A Look at the Sunshine State's Retail Real Estate

A Look at the Sunshine State's Retail Real Estate

Florida's retail real estate scene is expected to slowly improve throughout 2011, according to Marcus & Millichap Real Estate Investment Services. It's a much brighter scene than when we checked in two years ago.

A walk through some recent Marcus & Millichap market reports gives us some results to chew on. Here are stats from five Florida markets–Tampa, Orlando, Miami-Dade County, Palm Beach County and Broward County–showing vacancy and rental trends by submarket.

A look through various submarkets reveals a mixed picture. Vacancy rates have improved in the last 12 months in some markets and worsened in others, although the magnitudes of the year-over-year changes are not dramatic in either direction. Rents have shown greater stability and in most markets are within 1.0 percent of where they were a year ago. Miami-Dade County boasts some of the submarkets with the lowest vacancy rates in the state while Broward County has several submarkets where the vacancy rate exceeds 10 percent. Miami-Dade also has the most expensive rents while Tampa is the most affordable.

In terms of outlook, here are some commentary excerpts from the four reports along with charts.

Broward County

Property operations continue to improve notably in Broward County, but the deliberate pace of the recovery will minimize gains in occupancy and rents this year and defer a more robust turnaround until 2012. While resumed job creation generated a healthy 6 percent year-over-year increase in retail spending through the first quarter, space demand has strengthened modestly in response as retailers remain hesitant. A slack pace of household growth and a still-recovering housing market continue to limit the number of new store openings and will support a steady, albeit slow, increase in occupied space over the rest of 2011.

Investors' demand for decent yields and capital preservation continues to support a fluid single-tenant, net-leased investment market in the county. Nationally branded drugstores remain favored, with deal flow limited only by a lack of recent construction. Cap rates for these assets typically start at 7 percent for newer buildings with the long lease terms. Small investors have stayed active in deals listing for $3 million or less, targeting ground leases on bank branches, which often trade at cap rates in the mid-6 percent range. Multi-tenant deal volume also picked up recently, with healthy institutional and large investor interest in well-occupied properties with strong anchors.

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Miami-Dade County

With construction financing still limited and the local economy improving, the Miami-Dade County retail sector will record minimal completions this year and a decrease in store closures. Combined with a modest rate of expansion by retailers, these trends will support a solid decline in vacancy and a slight rent increase. Ongoing efforts to retain and attract tenants, though, continue to require liberal use of concessions, and leasing incentives will ease only gradually in the near term as tenants drive favorable lease terms. Concessions remain elevated even in prime areas such as Coral Gables, and rents here and in other submarkets will not rise appreciably until retailers expand more rapidly and lease additional space.

The investment market continues to make steady progress as highly rated single-tenant, net-leased properties attract interest from investors. National drugstore chains remain a primary target, with cap rates generally starting around 7 percent. Bank branches also garner attention, and the entrance of new banks seeking to backfill vacant outparcels may present opportunities for investors in the months ahead. In the multi-tenant segment, distressed or high-quality, institutional-grade assets continue to sell, with sales of properties comprising the middle of the quality spectrum coming back modestly.

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Orlando Metro Area

Despite the most significant job growth in any 12-month stretch in four years, retail operations have only slightly recovered thus far, lacking an appreciable rise in tenant demand. Store closures totaled about 2.7 million square feet over the past year, down from 4.7 million square feet in the preceding 12 months, but substantial numbers of new tenants have not yet emerged. Retailers such as the Aldi grocery chain have opened new stores and continue to scout locations, but many others remain cautious regarding expansion, a stance that will limit near-term vacancy improvement. As a result, extremely low completions, not a robust recovery in demand, will contribute most to the projected decline in Orlando vacancy this year.

Multi-tenant property investment has recovered, with more deals executed over the past 12 months than in any year-long period since the recession started. Access to financing, however, remains an impediment to restoring greater liquidity in the market. Lenders will finance acquisitions of newer, well-located shopping centers, where strong investor demand persists and properties anchored by top grocery chains can command cap rates in the mid-7 percent range. Other assets in lower-visibility locations or with weaker anchors and in-line tenants typically demand higher equity commitments from the limited number of lenders willing to underwrite deals.

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Palm Beach County

Positive economic trends, including job growth and a jump in spending, have sparked a recovery in Palm Beach County retail property operations and will drive more vigorous performance in the second half of 2011. A revival in hiring over the past 12 months triggered a 6 percent increase in retail sales as residents bought items for new jobs and moved forward with purchases deferred during the recession. As more residents become employed through 2011, further improvements in retail sales and a rise in traffic to local stores will occur. Employment and spending gains, in turn, have encouraged leasing activity of retail space, contributing to positive net absorption during the first quarter and over the last 12 months.

Improving access to financing continues to create a stronger, more liquid investment climate, but investors remain discriminatory. Single-tenant properties net leased to top-rated tenants account for most of the activity in the county, signaling strong demand for low-risk assets providing steady returns.

Additional multi-tenant sales were recorded in the past few months, and sales of well-occupied assets in high-traffic locations will help establish price benchmarks. Cap rates for such properties are estimated to range from 7.5 percent to 8.0 percent.

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Tampa Metro Area

A decline in the vacancy rate to less than 10 percent in the first quarter likely signals the start of a gradual recovery in the Tampa retail property sector. … While the marketwide vacancy rate will likely remain well above pre-recession levels for several more quarters, the recent decline has been sufficient to ease the fall in effective rents. Still, effective rents average 15 percent below rates prior to the downturn, leaving a considerable deficit to overcome as tenant demand ticks up slowly.

Investment activity in Tampa continues to rebound from recessionary lows, as expanded financing capacity and investors seeking to deploy capital have supported a surge in deals. Single-tenant, net-leased product accounts for the largest share of sales, with drugstores drawing keen interest. Scaled-down construction of new stores by CVS and Walgreens has compressed drugstore cap rates into the low-7 percent range.

In the multi-tenant segment, Publix-anchored properties are the primary target of institutions and large investors; cap rates for strong locations start in the low- to mid-6 percent range.

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