Study Confirms Downtown Miami is Coming to Life

As CPN reported last week, the results of a new residential occupancy and closings study for Downtown Miami defy the perception that Miami’s urban core is a ghost town awash with empty condos.

Conducted by independent research firm Goodkin Consulting/Focus Real Estate Advisors in partnership with the Miami Downtown Development Authority, the report surveyed 80 Downtown Miami buildings erected during the height of the boom and found that (1) a healthy majority of these units – 62% -- are occupied by mainly full-time owners or renters, (2) occupancy and closing rates are trending upward, and (3) equilibrium is probable within three to four years.

The study provides the first comprehensive picture of the number of people living in Downtown Miami since the start of the construction boom, reinforcing what people living and working here have witnessed for some time. Take a walk along Brickell Avenue or Biscayne Boulevard, two of Downtown’s major thoroughfares, after 5 pm and it’s clear that Downtown is filling up. We are home to a diverse population of residents who are drawn to the convenience of urban living, Downtown’s affordability, its waterfront location, a host of entertainment and cultural destinations, widespread access to public transit, and to our standing as Florida’s largest employment center.

Up to now, much attention has focused on Downtown Miami’s excess inventory of condominiums, but the Study’s findings suggest that we will see a steady increase of buyers and renters move into the market to capitalize on the competitive pricing. In fact, census projections indicate that the area’s residential base has increased from 40,000 to 60,000 since 2000, with more than 10,000 residents expected over the next six years. Adding to the mix are more than 190,000 employees come to work in Downtown each day. In response to this population growth, we are seeing more and more retailers relocating to Downtown Miami. From 2005 to 2008, Downtown Miami welcomed more than 85 new businesses and another 30 are expected to before the close of this year. These include high-end restaurants and retail shops that remain open on nights and weekends to cater to the growing number of residents.

While there is still much work to be done, we are encouraged by the findings in this report, which send a clear signal that Downtown Miami is coming alive. As price discounting continues – for sales and rentals – we will see even more people move into Downtown Miami and live here year-round. The DDA plans to update this study on a regular basis to learn more about the growing residential population. The more we can learn about this demographic, the better positioned retailers and service providers will be to meet their needs. To download a free copy of the full report and methodology employed, please visit www.miamidda.com

RealTech with Peter Boritz: Realcomm & ROI

Whole Building Design

 

Kyoto - bamboo forest

Kate Diamond, AIA, LEED AP, spoke with me this morning about whole building audits. Developers, building owners and occupants are all in a position to benefit from a holistic building audit. The whole building approach to energy usage and air quality optimizes assets and minimizes costs. In existing buildings, the assessment identifies where most energy is wasted, and allows building owners and tenants to develop alternatives and phased plans for optimization. 

 

Kyoto - palace garden pavillion

Humans thrive on exposure to daylight, views, and clean air. Strategies can be as simple as the use of low VOC paints on all renovations, to placing high walls perpendicular to windows, and lower walls parallel - adding daylight deeper into the building floorplate. I spent the morning in this west facing conference room, and noticed as the meeting adjourned that the light sensors had kept the lights off the entire time (daylight was more than adequate, and very pleasant), and I was inhaling the scent of rain on bamboo leaves in the alley below through the open windows.  

 

NBBJ - Seattle, photography Benjamin Benschneider

Balancing strategies can be unexpected - like the 2 foot ceiling to floor height achieved here by use of the interstitial floor space as a plenum, eliminating ductwork and the building height associated with it (typically 4 feet) - a significant reduction in building height, along with increased daylight due to open clear ceilings. Other strategies may be expected - updating lighting (reducing energy consumption) while capturing utility incentives and tax credits, or balancing the cost of an exterior skin modifications against savings in air conditioning and lighting loads.

Understanding the competition and their green lease offerings is also a tool in the development of optimization strategies. Understanding tenant behavior impacts and the demands for quality of light and air is critical, and will add pressure to this competitive marketplace. 

New York City Tri-State Area: Era of the Loan Extension

With a paucity of new capital coming into the system and many loans maturing, most property owners have limited options. In some cases the value of the property has fallen below or near the loan balance. Most lenders appear to be opting to extend with modest pay downs. This explains why fewer borrowers are refinancing. The option with the least friction for borrowers is to ask for a loan extension. These extensions differ from securitized loans and non-securitized loans.

Borrowers who have securitized loans maturing must deal with special servicers. When the loan is likely to go into default or in default, the securitized loan moves from the master servicer to the special servicer. In most cases, special servicers are determining whether the extension will create a higher NPV than foreclosure. Most extensions are for one year and could involve a loan pay down, increase in interest rate or increased reserves. Commercial banks are dealing with extension quite differently. Unlike the special servicer, the banks are not entirely motivated by an NPV analysis. The banks will consider the same evaluation but also consider the borrower’s relationship with the bank. Most bank extensions can involve a pay down in exchange but the extension period is often greater than a year.

Loan extensions are solving the borrower’s short-term need to avoid foreclosure, but they are also causing the lender to defer the problem, hoping for improved market conditions down the road. And this is the big question – what will leasing, the debt and equity markets, cap rates and the cost of debt be down the road.

If loans are not extended and properties foreclosed or handed back to the lender, the rapid drop in property values could lead to greater short-term stress on the financial institution and ultimately nearby property owners. Neither the extension nor foreclosure option is ideal, but for the time being loan extensions are solving the borrowers and lenders short-term needs.

Economy: The Road Trip of 2009

This year I will remember as the year of our extended “Spring & Summer Tour” to visit with our most valuable clients, and to nurture future client prospects. So far, it has stretched from New York, Boston, Hartford and Washington DC to Los Angeles, San Francisco, Dallas, and with colleagues joining me in Chicago. In addition, I personally re-visited Abu Dhabi and Dubai and made a first visit to Oman and Kuwait.

The atmosphere at all the meetings was filled with a common thread of “braving the current storm”. The combined investment of these clients represented hundreds of billions of dollars worth of commercial real estate portfolios. Each agreed they have not experienced similar conditions since the early nineties. All had a clear focus of the challenge for their respective organization, but also articulated, with real ingenuity, how they remembered the transference to wealth making opportunities during the time period from 1995 to 1999. Nearly all of the discussions centered on the need for new sources of debt to replace the stagnant CMBS marketplace; the challenge of $1.4 trillion of debt maturities in the next five years, and how to be positioned to take advantage of the inevitable distressed assets that will work their way through the system.

As I reviewed the six month report from Real Capital Analytics it is a sobering realization that a 2009 home sale in Lake Forest, at $7.5 million, exceeds most commercial “investment sales” in our Metro.

There is an insatiable need, from your clients for a return to a real pricing model reflecting current valuations, and an exchange of market perspective.

As I reflect back on our “Tour” it reminded me of the classic United Airlines commercial, that many of you will remember, with the opening line “I heard from a good friend today”, as the executive hands out flight tickets to his employees.

Creative thought, working more closely than ever with friends and clients, will help to identify those inevitable opportunities.

Finance: Still Paralyzed

For approximately 12 months, conventional wisdom has suggested that the wide bid-ask separation between sellers and investors would soon disappear and transaction activity would significantly increase at a lower pricing point. Continued deterioration of fundamentals as evidenced by a steadily increasing CMBS delinquency rate (now at 2.1%) would seem to support this forecast. But, as if defying gravity, transactional activity remains stagnant with capital ready to invest but not enough sellers willing to sell at price points required by investors.

There seems to be several explanations for this continued paralysis. Existing assets (equity and debt) are generally held by more strongly capitalized owners than during past downturns, enabling these owners to hold assets until the economy starts to recover and capital markets become more liquid. Government infusion of capital has strengthened financial institutions’ balance sheets thereby reducing pressure to sell assets at substantial discounts and making loan extension and restructuring more likely. Delinquent CMBS loans are turned over to special servicers who often hold the subordinated bonds and, to the extent permitted by the documents, would rather restructure or hold assets than sell at prices that would wipe out all but the senior position.

So the bid-ask remains wide and activity remains stagnant. Will this continue until current owners’ perceived values are supported by a recovering economy and more liquid capital markets or will more owners need to market assets at lower prices indicated by some recent trades? Let us know what you think.

New York City Tri-State Area: Early Signals of a Bottom?

Hedge funds, private equity funds and top-tier investment banks that inhabit or inhabited Midtown offices along the premier Avenues were the first companies in New York City to experience the tumult of the current recession. Of course, the declines in their respective businesses that began in the second quarter of 2008 were preceded by the burgeoning collapse of the residential housing market that began a year earlier in the rest of the country.

When New York City’s financial sector started to contract in 2008, demand for office space in the Midtown market shriveled. As a result, the availability rate escalated dramatically within key Midtown submarkets such as the Plaza and Rockefeller Center/Fifth Avenue districts

By the end of the first quarter of 2009, the office availability rate in Midtown was 13.3%; substantially higher than the availability rate in both Midtown South and Downtown, which ended the quarter with availability rates of 9.8% and 10.8% respectively. The financial sector is the lead horse that pulls the New York City economy, so the other major sub-markets in Manhattan were expected to follow the downward trend and show weakness in subsequent months.

This projection has in fact been borne out by the very preliminary numbers for the second quarter of 2009, which indicate that the degree of weakness among the major Manhattan markets is beginning to equalize. In the second quarter, for example, the overall Midtown availability rate likely increased to about 15%, or 1.7 percentage points higher than the end of the first quarter in 2009. Both the Downtown and Midtown South markets, however, will see substantially larger percentage gains. For Downtown, it probably jumped into the 12.5% area; and for Midtown South, the move was to 13%.

Manhattan’s office property market likely sustained further deterioration in the second quarter. But the more pressing concern centers on how long the decline will continue and how far it will drive availability rates up.

In recent weeks there have been some references to green shoots [meaning the beginnings of economic growth towards the end of a recession] when talking about the national economy’s incipient recovery. Virtually all of these instances were supported by observations that the rate of economic decline was slowing. The recent uptrend in the stock market, for the moment, confirms that upbeat assessment. While it is important to avoid getting caught up in overly optimistic scenarios based on a few positive developments, it’s important to note that our preliminary data for the Manhattan office market during the second quarter also shows some green shoots springing up among the rubble.

In May, the total amount of office space that was added to the total supply available for leasing did increase. But the total amount of space added during May was about 60% less than the amount added during each of the previous six months. The deluge of new space into the Midtown market slowed even more, with 70% less space hitting the market in May versus the preceding six months.

With net absorption of office space negative, the amount of available space continues to increase. But the pace of deterioration has slowed. All of this data indicates that Manhattan office market fundamentals are still weakening, but at a much slower pace. Again, one month of data does not prove a solid trend, but there is additional fundamental data that may lend credence to the property level statistics.

Again, based on the preliminary data, the employment situation in New York City does not seem to be weakening as fast as it was during late 2008 and early 2009. The year-over-year job loss in total employment is about 100,000, or 2.4%. In the financial sector, employment levels seem to be holding steady, and the business fundamentals in that industry are improving. The unemployment rate for residents of New York City has been steady over the last few months, and the labor force number has continued to rise. These are additional positive signs.

While we have only a few indicators and observations from those measures of business activity, the incoming observations over the last month have turned more positive.

Dr. Peter P. Kozel, Senior Managing Director, FirstService Williams

Ideas Change Everything

Change Design - our pursuit of the moment.  In developing and designing buildings --  the act of creating buildings, by its nature, is a great expense of energy and materials dedicated to a moment in time, for the human activity of it's time.

   

photography - Sean Airhart 

Change is a constant state -- how can we create buildings that are relevant today, and lead us into our changed future?  Between the economy, climate change, and the technology revolution, we must design for change.  Here are some of the change design tools that we are using, every day.

Understand the past, listen to the present, design for the future. True listening involves challenging and dropping assumptions that are no longer relevant - and gaining new insights

Find the essential human experience necessary for an organization to optimise and be better. Look deeper, put yourself inside and walk through the experience, every step of the way.

Build renaissance teams - integrating diverse intelligence creates high performance outcomes. Pull in team members from differing backgrounds and with varied knowledge and training - don't allow social cohesion to stifle creative thinking.

Design to reuse, adapt, and re-invent. Look beyond the horizon line, understand directional shifts - step outside, broaden your vision. Consider all scales - the site, the neighborhood, the city, state, country - and look to the world beyond,

Design to cross boundaries - drive for integration, inside out, outside in. individual, community, world.

We can all be artists of change, shaping our future through change design.

New York City Tri-State Area: Data Points - Where & How the Trades are Happening

The investment market held its collective breath late last week as the 10-year US Treasury touched 4% before settling at 3.79% on Friday. The sharp upward movement of the 10-year was a reminder of how important debt is to the overall economic recovery and our business in particular. Over the past twelve months, we’ve seen the continuation of a number of debt trends that are shaping the deals that close today: assumable debt that drives transactions; regional lenders filling a lending void for smaller (sub-$25MM) deals, and Fannie & Freddie drawing buyers to multi-family with attractive first mortgage financing.

The potential for out-sized returns created through in-place debt is helping to make larger purchases possible, as we experienced with the sale of Corporate Center last week, a 1,046,811± SF multi-headquarter office campus located just off I-84 in Danbury, Connecticut. Constructed as the Union Carbide World Headquarters, Corporate Center is primarily leased to major credit quality tenants including Boehringer Ingelheim, Praxair and Honeywell, and was 62% occupied at the time of sale. The property’s $72.4 million price was driven, in part, by existing short-term financing that yields a nearly 20% first-year cash-on-cash return based on the in-place NOI. The amenity-rich headquarter property and strong in-place financing made Corporate Center an attractive investment.

The Corporate Center transaction also highlighted something we’ve discussed in the recent past on this blog: the reemergence of the private buyer. Patiently waiting on the sidelines for the past few years, the private buyer is back and bidding more aggressively.

We cover this and much more in our team’s Summer 2009 newsletter.

Hotel Values Decline – Have Your Property Taxes Gone Down?

The latest national forecasts by PKF Hospitality Research call for unit-level RevPAR declines in excess of 17 percent and a fall-off in profits of more than 30 percent.  In this depressed environment, cost control becomes even more crucial.  While savvy managers tend to keep a close check on their operating expenditures, one expense item that is not typically on management’s radar screen is property taxes.

For the most part, property owners have no control over the movement of the millage/tax rates set by the taxing jurisdiction. However, there are ways for hotel owners, lenders, and asset managers to take a proactive approach and closely review the assessed valuations of the hotels in their portfolios.  Since market values form the basis of property tax payments, it is important to understand hotel values in this period of volatility.

When determining the value of income product properties, it is essential to be aware of net operating income (NOI) expectations, as well as movements in capitalization and discount rates. According to PKF Hospitality Research's Hospitality Investment Survey 2009, the overall capitalization rate in 2009 is expected to be 10.65 percent, 122 basis points higher than that in 2008. The discount rate is estimated to be 15.17 percent in 2009, representing a 204-basis-point increase from the prior year. The spread between the overall capitalization and discount rates in 2009 was 452 basis points, significantly higher than the 370-basis-point spread in 2008. All these investment factors, combined with the anticipated declines in NOI, are suggesting lower hotel values in 2009 compared to 2008.

Based on information from our firm’s Trends® in the Hotel Industry database, we analyzed the change in property tax expense from 2007 to 2008. For a hotel with annual revenue of $10 million, the average loss in profits for the year was $80,000. Assuming a 10.65 percent cap rate, this equates to a $750,000 loss in value.

In a period of declining values, hotel owners should ask themselves, “Why are my tax liabilities rising?” Hotel owners and asset managers should continue to exercise vigilance in reviewing their property assessments. The need for professional involvement is essential to help establish fair and reasonable values.

Posted on behalf of Charlotte Kang, Vice President with PKF Consulting out of Atlanta.