Florida is finally getting out of the doldrums, albeit at a rather slow pace.
A year ago, the outlook appeared dismal. Unemployment was high, the residential foreclosure rate was among the highest in the country and many retail real estate professionals felt the state had yet to hit the bottom.
Today, the picture has improved, with a pick-up in leasing activity from national tenants, low volume of new construction and opportunistic investment sale plays. In the second quarter of 2010, the retail vacancy rate in Central Florida fell 80 basis points quarter-over-quarter, to 9.5 percent, according to real estate services firm Colliers International. The retail vacancy rate in South Florida stood at 8.9 percent, according to CB Richard Ellis, with vacancy in Miami, one of the strongest cities in the market, at a still healthy 5.4 percent.
But while conditions are improving, Florida continues to face some serious challenges. In July, the stateâ€™s unemployment rate averaged 11.4 percent, 190 basis points above the national average of 9.5 percent. The figure was also up over last year, but below the peak of 12.3 percent this March.
Florida also remains among the top five states in the country for foreclosure rates, according to RealtyTrac, an online provider of foreclosure information. In the first half of 2010, one in every 26 homes in the state received a foreclosure notice. This is preventing a true resurgence in consumer spending. The University of Florida reports that consumer confidence index in the state fell to 65 points in July, from 70 points in May, due to concerns over job security and the impact of the Gulf oil spill.
Industry insiders say the Florida retail real estate market wonâ€™t return to a state of equilibrium until the employment situation improves and Floridians start to feel more confidence in their financial future. Retail rents have already fallen significantly from the peak of the market in 2006â€”many expect that they will continue to decline for the rest of the year.
In advance of next week's ICSC Florida Conference, Retail Traffic spoke with five Florida retail real estate experts about whatâ€™s happening in the state. The experts include Paco Diaz, senior vice president with CB Richard Ellis; Boris Kozolchyk, senior vice president in the Miami office of Grubb & Ellis; Cynthia Shelton, director of investment sales with Colliers International Central Florida; as well as Jorge Rodriguez and Lisa Schummer, director of retail services and retail associate with Colliers International Central Florida.
Retail Traffic: Brokers in the rest of the country report that tenants are finally beginning to expand. Has there been an increase in leasing activity in Florida since last year?
Schummer: We are definitely seeing a little bit more momentum in the market. I have a couple of tenants who are looking for sites, but it comes in spurts. For a couple of weeks, Iâ€™ll get a lot of calls and then for a couple of weeks, Iâ€™ll get almost none.
Rodriguez: The momentum is there, activity is high, but a lot of it is short-term dealsâ€”less than three years and a lot of those deals are aggressive on rents. Itâ€™s busier for sure, but itâ€™s just that most of the deals are small shop tenants with short terms.
Diaz: In Miami, there has definitely been a pick-up in leasing activity, although we are still leasing at about 20 percent below what the rents were in 2006. The problem is that big box leasing, believe it or not, is easier than local leasing because the prices are down and there is really not that many available boxes. But with the more than 12 percent unemployment that we are running here, that affects directly the leasing for local tenant space because the mom and pops are under-capitalized and the customers that frequent those establishments, a lot of them are out of work.
RT: Who are some of the tenants that are expanding right now?
Kozolchyk: Publix has continued to be very aggressive, some banks are working very diligently to secure locations, and we are also getting the CVSâ€™ of this world and Walgreens. We hear that tenants like IKEA and Loweâ€™s would be available for the proper locations and proper terms.
Diaz: You have Home Goods, Marshalls, T.J. Maxx, buybuy Baby, Big Lots. Those guys have done deals and taken advantage of the down trend in rental rates.
Rodriguez: T.J. Maxx is active, Office Depot. A lot of them are repositioning in the same market to a better location. The yogurt concepts are really hot right now. I am getting a lot of phone calls on those. Chick-fil-A in Central Flodia, Papa Murphyâ€™s is doing a lot of deals.
RT: What about the investment sales market? Has there been more activity in that sector as well?
Shelton: I definitely think it is picking up. Itâ€™s been picking up on single-tenant net-leased properties. We are busier than we were last year and had a few closings. We closed on a Macaroni Grill, we have a CVS under contract, we have Borders on the market. Nothingâ€™s happened to it yet, but I get calls on a regular basis. The problem is these investments are below $2 million and nobody is tracking that. We closed on a shopping center in Fort Myers this year and that was $2.9 million. But the good news those small deals help drive our economy.
RT: Where are the cap rates on these transactions?
Shelton: The cap rates havenâ€™t moved greatly. Investment grade tenantsâ€”the Walgreens, the CVSâ€™, the Best Buysâ€”with longer term leases are trading between 7 and 8 percent. Usually, the deals get closed at between 7.5 percent and 8.25 percent. If the tenants are not investment grade or have a shorter lease, they are trading north of 9 percent. I have several Borders on the market right now. On one the cap rate is 15.5 percent, and on another, 10.5 percent. Why the difference? One has 11 years left on the lease, and another has five years left. They are both great locations, but youâ€™ve got to know a little more about the property.
The other thing is that investors are saying they want to be in the major metropolitan areas. We have a number of international buyers and they are buying in the markets they knowâ€”in Miami, in Orlando, in Tampa. You get offers today, but they wonâ€™t close if the investors donâ€™t know the market. We are back to fundamentalsâ€”price per square foot, rent per square foot, and the cap rate follows that.
RT: Several of you mentioned that the terms of the leasing deals are quite aggressive. Can you be more specific?
Diaz: In some cases, tenants are getting tenant improvement allowances and free rent, in addition to the lower rental rate. They are taking advantage of the situation.
Schummer: Landlords are giving free rent. I have a deal where they gave six months free.
Kozolchyk: It all depends on the location and the tenant, but undeniably, there is a tendency to support good tenants coming into the market. There is tenant improvement allowance, there are definite rental concessions, there are all kinds of incentives for the right tenants, the ones that are in good financial condition.
RT: Whatâ€™s your outlook for Florida in the near term?
Shelton: Cautiously optimistic. Iâ€™ve been doing this for 35 years and I have to say I am working twice as hard for a quarter of the money. But I think Florida will come out [on top]â€”people who have cash today and are buying will be pleased five years from now. They canâ€™t be flippers because real estate is not a short-term hold. Anyone who is buying today who is smart and is buying on rent and price per square foot will make money five years from now. Florida will bounce back. If you look at a seven-year real estate cycle, Florida consistently comes out ahead.
Kozolchyk: I think a lot may depend on what happens with the elections. Economics have a lot to do with psychology and right now there is a lot of uncertainty, whether itâ€™s based on fact or not. I think the elections may or may not be a factor that will determine an improvement in the market. But as long as unemployment remains high, we are going to be facing this uncertainty. The Miami-Dade County remains somewhat insulated because we have tourists, but thatâ€™s not enough to create real growth. Miami-Dade County and municipalities are very, very stretched for cash, they are cutting employment and that doesnâ€™t help retail.
Diaz: I would like to think that we will return to an equilibrium in an 18- to 24-month period, but there are so many factors, including the Presidential election. We have many different issues that influence the economic system, but the main indicator we need to keep our eyes are on are the jobs. We need to bring unemployment down. Once that happens, the rental rates and everything else will start getting back to some sort of normalcy.