

Hospital 109,181 0 0 57,769 52,338 40,745

Inst./Govt. 156,602 74,350 69,751 132,859 225,071 203,395

Pasco COUNTY

2006 2007 2008 2009 2010 2011

Population 424,355 434,425 438,445 442,526 446,856 453,445

Population Change 17,457 10,070 4,020 4,081 4,330 6,589

Employment 99,456 99,983 98,962 99,549 101,028 103,516

Employment Change 7,189 527 (1,022) 587 1,479 2,488

Per Capita Income* 54.730 59.631 32.699 32.739 33.778 35.817

Unemployment Rate 3.82 4.86 6.12 6.39 5.89 4.52

Total Housing Starts 5,971 2,517 1,190 1,207 1,400 3,198

Single Family 5,037 1,867 1,137 1,139 1,323 3,043

Multifamily 934 650 53 68 77 154

Commercial Construction** 1,816,861 1,281,893 1,110,362 994,145 1,276,705 1,303,809

Local Retail 308,186 232,655 202,888 206,507 223,267 210,748

Regional Retail 430,658 214,851 173,255 99,053 222,254 223,144

Office 210,578 127,297 106,958 71,227 159,227 165,453

Industrial 77,879 49,062 41,540 24,080 31,150 13,474

Warehouse 392,964 274,164 236,208 172,878 157,177 146,592

Hotel 40,969 0 (0) 53,449 66,387 99,403

Hospital 0 0 0 20,000 75,000 75,000

Inst./Govt. 355,627 383,863 349,514 346,951 342,243 369,996

Pinellas COUNTY

2006 2007 2008 2009 2010 2011

Population 948,102 944,199 945,283 947,371 950,214 953,320

Population Change 358 (3,903) 1,084 2,088 2,843 3,106

Employment 444,321 436,814 428,619 431,440 435,718 440,609

Employment Change 5,976 (7,508) (8,195) 2,821 4,278 4,891

Per Capita Income* 38.827 40.465 40.972 42.262 43.553 44.844

Unemployment Rate 3.32 3.92 6.76 6.72 6.25 2.42

Total Housing Starts 2,300 962 659 707 961 1,441

Single Family 1,794 588 554 554 511 494

Multifamily 506 374 106 153 449 947

Commercial Construction** 3,105,767 2,060,750 1,026,264 814,124 554,886 1,313,871

Local Retail 220,163 231,906 208,951 160,595 88,295 211,740

Regional Retail 557,356 433,927 222,659 170,243 70,369 265,083

Office 512,992 307,347 220,855 158,184 72,728 123,464

Industrial 461,205 276,320 118,750 87,453 75,481 171,772

Warehouse 192,285 115,203 107,817 145,584 89,777 136,327

Hotel 102,172 61,214 4,154 6,713 64,568 94,734

Hospital 139,651 83,669 5,677 5 42,576 134,485

Inst./Govt. 919,944 551,164 137,400 85,347 51,092 176,265

Sarasota COUNTY

2006 2007 2008 2009 2010 2011

Population 379,386 387,461 390,085 392,709 395,635 402,348

Population Change 11,519 8,075 2,624 2,624 2,926 6,713

Employment 159,122 154,547 153,490 154,100 155,842 158,099

Employment Change 1,025 (4,575) (1,057) 610 1,743 2,257

Per Capita Income* 30.648 32.230 52.795 53.757 55.719 57.681

Unemployment Rate 3.08 4.33 5.80 5.77 4.87 3.19

Total Housing Starts 3,129 1,785 1,147 1,310 1,934 3,728

Single Family 2,659 1,533 953 937 1,515 3,267

Multifamily 470 252 194 373 419 461

Commercial Construction** 2,208,458 1,234,883 1,053,233 792,480 1,594,008 1,949,029

Local Retail 288,505 163,503 148,445 102,442 161,385 145,587

Regional Retail 329,006 157,513 140,341 59,371 405,531 608,270

Office 385,002 168,362 148,267 103,516 232,003 235,658

Industrial 102,198 61,053 55,719 30,567 48,312 30,549

Warehouse 412,438 248,175 226,648 125,144 294,972 350,012

Hotel 47,188 36,277 33,814 22,201 47,307 111,408

Hospital 17,565 0 0 (761) 8,304 76,088

Inst./Govt. 626,556 400,000 300,000 350,000 396,193 391,458