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The South Florida retail market is changing, as is evidenced by factors such as net migration, retail rents and occupancy levels. There are also differences between how lenders and buyers are underwriting risk and value in today’s retail market versus how sellers would like the lenders and buyers to underwrite assets. Other sectors of real estate product and economic outlook are also influencing the market right now.

Net migration in Florida is still positive according to the Census Bureau, which estimates that the statewide population had increased by an annual average of about 310,740 residents between 2000 and mid-2007, to 18,251,243 residents. However, Florida has suffered heavily from the housing bust, and Florida’s population growth was only slightly ahead of the national rate last year, at just above 1%.

Vacancy rates in Broward County have risen substantially over the past year, ending 2007 just below 6%, and another slight increase is forecast throughout 2008. But South Florida is less problematic than other parts of the country, where vacancy rates in secondary markets regularly exceed 10%.

The occupancy trend will make it difficult for owners to push rents higher and, more realistically, owners will have to work to sustain their current tenant mix. However according to Marcus & Millichap’s 2008 Real Estate Investor Outlook, the asking rents in Fort Lauderdale are forecasted to grow by 2.5% to $19.90 per sf, while effective rents advance 2.2% to $17.83 per sf.

According to a recent Marcus & Millichap survey of lenders and in-house capital corporation representatives, commercial real estate lenders are closely scrutinizing underwriting assumptions, as well as borrowers’ and tenant credit quality. Loan-to-value ratios have declined over the past year, and lender spreads reflect the perception of greater risk in the marketplace. Yet the change in the financing climate represents a turn toward more normalized standards, ultimately benefiting the retail market by reducing speculation and construction.

Retail lending requirements, like other property sectors, are becoming increasingly dependent on tenant credit and property quality, as well as location. Owners who need to refinance lower-quality assets this year may be required to contribute additional equity to meet current LTVs. Many owners may choose to sell instead, creating strong buying opportunities for low-leverage investors. Properties with attractive and assumable financing already in place will draw the greatest interest in the months ahead, as buyers continue to encounter obstacles in obtaining attractive borrowing terms.

All of these factors make for a very dynamic retail market in South Florida. Demand is still extremely strong and investors still perceive South Florida as a viable place to put capital compared to most other retail markets across the country. These investors expect to earn healthy returns over the long term regardless of what short term challenges they may be facing, especially given that South Florida is largely “under retailed” in terms of supply, with square feet per capita far below the national average.

The views expressed here are those of the author and not of Real Estate Media or its publications.

Richard Matricaria is associate vice president of investments for Marcus & Millichap Real Estate Investment Services in Fort Lauderdale. He can be reached at [email protected]

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