by Tom Dixon

Hopefully, now that we have passed through the dark time of not knowing what the financial future holds for us, it is time to consider how things can be better in the future. It seems to me that not too many years ago the belief was that if you have more, spend more and live in a bigger house you will be happier. Maybe it is now time to re-think what all this “more” has created.

My guess is that this came about because we were not content with what we had and thought more would be better. In terms of houses, this was financially possible but had a hidden trap. If you could buy a home for $100,000 with a down payment of $10,000 and a loan of $90,000 and the price of the home increased by only 10% then it would have a value of $110,000. With a $90,000 mortgage you had made $20,000, a 100% return on your $10,000 investment. If you can keep refinancing your home loan at 90% of its value will continue to double your money. Why not? The why not or risk is that if the value of your home declines then your equity is wiped out. Yes it was fun while it lasted but eventually more homes and condos were built than there were people able to afford to purchase without fraud or even to live in them. Prices declined and equity was wiped out.

The second problem became the cost for mortgage payments, upkeep, insurance, and real estate taxes. As long as values were going up it made sense. But when home prices stopped rising couples with no children began to question their need for 8,000 SF 6 bedroom 6 bath home with real estate tax bills of $4,000 to $6,000 per month. An excessive home is like a Hummer, yes to looks cool and seemed like a good idea, but do we really need to live in a monster home and drive around in such a massive vehicle.

How did all this happen? The combination of a belief that good times will continue, incomes will rise, home prices will never decline and more and more and bigger and bigger are better. This is not to say that there may be reasons for big homes and big cars, but just because we can borrow money to buy them is not a good reason.

So how do we overcome the “Hummer Dilemma”? A realization that perhaps the answer is in these quotes :

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.” -Will Smith

“Wealth consists not in having great possessions but in having few wants.” -Epicurus

Or this great truism my wife Linda gave us when we moved to our new office. “The best things in life are not things”.

On Thursday June 17,th we presented the 2010 South Florida Office Market Report.  If you missed the presentation or want a copy of the printed report you can find it and all the previous report under the CIASF tab of our website.

We just added a PDF version of the CIASF’s 2010 Hospitality Report compiled by Guy Trusty to our CIASF page.  Check it out.

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

Last week Andrew and I presented the 2010 Miami-Dade County Industrial Market Study to over 240 members of the Commercial Industrial Association of South Florida. This is 15th year we have reported on the industrial market conditions in South Florida.

The Market Trends Section reported a growth in industrial space for the year of 2008 of just over 267,000 SF a decline of about 87% from the prior year. This downward trend was also evident in the industrial employment sector showing an employment decline of 7,600 to a total employment of just over 175,000. For the year of 2009 projected total freight at the Port of Miami declined by 8% while freight through Miami International Airport declined by 20%.

The Market Activity Section shows volume of warehouse sales remained the same at 74 buildings but a decline in the average sale price from $71/SF to $69/SF. The dollar amount of the sales decreased by 55% to $108,328,400. The industrial condominium market also slowed with a 25% decline in sales volume in 2009 and an average price decline from $144/SF to $122/SF.

Because of the variety of warehouse/industrial properties in various locations Miami-Dade County is divided into seven regions based on similar types of properties in each region. All regions are reporting an increase in the amount of rental space available, vacancy rates are as high as 18%-20% and rental rates have declined to as low as $3.50/SF in some areas.

Summary:

First year rental rates have declined from the mid $7.00/SF to as low as $3.50/SF. Some industrial property owners in larger buildings are renting for $1.00/SF plus all expenses (NNN) for the first year of a three year lease. Existing tenants are requesting rent rate reductions, abatement of rent or other concessions in exchange for longer term leases. Property managers are reviewing these requests on a case by case basis.

Vacancy rates should continue to increase from 13% and could rise to as high as 18% as a result of no new companies moving into this market. Existing companies are relocating from older less efficient buildings to newer buildings taking advantage of the lower rental rates in newer building with better access, parking and loading areas. This is forcing properties with functional problems to become even more rate competitive.

The major issues facing commercial property owners are the burden of additional governmental regulation and enforcement. Property owners are being forced to install expensive wired fire alarm systems, re-inspection for code compliance whenever a tenant applies for an occupational license.

The encouraging news in cargo compared to other US Customs districts is that Miami’s decline of 15% in trade from June 2008 to June 2009 was the smallest of all districts except Norfork/Mobile/Charleston. With the construction of two cargo facilities, the Miami International Airport will have an additional 800,000 SF of cargo space plus a new fumigation facility. At the Port of Miami the dredging of the channel to 50’ depth will make Miami only one of three ports on the Eastern Seaboard with this depth which can take advantage of the widening of the Panama Canal. These factors will improve Miami’s international trade as the economy recovers and secure Miami’s future as a major air and sea port.

If you’d like more information about the “Commercial Industrial Association of South Florida” send an e-mail to info@ciasf.com or you can view and download the entire Market Report.

By Tom Dixon