South Florida’s pancaked real estate market won’t see a sharp rebound, even if the national economy picks up in a hurry.
“Plan to be conservative,” said Hessam Nadji, managing director of research services at brokerage Marcus & Millichap, addressing potential investors at a recent industry conference in Hollywood. “Do not plan for a hockey-stick or v-shape recovery,” he said. The shapes refer to traditional patterns of economic recovery, describing speedy accelerations of activity after short, sharp drops or long periods of flat markets.
By the end of 2009, Miami area employers will cut a total of 40,000 jobs, a 3.9 percent decrease in employment, following the loss of 27,300 jobs in 2008, according to Marcus & Millichap’s recently published 2009 National Office Report.
No corner of the real estate market will be untouched, the report noted, and recovery will be uneven. Office vacancy rates will increase and asking rents are projected to fall to 5.2 percent. The decline in office employment will generate a 440-basis point rise in vacancy to 15.9 percent, compared to the 280-basis point jump it made last year.
If things here look grim, Nadji pointed out that some battered housing markets are in even worse shape. “We’re less affected than places like Detroit,” he said.
According to the report, after years of robust, double-digit increases, rents in the Downtown Miami and Brickell submarkets are expected to fall more than 7 percent in 2009 and may not regain positive momentum until late next year.
Recent research predicts investors’ focus in the Miami market will shift from the central business district to submarkets like Coral Gables, where properties may be less affected by declines in financial services employment and solid demographics generate demand.
Broward County will also see a drastic increase in office vacancies in areas where rents climbed in recent years, including Fort Lauderdale and Plantation/Davie. The annual report suggests that the key submarket to watch is Coral Springs, where an expanding population of college-educated residents will attract office-using employers. Cap rates metrowide run from the mid-7 percent range to nearly 9 percent.
“The economy is controlled by fear right now and companies and buyers are sitting on a lot of cash,” Nadji said. “There is a trust issue right now, and the only way to fix that is through modest business activities.”
Miami retail space is likely to see aggressive bids in the months ahead on properties located in areas with high population densities such as Aventura, Coral Gables and Coconut Grove. In Broward County, vacancies are expected to increase across most areas, especially in unanchored strip centers measuring from 10,000 to 30,000 square feet. Vacancies in the last year rose more than 300-basis points to the mid-8 percent rage, and could push up an additional 300-basis points or more in 2009 as small retailers close.
Bernard Haddigan, managing director for special assets services at Marcus & Millichap, said investors should seek opportunities in the wake of national chain store troubles like the ones that hit Starbucks, which has announced hundreds of store closings by the end of 2009. “They’re likely paying 80 percent more on their lease than what the space will go for in today’s market so that’s something to think about — one more piece to this,” Haddigan said.
While recovery on a national and regional basis remains tentative and jerky, Nadji said the South Florida market will likely show its outsized, upside movement once recovery begins in earnest.
“South Florida has always done better than the rest of the nation,” he said. “We came back strong after 9/11, and then crashed more severely, and we’ll come back strong again.”