Bergstrom Center for Real Estate Studies
Survey of Emerging Market Conditions

Most Recent Quarterly Report (Q2 - 2011)

Executive Summary & Conclusions

The outlook for the real estate markets in the state declined slightly in the second quarter as uncertainty in the direction of the economy and the political gridlock in Washington weigh on respondents' minds. UF's Commercial Real Estate Sentiment Index, an outlook on our respondents' own businesses, decreased for the first time in seven quarters despite relatively stable fundamentals across asset classes. Economic and political uncertainties were the common themes put forward by the respondents. Topping the list was job growth. Even though unemployment in Florida improved in many markets, the pace of change and the still high levels are affecting the pace of improvements in the real estate markets. Consumers continue to be cautious and pessimistic about their own spending which is also affecting the rate of fundamental improvement.

As has been the case over the past year, respondents continue to be concerned about the level of government debt and spending. The debt ceiling debates going on in Congress haven't help ease their fears as gridlock adds uncertainty to an already uncertain marketplace. This prevents companies, making record profits, from investing in personnel. Consumers, uneasy about their own jobs and the slow economic growth continue to limit spending which drives a significant portion of gross domestic product. Resolution to the government spending issues in the short and mid-term would help provide more certainty to the marketplace and is a needed component for meaning(ful) improvement in the real estate markets.

Despite these challenges, respondents were mostly positive about the outlook for fundaments. The apartment market continues to be the best performing asset class as changing demographics and the continued foreclosure issues are combining to have a positive effect on supply and rent growth. The race is already on to find new development opportunities to address the coming shortage of quality units in major markets. Another bright spot in the market is the hospitality sector. Hotel fundamentals have been improving tremendously over the past year driven by an improving tourism market in Florida that was surprising resilient during the great recession. The number of visitors to Florida in the 1st quarter rose by 3.3% to over 23 million. Additionally, the weak dollar compared to foreign currencies is driving more foreign tourism which is leading to an increase in investment from foreign investors into Florida.

Overall the future remains uncertain and will continue to depend on policies from Washington that effect both spending and job growth over the coming quarters. Positives steps in either or both of those areas with have a positive impact on real estate markets.

Highlights

• The UF Commercial Real Estate Sentiment Index declined for the first time in seven quarters.
• The outlook for occupancy declined slightly across property types but remains positive for future increases.
• Cap rates and yields continue stabilizing across most property types. Expectations are for continued stabilization at current levels over the next year.
• The outlook for investment declined across most property types, however a more positive outlook was seen for apartments, warehouse and several land categories.
• Respondents' outlook for capital availability declined slightly but respondents continue to believe that the availability of capital will increase.
• Job growth and government spending continue to be the main concerns of most respondents.

The Survey

Our quarterly survey, conducted by the Bergstrom Center for Real Estate Studies, Warrington College of Business Administration, University of Florida is in its twenty-first fielding. The total number of participants, at 172, is the most extensive survey of Florida professional real estate analysts and investors conducted on an ongoing basis. It includes respondents representing thirteen urban regions of the state and up to fifteen property types.

General Investment Outlook

Our general index of real estate investment outlook, weighted 40 percent for single family and condo development, 40 percent for apartments and commercial rental property and 20 percent for developable land, declined slightly this quarter with respondents still believing that the outlook is mixed but improving. An increase in the financing available has had a positive effect on the outlook along with a belief that banks will be forced to sell more assets in the coming year proving better opportunities for investment.

Industrial

The outlook for industrial occupancy declined this quarter for both warehouse and flexspace. Respondents continue to believe that warehouse occupancy will stabilize at current levels. The outlook for rental rates followed suit this quarter with a sharp decrease for both sectors as respondents now believe that rental rates will lag inflation over the next year. The outlook for investment in industrial properties increased slightly for warehouse but declined for flex space. Respondents continue to believe it is a mixed to positive time to buy. Cap rates increased this quarter for both sectors with current rates between 8% and 9%. Respondents expect cap rates to stabilize at current levels. 

Office

Office occupancy expectations declined sharply for Class A space but continued a positive trend for Class B. Respondents now believe that Class A occupancy will stabilize at current levels with a small positive increase in occupancy projected for Class B. The outlook for rental rates for both sectors was opposite their occupancy outlook with Class A respondents being slightly more positive this quarter and Class B respondents slightly more negative. Cap rates stabilized at 8% and 9% respectively for Class A and B space and respondents continue to believe that this trend will continue. 

Retail

Retail occupancy expectations declined for three of the four retail sectors this quarter with only Free Standing retail improving. Respondents continue to believe however that occupancies will remain stable at current levels for all sectors. The expectations for rental rates followed a similar pattern to the occupancy outlook. Respondents continue to believe that rental rates will lag inflation in the near term. Cap rates continue to stabilize across retail property types with the exception of strip centers which increased this quarter. Expectations for future cap rates continue moving toward a declining cap rate environment. The investment outlook in retail remained positive for all sectors but large retail (which) declined to a mixed time to buy. 

Land Investment

The outlook for investment in land declined slightly across most land categories with the exception of land with hospitality or warehouse improvements. Increasing fundamentals in hospitality and increasing demand for warehouse space for exports are driving these expectations. 

Capital Availability

The outlook for capital availability declined this quarter but remained positive. Private equity continues to be plentiful for quality core assets and valued-add assets. Debt capital from financial institutions has started to come back to the market; however, it is still only available to the strongest players. Foreign investment is increasing particularly in the South Florida marketplace. A large investment is coming from South America and European countries with debt issues.

UF Commercial Real Estate Sentiment Index

Formerly called the Own Business Outlook, the Sentiment index declined for the first time in seven quarters. Lenders’ outlook improved this quarter pushing them to the most positive position. Developers’ outlook also improved on the belief that apartment development and potentially hospitality development will be coming back to the market. Uncertainty with employment and government spending continue to hold down the overall expectations for our respondents’ businesses. 

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Orlando Area

• Cap rates in Orlando are, on average, higher (0.12 percentage points) than that of the state, and range from 7.3% (Apartments) to 10.0% (Strip Centers).
• Cap rates increased over the past quarter, with the largest changes being seen in Retail Large (+0.85% change) and Strip Centers (+0.80% change).
• Cap rates are expected to stabilize for all property types over the next quarter with the exception of Retail Large which is expected to decline.
• Required yields for Orlando are, on average, higher than that of the state, 12.84% compared to 11.31% statewide.
• Required yields are highest for Condo Conversion and Office: Class B at 14.5% and lowest for Free Standing Retail at 11.0%.
• Required yields increased across most property types the past quarter, the largest changes occurring in Office: Class B (+1.34%) and Retail Large (+1.31%).
• The investment outlook is neutral to positive across most property types. The strongest indication of a positive outlook occurs for Apartments, Office: Class B and Retail Large.
• The outlook for Land Development is neutral to negative across all land classifications except Land for Urban Redevelopment and Land with Residential Entitlements which are neutral to positive.
• Occupancy expectations are mixed across property types. Occupancy is expected to increase in Apartments and Condo Conversions and remain stable across the remaining properties.
• Rental rates are expected to increase slower than inflation for most property types with the exception of Apartments and Condo Conversion which are expected to rise faster than inflation.
• 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.

See the complete Survey at:  Warrington College of Business Administration, University of Florida

The Survey of Emerging Market Conditions is the only Florida-centered survey of leaders and professional advisors in the real estate industry. It analyzes prospective data to produce extensive forecasting information pertinent to 37 of the state's 67 counties. The survey is administered by the Bergstrom Center for Real Estate Studies at the University of Florida.