Email
Print
Bergstrom Center for Real Estate Studies
Survey of Emerging Market Conditions
Most Recent Quarterly Report (Q3 - 2011)
Executive Summary & Conclusions
Turbulence in the stock market and weak economic data continued to put downward pressure on real estate markets in the third quarter. The UF Commercial Real Estate Sentiment Index declined for the second consecutive quarter as respondents worry about the continued weakness in the U.S. and Florida economies and project a tough market over the next year. Continued weakness in the job market along with what our respondents' believe is excessive regulation of the banking industry are dampening their outlook on real estate despite a continued positive outlook on property fundamentals.
On the job front, Florida has added over 70,000 jobs to the state since the beginning of the year, however the unemployment rate has remained mostly stable since April hovering around 10.6% because we've lost over 63,000 people in the labor force. Unfortunately the outlook for job growth is pessimistic as companies continue to refrain from hiring because of uncertainty in the direction of the economy as well as continue gridlock in Washington as we approach a year of presidential election politics. Companies, instead, are squeezing more efficiency out of current staff and hoarding cash from continued profit increases to ensure they are able to survive another downturn. These factors will most likely continue for the next year and are the primary reason for the declining outlook for our respondents.
Another factor affecting the outlook continues to be the capital markets. The emerging requirements of Dodd-Frank along with the skittish nature of the economic recovery have had a negative impact on the availability of financing in the marketplace. Several respondents commented that there was a noticeable decline in construction funding for new apartment development, which has the strongest fundamentals of any sector. With the freezing up of the CMBS market in the third quarter and the noticeable shift in debt capital for development, our respondents' view of the future availability of capital declined for the second consecutive quarter. However, they continue to comment on the amount of equity available for core assets particularly from foreign investors.
Despite these challenges, respondents were mostly positive about the outlook for fundamentals. The apartment market continues to be the best performing asset class but the investment outlook for most asset classes has reached survey highs. Respondents continue to believe that occupancy has stabilized or will increase across most asset classes which is helping to stabilize rents. The industrial sector is also showing signs of improvement as respondents continue to comment on the effects of the Panama Canal expansion on ports throughout the state. In South Florida, the warehouse and distribution market has picked up as the area benefits from a booming export business to South America.
Overall the future continues to remain uncertain and barring any miracles from Washington, we are in for a continued sluggish recovery over the course of the next year. We will also continue to see bright spots in the real estate market as certain asset classes and locations benefit from positive demographic trends.
UF Commercial Real Estate Sentiment Index
Formerly called the Own Business Outlook, the Sentiment index declined for the second consecutive quarter. Brokers’ outlook improved the most this quarter as more transactions, particularly in the multi-family sector boasted their outlook. The largest declines in outlook occurred for developers who were impacted by the declining view of the economy which impacted financing available for new construction. The outlook for other service providers also declined for the second consecutive quarter which may be a leading indicator of things to come. Most times, these consultants are on the front lines of new development. Their outlook along with the developers doesn’t bode well for new development over the next year.
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 again this quarter with respondents still believing that the outlook is mixed but improving. The overall decline was driven by a decline in the outlook for residential and condominium development as well as the investment outlook for land. The remaining asset classes remained stable to increasing this quarter.
Industrial
The outlook for industrial occupancy declined this quarter for both warehouse but increased for flex space. Respondents continue to believe that warehouse and flex space occupancy will stabilize at current levels. The outlook for rental rates increased this quarter in both sectors with more respondents now believing that rental rates will grow with inflation. The outlook for investment in industrial properties increased for both warehouse and flex space with warehouse expectations at a new survey high. Respondents continue to believe it is a mixed to positive time to buy. Cap rates held steady or declined 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 for Class A space rebounded this quarter after a big drop last quarter. Their outlook declined slightly for Class B space. Respondents believe that occupancy will remain stable over the next quarter for both classes. The outlook for rental rates for Class A space declined sharply this quarter with respondents continuing to believe that rents will grow at rates slower than inflation for both classes. Cap rates increased slightly for Class B space which is now over 9%. Class A cap rates remained stable at 8%.
Retail
Retail occupancy expectations remained stable or increased for three of the four retail sectors this quarter with only Free Standing retail declining. Respondents continue to believe however that occupancies will remain stable at current levels for all sectors. The expectations for rental rates improved dramatically for all sectors except strip centers. Respondents now believe that rental rates will match inflation in the near term. Cap rates continue to stabilize across retail property types this quarter. Expectations for future cap rates indicate stabilization at current levels. The investment outlook in retail remained positive for all sectors.
Land Investment
The outlook for investment in land declined slightly across most land categories. A decline in future economic expectations along with a decline in the availability of financing for new development affected the outlook for land investment.
Capital Availability
The outlook for capital availability declined again this quarter for both development and acquisitions. Private equity continues to be plentiful for quality core assets and valued-add assets. Debt capital from financial institutions remains sluggish and the CMBS market has become stagnant and will not reach earlier projections for issuances for the year. Foreign investment continues to increase in the state. Are respondents continue to assert that “cash is king.”
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-third fielding. The total number of participants, at 231, 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.
See the complete Survey at: Warrington College of Business Administration, University of Florida
The Survey of Emerging Market Conditions targets the experienced leadership and professionals of Florida's real estate development and investment community to gain insights and market intelligence on matters of fundamental importance to real estate practitioners and policy-makers across Florida.
