Slow and Steady (Improvement) Wins Race

MIAMI—Market fundamentals have remained relatively steady over the past quarter across South Florida. So says Newmark Grubb Knight Frank's (NGKF) 2013 State of the Market report.

The office vacancy rate fell slightly across the board, with Broward County ending the quarter with the lowest level in the region at 16.1%. The industrial sector also performed well, with vacancy inching downward in both Broward County and Palm Beach. Miami recorded quite a bit of activity. However, vacancy remained relatively flat due to the delivery of the 335,000-square-foot Miami International Distribution Center.

“Across South Florida, over 1.1 million square feet of office leasing activity was tracked in the first quarter,” says Jon Bourbeau, vice chairman in NGKF's Miami office. “The majority of deals came from tenants already in the market in the form of expansions, renewals, relocations and, in some cases, contractions, but the pendulum appears to have swung with demand outpacing supply.”

With this market improvement—and the fact that new development across South Florida has been kept in check—asking rents for both office and industrial product are expected to increase moderately over the next several quarters. What's more, the firm predicts, landlords will feel less compelled to offer leasing concessions as the year progresses. Still, stronger signals of widespread economic recovery are needed before robust growth takes hold.

Bach says improving market fundamentals, especially job growth, retail sales, and the housing market, bode well for commercial real estate on a national basis, and that South Florida in particular is benefiting from a rebound in the residential sector.

“The spike in demand for residential real estate is a harbinger of stronger growth on the commercial side,” says Bach. “This is especially true for retail, as homeowners look to remodel existing properties or homebuilders deliver new projects.”

Activity in South Florida's investment sales market has been fueled by competitive, long-term low interest rate financing and a continued demand for yield by investors. This is true across a variety of product types, such as multifamily, retail, and office.

“The pending purchase of 1111 Brickell Avenue by Principal Global Investors underscores the fact that South Florida is attracting global private and institutional capital,” says Michael Lapointe, executive managing director of NGKF.

The region's hospitality sector remains one of the strongest in the country. Over a 10-year period, the compounded annual growth rate in RevPAR is one of the highest in any major domestic city. Miami continues to move toward becoming a true 12-month market. Improving fundamentals coupled with longer-than-average hold periods are producing high per-key valuations.

Another property type that will continue to attract investors both locally and nationally is healthcare real estate. Todd Perman, executive managing director of Global Healthcare Services at NGKF, says the Obama administration's Affordable Care Act is having an impact on this sector and the effect it is likely to have on South Florida.

“Healthcare currently makes up 18% of the gross domestic product, and due to a growing and aging population, this figure is expected to increase to 22%, with 30 million new patients entering the market over the next several years,” says Perman. “This trend will fuel demand for healthcare properties, and prompt healthcare organizations to aggressively explore cost reduction strategies and efficiencies.”