SW Florida Commercial Real Estate Market Will Be Slow To Turn The Corner.
By Mark Alexander, CCIM
Thud! Did you hear that? It sounded like the Florida residential real estate market just hit bottom. Most cities across the country have reported a stabilization of average home prices and a number of cities have actually shown small increases. Stable home prices should help to more accurately value the toxic mortgage-backed securities which should help ease our battered banking industry.
It is nice to see these other cities apparently turning the corner in front of Fort Myers during these tough economic times. This can only mean it will be our turn soon, right? Hope is alive, but I fear that thud heard round the U.S might be a hollow knock on a false bottom as we tread water before diving for the real bottom.
If you look at the price of home sales closed each week in Southwest Florida, you may notice the vast majority of sales are between $50,000 and $250,000. It appears the lower end of the home sale market is dominating sales activity which naturally skews our average home prices downward.
But what about the high end of the residential market? I bumped into broker Trae Zipperer at the car wash last month. Trae got his MBA from Harvard and specializes in high-end waterfront home sales in Lee County.
He said his market is slow and asking prices have come down dramatically. Trae said homes that were selling between $800,000 and $900,000 just a few years ago are now being offered between $400,000 and $500,000. He said many wealthy homeowners also own commercial real estate which is pulling them down. Plus their local businesses are off 40 percent to 50 percent in some cases due to the economy. The problems of commercial real estate, with its high vacancies and lower market rental rates, coupled with the slow economy, may cause a small wave of higher-end residential foreclosures over the next six to 12 months. The wealthy have the resources to hold on longer than others, but even they can only go so long with negative cash flow from their businesses and negative cash flow from their commercial real estate holdings.
We already expect a strong wave of commercial real estate foreclosures in the next few years. According to a recent report on the Commercial Real Estate Outlook by Deutsche Bank, here are some sobering statistics:
- Speed of deterioration in loan performance is unprecedented.
- Delinquency rates likely to soar higher over next 24-plus months.
- In the past, larger loans showed superior performance to smaller loans. The reverse is likely to be the case going forward.
- The industrial sector is showing relatively moderate deterioration, but declining production and collapsing international trade could pose problems for industrial space demand.
- Multifamily deterioration picks up: current total delinquency rate of 5.4 percent far surpasses previous peak of 2.4 percent in October 2005.
- Office delinquency low, but accelerating sharply: given the deterioration in employment rates in general, and office employment rates in particular, expect office to be one of the hardest hit property segments.
- Degree of deterioration in retail is simply stunning, going from less than 1 percent delinquency to 6 percent in the past 12 months.
- With well over $2 trillion in commercial mortgages maturing between now and 2013 in CMBS (Commercial Mortgage-Backed Securities), the scale of the potential problem is formidable.
- Improvements in market rents and vacancy rates are extremely unlikely to be sufficient to materially affect the scope of the problems.
- Some good news: There continues to be some degree of financing available for smaller loans whose main source is regional banks.
Bright spot
The one segment of commercial real estate that continues to hold value is medical office buildings with long term triple net leases. In a triple-net deal, the tenant pays a share of taxes, insurance and maintenance. As an example, I had two closings for medical sale/leasebacks in the third quarter of 2009 in Southwest Florida.
I represented George Whiteside, DDS, in the sale/leaseback of his dental building located on Cambridge Manor Place in Fort Myers that closed for $809,400 or $279 per square foot. Also, I helped longtime local optometrists Dr. Timothy Underhill and Dr. Robert LeSage to sell/leaseback their medical office condo on McGregor Boulevard that closed at $475,000. Both medical office sales had no trouble getting financing from small local independent banks. This supports the Deutsche Bank projection that small loans are still available from local regional banks.
Jobs dictate
Our worst job-losing months nationwide appear to be behind us. Starting in June 2009 we lost 443,000 jobs, in July 247,000 jobs, in August 216,000 and in September 263,000. Even though we are slowly going in the right direction with diminishing job losses, the U.S. unemployment still reached 10.2 percent in October 2009.
The fate of commercial real estate is tied to employment more than any other factor. That’s why it is doing so poorly now.
The economy may have a jobless recovery but commercial real estate isn’t going to start recovering until we start gaining jobs again.
Thankfully this recession has not affected our sun, sea and sand. Many will still come to our area to retire, to vacation, to run a business and to raise their families. It will be slow but our market will eventually turn around.
Tags: CCIM, commercial real estate, commercial real estate investment, florida commercial real estate, Industrial, Mark Alexander, Multifamily, Office, Retail, Southwest Florida Real Estate
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