Bergstrom Center for Real Estate Studies
Survey of Emerging Market Conditions

Q3 2009 Findings

By most accounts, the US economy has emerged from recession and many agree that the economy will start growing slowly over the next several quarters. Unfortunately, according to the Federal Reserve Beige Book, commercial real estate is the weakest sector of the economy in most markets. Our respondents appear to agree with the Fed and indicate in this quarter's survey that several factors will hinder the recovery in real estate markets in Florida including capital availability and unemployment. In fact, the real estate markets in Florida can be categorized by one term, uncertainty. As one respondent stated, "uncertainty is the most dangerous market condition delaying recovery." Unemployment continues to rise in Florida which now has a seasonally adjusted unemployment rate of 11% as of the end of the third quarter. That is the highest recorded rate since 1975. The uncertainty in the job market will continue to put pressure on real estate markets, both commercial and residential.

Another factor looming large in the real estate markets is the continued turmoil in the capital markets. On the positive side, our respondents indicate that they are seeing an increase in private capital entering the marketplace particularly from foreign sources. Continued weakening of the dollar should increase the foreign investment as they can buy more with their funds. Additionally, financially sound community lenders are increasing their appetite for commercial lending opportunities. On the negative side, the large banks continue to be reluctant to lend and when they are the terms are very conservative. Adding to the uncertainty is the cloud of foreclosures in the commercial real estate markets. Banks have been slow to bring REO to market and there continues to be a large gap in bid/ask between distressed debt investors and the banks. Additionally, no one is certain about how the CMBS refinancing risk is going to play out. All of these factors continue to cause our respondents to be skeptical of the current state of the real estate markets.

Highlights

• The general investment outlook for Florida real estate continues to be a volatile measure but remains mixed.
• Expectations for single family residential absorption remain positive in light of low interest rates and government incentives.
• The investment outlook for is mixed for all property types but increased this quarter in industrial properties.
• The outlook for rental rates continues to be negative across all property types.
• The outlook for occupancy is mixed over the property types with most expecting no change. However, there continues to be negative pressure on retail and office properties.
• Cap rates continued to increase over most property types this quarter with an outlook of continued increases.

Orlando Area

• Cap rates in Orlando are, on average, higher (0.02 percentage points) than that of the state, and range from 8.2% (Apartments) to 16.1% (Condo Conversions).
• Cap rates have increased over the past quarter, with the largest changes being seen in Condo Conversions (+7.2% change) and Free Standing Retail (+1.02% change).
• Cap rates are expected to either remain the same or increase over the next quarter, with the strongest indications of rate increases occurring for Flex Space.
• Required yields for Orlando are, on average, higher than that of the state, 13.22% compared to 12.75% statewide.
• Required yields are highest for Condo Conversion at 18.7% and lowest for Free Standing Retail at 11.2%.
• Required yields have increased over the past quarter for all but three property types, the largest being Strip Centers (+3.01%) and Office: Class B (+1.82%).
• The investment outlook is mixed across most property types. The strongest indication of a positive outlook occurs for Apartments, while the most negative outlook occurs in Condo Conversion.
• The outlook for Land Development is neutral to negative across land classifications. It appears that the most negative outlook occurs for Land with Hospitality Entitlements.
• Occupancy rates are expected to be neutral to negative across the majority of property types. Respondents indicate that rate decreases are most likely to occur in Strip Centers, Retail-Large and Office: Class A.
• Rental rates are expected to increase slower than inflation for all property types.
• Future absorption rates are expected to be neutral for Single Family Development and Condominium Development.
• Future price increases are expected to occur slower than inflation in both Single Family and Condominium Development.

To view and download the full report, or see past quarterly reports, please visit:
http://warrington.ufl.edu/fire/realestate/cres/survey.asp

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