Southwest Florida Commercial Real Estate Forecast – 2013
Steady As She Goes
Two or three years ago there was serious doubt as to whether the real estate scene in Florida would ever recover from the Great Recession. For many players in the retail and investment sectors, Florida was the “F” word that should be avoided at all costs. But memories fortunately lapse and Florida, and particularly our beloved Southwest corner of the state, has inched back into respectability. Sure there are some trouble spots in the area that will take many more years to be healthy, but in the end 2012 turned out to be a fairly solid rebuilding of a year.
That’s easy to say but harder to prove. However, there are some strong indicators. Home resale inventories began to shrink, loan defaults have slowed, and even the national homebuilders have come out of their hiding spots and are starting to think about getting back to business – The number of massive homes being built in Olde Naples and Port Royal illustrate that at least one segment of the market is bullish.
Looking ahead, 2013 should prove to be a year of further ‘building the base’ of slow, but steady growth and improvement. Fueled to a large extent by historically, crazy-low (4% and even lower with great credit) interest rates, the commercial real estate scene should be a very good place to be this year.
Naples will continue to be the perennial hot spot, with Ft. Myers coming in a more distant second place. Even the hard hit Bonita and Estero sub-markets have bottomed out and are starting to improve, albeit at a much less discernible pace.
From a commercial real estate investment standpoint, the pendulum has started to shift back to the seller side, as demand for solid investment properties substantially exceeds supply. The low interest rates have driven down cap rates (a valuation index) to a cyclical low point. “Yield hungry” investors look at 7-8% yields in today’s real estate very positively compared to the 1-2% yields found in the capital markets. Likewise the extremely low loan interest rates make conservative leverage a real yield maximizer, potentially turning that yield into double digits. On the other side of the table, many potential sellers are sitting on the sidelines because they rightfully surmise that they too would face the same dilemma as to where to get a decent yield on their money if they did sell (yet being a seller allows one to sell into strength). Accordingly the demand outpaces the supply…a double-edged sword. 2013 will be a continuation if not acceleration of that trend. In addition to all this, it will still be several years before developers start building commercial buildings again in a serious way, with additional time on top of that for planning, permitting, and construction (perhaps as much as five years, all told).
Unfortunately, those hopeful of finding that incredibly deeply discounted bank foreclosure deal on a good property are about two years late to that party. With the occasional exception, what remains on the books of many lenders are properties that just don’t have an easy fix (if any at all). While 2009 and 2010 may have been the years of the incredible bargains (so long as you had deep pockets to weather the storm, and had an optimistic vision of the future), we have long since entered the next phase of that cycle. Banks too have realized that they no longer have to ‘dump’ good real estate at discount pricing.
Nationally, multi-family properties (apartment complexes) have been one of the most sought after categories with cap rates dipping well below 6% for the top echelon properties. This will continue to be a strong category in the coming year…here again with buyers substantially outnumbering sellers. As with any type of investment that comes into vogue, however, they have the risk of being over-bought, and over-built, leading to problems down the road.
Industrial property is another category that seemingly has started to improve, with inventory accesses being slowed worked through. A casual drive through the industrial parks of the Collier area two years ago was indeed a scary adventure, especially if you were a landlord or lender. Today that same drive will show a much improved picture. The Estero/Bonita markets are still not to that point.
2013 will also be a year where tax strategies, such as 1031 exchanges, come strongly back into vogue, in reaction to higher capital gains taxes and continued hunt for more ‘revenue’ (taxes) by the Federal government.
Office and retail rents will generally rise in 2013, especially in the Naples market, as inventory of vacant space slowly gets absorbed and the general health of the local economy improves. Retailers will have a decent year while restaurants should have a very strong year. On the supply side, we are still a couple of years away from seeing the beginnings of any new construction (except for the occasional end-user), which here again will bring some pricing power back to landlord side. Secondary locations and lower quality buildings will always be the weak link.
Dougall McCorkle, MBA
Sales Associate and Commercial Specialist
Premier Commercial, Inc., Licensed Real Estate Brokers
Direct: 239.213.7234
Cell: 239.860.3368
dougall@premiermail.net
