For those of us involved in real estate for over 20 years, we have experienced cycles which seldom took more than 3-4 years to work out. This one is much different with few experts able to forecast a time to return to normalcy.  It has been much more personal than the past because all of us have heard of the economic impacts on members of our families, neighbors and close friends.  Those involved in real estate seem to be particularly hard hit. Architects, title insurance firms, engineers and developers have suffered mortal blows. It is understandable why the government administration grasps at green shoots in order to show improvement with our dire economy.  Let’s dissect some of the most influential elements:

Here in Florida we have historically depended upon increasing population to feed our growth and real estate activity. That in turn fuels our construction employment. This growth has not occurred for the past two years and this year will show more outflow than inflow. This is causing havoc with local government budgets.

With our housing bubble resulting in serious overbuilding for single family and condos, we are still wallowing around trying to figure out when residential housing will return to normalcy. No question that bargain basement prices are assisting the sale of houses. But, this is with unusual amounts of government support such as the $8,000 credit for new home buyers and the fact that 90% of the residential financing has government backing. What will happen without this government support?

The unemployment numbers are downright scary. The present average unemployment level and length of time unemployed is the greatest since 1948. Paul Krugman, economist and writer for New York Times, says US household’s net worth has declined by $14 trillion. A large segment of our population, fearful of our burgeoning debt and feeling the need to increase reserves, is saving more and curtailing their consumer spending. Of course, this adversely impacts real estate investments.

We have yet to feel the full sledge hammer impact of commercial foreclosures, the result of commercial real estate having a 35-40 % reduction in market value. Locally and in the rest of Florida, we have a large amount of our commercial loans coming due in 5-10 years posing a tremendous challenge to both borrowers and lenders.

No rational answers have been forthcoming for these challenging elements. Against the backdrop of these daunting challenges giving advice to active investors is difficult. There will be a large group of investors who have been active in the area for years, throwing up their hands and electing not to play the game. Offsetting this will be some new players, bringing to the market large chunks of cash, attracted to buying well below replacement costs.

The great investor, Warren Buffett has several observations to remember:

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”

And “In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”

By: Gary Sisler

As the Great Recession of 2008-2009 continues, its effects are felt in the commercial real estate market and submarkets of South Florida in the form of increased vacancies, lower rents, reduced income and cash flow to landlords and owners of investment properties.  If landlords, owners and their leasing agents are not agile enough or willing to bend, blend and extend existing lease agreements, then we will see this segment of the market go through what has happened in the housing markets.  However, no matter what action ownership takes the combination of short term loans coming due, the new rules of higher equity requirements, increased capitalization rates and appraisal values might still tilt the balance downward.  But no matter, the mortgage debt side of the equation is a subject of a later newsletter.  We will discuss here the ownership side.

What is a landlord and it’s representative to do when approached by a large major tenant with several years remaining on their lease term, to reduce rent and/or give up space back to the landlord?  There are various concessions and amendments that can be offered and considered.  The main element has to be to save the tenant and keep them from vacating the space and moving to another location.  Other questions are:  How much space do they occupy? How long have they been a tenant?  What is their track record in rent payments?  Also are they willing to give the landlord financial records of the past 12 to 18 months and a projection of their income for the next 12 to 18 months?  Will their request to give back seriously affect the cash flow of the property?  And lastly, what is the future of their business?  And most important are they going to survive?

Answers to these questions and the willingness to disclose their present and future financial condition will greatly affect the landlord’s ability to bend, blend and extend.   Help can take various forms:  rent abatement (free rent) for short periods to give them breathing room, rent deferrals with accrued deferrals repaid at a future date with interest, reduced or eliminated rent escalations to provide “breathing room” for a period, give back of space with or without a future take back, updating of base year for operating expense pass-thru to a current year or eliminate it entirely.  More help can take the form of paint and new carpet to “refresh” their space in return for extended lease term, say two or three years remaining extended to five to ten years.

Finally, a rent per square foot reduction and some parking rate concession for a short term (12 to 18 months) can go a long way to help a tenant survive these rough economic times.  The key is, will you as the landlord or his representative be able to make the value judgment: “Will the tenant survive?”  If you have strong doubts, do not play the bend, blend and extend game.  Let the space go vacant and find a tenant to occupy the space at a rate where you as the landlord can survive!

CALL US, WE KNOW HOW TO BEND, BLEND AND EXTEND.  WE ALSO KNOW HOW TO SURVIVE!

by Steve Magenheimer

Last Friday, I attended with 130 other professionals the presentation of the Official 2009 Annual Miami Office Market Report by the Commercial Industrial Association of South Florida, (CIASF).  Data for the report was based on information from Black’s Office Guide.  The report was prepared and presented by my two able office mates, Tom and Andrew Dixon.  There was also a panel of office leasing professionals sharing their views of the office market and presenting estimates for the remainder of 2009 and 2010.

As an office leasing professional in South Florida for over 30 years acting as both a tenant and landlord professional broker representative, to me the glass is always half full.  This market for the foreseeable future will be soft and stagnant, with higher vacancies, lower rents and greater concessions by landlords to keep existing tenants and attract new ones, particularly in the Downtown and Brickell Districts.

When the new office buildings hit the market in 2010, the Miami-Dade office market will have a total close to sixty million square feet of rentable space.  Where are these tenants going to come from?  The CIASF report shows that the number of businesses with more than 100 employees have shrunk to less than 300.  Landlord/Developers building high-rise structures with large floor plates will find that users are few and far between for their space.  Only larger tenants can efficiently use large floor plans.

The economy of South Florida is based on three structures holding up our communities; tourism, finance/trade and construction.  Construction will not be a factor in the near term and tourism does not create a significant office demand.  A majority of the office space I have leased is in Coral Gables, home to multi-national tenants based here to service their Latin American businesses.  They are not large users of office space.  Typically, they will occupy 1,500 to 2,500 SF.  Some landlords are aware of this requirement and have tailored their marketing programs in this direction.  Other landlords, many on Brickell Avenue and Downtown are still looking for full floor tenants.  Most of these will be large regional law firms that continue to see opportunities to locate to Miami/Coral Gables to service their international clients in Latin America.

So, where are we and where are we going, and better yet, how do we get there?  First, with few exceptions, new tenants to the market are going to be few and far between.  Landlords will have to offer huge concessions to attract them.  These will take the form of free rent, moving allowances and generous tenant improvement budgets.  A bit of history here, as the landlord’s representative in the Texaco Latin America-West Africa division lease for 72,000 SF in Coral Gables twenty five years ago, the lease provided an 18 month rental abatement on a ten year lease.  Plus, turnkey tenant improvements and free parking!  The effective rate was in the mid $20’s/SF and the face rate was in the low $30/SF.

Other that new tenants, landlords have to react to existing tenant needs to retain them.  Reduced rents, moving base year operating expenses pass-thrus and rent abatement will be the order of the day.  Otherwise we will see a massive game of “musical chairs” throughout the market.  With tenants moving from one building to the next for lower rents.

We will get “there” by having leasing professionals, landlord and tenant representatives educate and inform landlords on the market conditions that will require them to be receptive, creative and realistic to the current market circumstances.  Those that do, will enjoy reasonably full buildings, others will suffer vacancies of up to 50%! Remember, those in the business of office leasing have to believe the glass is half full and will stay that way.

CALL US: WE KNOW HOW TO KEEP THE GLASS HALF FULL

To view the 2009 Office Market Report go to www.dixoncommercialre.com click on 2009 Office Report

By: Steve Magenheimer

As an active real estate broker in South Florida the changes I have seen in the market for real estate are both upsetting and beneficial.

The upsetting part began in 2005 and 2006 when money was so plentiful that almost any borrower could qualify for a loan.  These borrowers realized that if they could purchase property with 100% financing and the value of the property went up they made an infinite return on their “investment.”  In fact, this looked so good that many buyers-speculators purchased multiple properties solely with the intent of reselling them at a profit.  This led to groups of individuals buying and selling to themselves at ever increasing prices.  Using these systems condominiums appeared to be doubling in value in less than a month.  As the prices increased this drew more and more speculators into the market.

How was all this possible?   Easy money based on loans without income verifications, credit reports or proof of ability to repay.  Some of these loans were called “NINJA” loans (No Income No Job or Assets).  Who provided these loans?  Mortgage brokers wrote these loans, they were sold to a wholesaler, who sold them to an investment bank.  The investment bank packaged them and resold them to investors.  Everyone made a profit and hoped that they could resell the loan before the borrower missed a payment.  The problems started when the “NINJA” borrower stopped making the payment because he could not flip or resell and did not have the income to make the payment.

Jump to mid-2006, the impact of this speculation and false demand was residential construction and speculative building not seen since the early 1970’s.  All of this buying and selling at ever increasing prices created an apparent wealth from real estate ownership.

Housing became so expensive most of the residents in South Florida did not have an income to cover the cost of housing. Of course this also led to higher taxes and insurance premiums because of the apparent increase in values.  The chain started to break in mid-2007 when foreclosures increased, construction spending declined and unemployment started to rise.

The beneficial part of this cycle is that the cost of housing has declined and more families should qualify to obtain home loans, real estate tax assessments will decline and insurance premiums should decline because of lower insurable values.  As the real estate market stabilizes and the existing inventory is occupied the market will recover.  If history is a guide we have had similar real estate booms and busts every 10 years.  The first real estate bust I experienced was in the early 1970’s and they repeated on a ten-year cycle.

When all of the new proposed financial stimulus packages are funded I predict a new round of inflation. It may take two to three years but the trillions of dollars being funded by the government will bailout the economy and bring on a new round of inflation. This in turn will help the banks with increases in the safety and the value of real estate loans. This inflation will raise the price of everything including fixed assets such as real estate.  My recommendation is that if we have a new round of inflation then the best investment you can make is to buy fixed assets such as real estate with a long-term, low interest rate loan which can be repaid with inflated dollars.

Call us we have been through the Cycles

By Tom Dixon