Florida’s retail real estate market continues its upward climb, but the progress has been slow and uneven—and will likely remain so until Florida experiences an improvement in its employment outlook.
In June, the most recent month for which figures are available, Florida’s unemployment rate stood at 10.6 percent, according to the Bureau of Labor of Statistics. The figure represented an 80 basis points decrease from the same period last year, but was still higher than the national rate of 9.2 percent. Moreover, it means Florida has the fourth highest unemployment rate of any state, trailing only Nevada (12.4 percent), California (11.8 percent) and Rhode Island (10.8 percent).
The health of the state’s labor market is largely dependent on the health of its construction sector, and with a glut of suburban housing and plenty of struggling shopping centers, construction on new residential or commercial projects in Florida is not likely to resume for several years.
Still, national big-box tenants with plenty of cash have contributed to greater leasing momentum in the state over the past year. Securing small shop tenants, however, remains a challenge—particularly for owners of class-B and class-C centers.
To find out about what’s happening on Florida’s retail scene, Retail Traffic spoke to a number of local experts. They include Paco Diaz, Miami-based senior vice president with CB Richard Ellis; Mike Milano and J. Benjamin McLeish, Tampa-based managing director and director of retail services respectively with Colliers International; Mitchell Rice, CEO, and Bobby Eggleston, vice president of real estate, with Tampa-based RMC Property Group; John F. Stoner, Tampa-based vice president with the retail group at Grubb & Ellis; and Gregory Masin, Miami-based broker with Cushman & Wakefield.
Below is an edited transcript of the conversation:
Retail Traffic: Housing and unemployment have a big impact on the health of retail real estate and that has been particularly true for Florida in the past few years. How much improvement have you seen in Florida’s housing situation over the past year?
Paco Diaz: The biggest issue here in Miami was the condo glut and we have overcome that. There has been a tremendous absorption of condos in the last year, a lot of them ahead of schedule. A lot of South Americans are purchasing condos here since prices were adjusted downward.
Mike Milano: From the housing standpoint, we have the sense that we’ve been long enough in this that we are starting to see some stability; it doesn’t seem like a continuing downward spiral. A lot of people who were going to lose houses have lost houses and the ones that are left are maintaining [ownership]. There seems to be a status quo. Employment seems to be the same thing.
Gregory Masin: I think the housing market is showing signs of life, but the reality is that new construction starts are still very nominal and are likely to be nominal for the foreseeable future. It’s still going to take time to work through some of the troubled inventory on the books of financial institutions. And while there are pockets of rising prices, overall pricing remains flat at best.
Bobby Eggleston: The housing market continues to have its struggles, in particular in suburbia, where a lot of houses were built on spec. I think in denser, urban areas it has stabilized somewhat. I speak from personal experience as I am trying to sell my house right now and it’s very, very selective. There are a lot of foreclosures and short sales and so it’s difficult to bring a non-foreclosure [property] to market.
RT: Have you seen any appreciable uptick in retail leasing velocity since last year?
J. Benjamin McLeish: In the cycle, we are definitely in absorption. The occupancy levels have stabilized and are now increasing. We are factoring in the recent Borders closings. So, we anticipate the delivery of new construction projects will be forthcoming in 2013.
John F. Stoner: It’s been moderate and primarily on your class-A grocery-anchored centers. You do have restaurants that are looking for second- or third-generation space. You have a few service users: day care, and certainly medical is doing some freestanding walk-in clinics. And then you do have a little bit of hard goods and apparel. There are national tenants that have the capital to try to take advantage of the lower occupancy costs that we see now. For mom-and-pops, the credit is not out there.
Bobby Eggleston: The answer is yes, but it’s a tale of two worlds. There has been a substantial amount of activity in the mid-size boxes. There are a lot of discount retailers—the Marshalls, the TJ Maxxs, the Dollar Trees. They’ve been able to get into spaces that were too expensive for them before. The market where we are seeing trouble now is smaller space. You just don’t find a lot of smaller tenants who are expanding at this time. We do get a lot of applications, but it’s mostly from people who are currently unemployed and are trying to turn entrepreneurial and there is no way to check their credit-worthiness. Leasing is up, and it’s up a good amount from last year, but it’s really being driven by bigger spaces versus smaller stuff.
Gregory Masin: There has clearly been an increase in demand, but all the different markets are moving at different paces right now. The market in Miami is exceedingly stronger than the market in Jacksonville. Overall demand is up, but there are pockets of relative strength and pockets where demand is still relatively flat. Most national retailers are in search of additional sites, but continue to be highly selective in terms of price and location. Miami, for example, is attractive for people because there is a dearth of retail space per capita, it’s always been under-retailed, it exists between an ocean and a swamp and it’s probably the most urban of retail environments throughout the state. I think there are pockets of strength in class-A locations in other major metro markets, places like Boca Raton and certain sections of Orlando and Tampa.
RT: Where would you say the average vacancy rate is right now versus the bottom of the market in 2009?
Bobby Eggleston: Everything is so sub-market driven. There are parts of South Florida where vacancy is 0 percent and parts where it’s 20 percent. Looking back a couple of years, I would say that vacancy has decreased from then, but I can’t say the number. We’ve definitely seen absorption and this year there has been a lot more leasing activity than in the prior year or two.
Gregory Masin: Depending on geography, the vacancy rate for class-A centers was anywhere between 5 and 10 percent statewide at the bottom of the market and I’d say the number has reduced itself at least by half. Most of the overhang of empty boxes has been spoken for. I think that at class-B and class-C locations, you had vacancy rates between 10 and 20 percent and I would say it’s still in the 15 percent range.
J. Benjamin McLeish: I would say in class-A across the board we were probably somewhere between 12 and 14 percent, and the reason was that Circuit City and Linens ‘n Things were in a lot of class-A centers and they closed almost simultaneously. Now it’s more 10 percent.
RT: Has there been any upward movement in retail rents?
Paco Diaz: Yes. The class-A properties and the smaller size spaces are commanding rents that are either similar or slightly lower than they were at the high point in 2006. The class-B and class-C properties are still down about 15 to 20 percent from the height.
J. Benjamin McLeish: In the preferred locations, that are either in class-A centers or are street front retail with high visibility, there are multiple tenants that are interested in those locations. Therefore landlords are trying to increase rental rates in those areas. The anecdote we’ve been sharing is that for the best spaces, there are four tenants for every one space, and for the rest, there are four spaces for every tenant.
Mitchell Rice: We have been on record for the past few years in terms of the need to adjust rents. So when currently leased spaces become available, we are seeing increases in rents where we made concessions in the downturn and those leases are either expiring or the tenants are not withstanding the concessions we have made. We are in Florida, let’s face it, there are issues. Having said that, there are spaces that become available that are absolutely competed for and sought after and premium rents are being paid [for them]. It’s not the rule, but it does exist.
Bobby Eggleston: The good news is that rents have stabilized. The days of when we were looking at $18 [per square foot] and everybody was asking for $12 are thankfully behind us. There are renewals we are entering into where we do have to go backwards a little bit. And on new absorption, the new tenants take the space at a little bit lower rent than was previously there.
RT: Florida has been among the states worst hit during the recent downturn, and likely has a lot of distressed inventory on the books. Have there been more distressed retail assets coming on the market in the past year?
Mike Milano: There are still not a lot of distressed assets coming to market and that has a lot to do with the foreclosure process in Florida. It takes a long time for properties to get into REO. It wasn’t the wave the investment community was anticipating.
Bobby Eggleston: We are an investor looking for opportunities and the entire marketplace is frustrated with the small volume of good deals. The banks are doing everything they can to delay and forestall recognizing those values as much as possible.
RT: How worried are you about the recent volatility in the stock market and its possible impact on the retail real estate recovery in the state?
Paco Diaz: I don’t know what’s going to happen, what influence these new stock markets swings are going to have. Hopefully, none. But the sense I am getting is there is a lot of uncertainty out there and that is simply due to what has happened.
Mike Milano: Here’s the good and the bad. The bad point is that the capital markets are so intertwined, when you have this kind of trauma a lot of people just want to stop for a period of time and see how things shake out. Some others say “we are just going to be more selective and focus on core—your stable, grocery-anchored centers in the major markets.” At the same time, it will drive people to real estate because it’s not as volatile as the stock market.
Mitchell Rice: I am not as swayed by individual market blips, so my answer is there is enthusiasm in the shopping center market in Florida, there is energy in retailers. Not all, but enough energy and enough retailers that desire to expand to drive the market. I wouldn’t say it’s healthy and strong. There are product sectors that are weak, and there are plenty of tenants that are weak or over-leveraged. It’s sort of mixed, but trending higher because of pent-up demand from three years of near dormancy.
RT: What do you expect to see at the ICSC Florida conference next week?
Bobby Eggleston: Our appointments or the requests for appointments have really been up a lot compared to the prior two years. As a matter of fact, most of our agents are fully booked. The people who survived are back and ready to get going again.
Mike Milano: I think it’s going to be very upbeat. We saw that in Las Vegas. The people that are still here are the people who have been here for a number of years and understand how the market fluctuates. We’ve been through this long enough, life goes on. So you have people who are trying to figure out how to make deals in this environment. There may be a certain amount of cautious optimism, but people are going to figure out how to lease space and close transactions.
John F. Stoner: Within my group, we are all optimistic. There are actually deals being done, there are less people looking for jobs. Three years ago, right on that front end of recession, people were just commiserating with each other.