FLORIDA CHICA Q3 2012 Q3 AND Q4 2012 ECONOMIC AND COMMERCIAL REAL ESTATE TRENDS REPORT NATIONAL AND FLORIDA MARKET UPDATES LEADERS IN COMMERCIAL REAL ESTATE
2 NATIONAL ECONOMY Page 2 National*and*Florida*Economic*Update* - - US#economic#growth#slowed#to#just#1.3#percent# in# the# second# quarter,# tempering# the# forecast# for#the#rest#of#the#year.#drags#from#weakening# business# investment# and# lackluster# hiring# trends# #and#from#the#exaggerated#uncertainties# of#the#current#political#environment# #have#not# impinged# on# consumer# sentiment,# however.# The#rising#stock#market#and#the#beginnings#of#a# national# housing# recovery# have# cushioned# against# an# otherwise# almostdinevitable# decline# in#confidence.#in#florida,#consumer#confidence# hit# a#fivedyear# high#in#september,#according#to# the#university#of#florida s#independent#survey.# Even# as# the# national# pace# slowed,# Florida s# recovery# continued# to# lag# broader# trends.# Going# into# the# third# quarter,# the# statewide# unemployment#rate#was#the#eleventh#highest#in# the# nation,# tied# with# Michigan.# While# a# full# recovery# will# take# many# years,# the# headline# numbers# show# signs# of# improvement.# The# number# of# counties# with# doubleddigit# employment#has#fallen#from#52#to#15.#owing#to# Year-Over-Year Change in Non-Farm Employment Florida National Source: Bureau of Labor Statistics demographic# differences,# the# gap# between# national# and# state# unemployment# has# narrowed#significantly,#as#well.# Florida s*favorable*long1term*outlook* Even# as# the# state# struggles# to# develop# greater# momentum#in#job#creation,#population#growth# from# indmigration# to# the# state# is# driving# economic# expansion.# The# Florida# Office# of# Economic# and# Demographic# Research# projects# annualized# population# growth# of# 1.2# percent# through# 2015# and# longdterm# growth# of# 1.4# percent#per#year.#compared#to#national#average# growth# of# 0.9# percent,# the# state s# longdterm# forecast# is# much# stronger# than# the# current# malaise# suggests.# Even# though# it# falls# short#of# its# predrecession# pace,# Florida# is# poised# to# surpass# New# York#as#the#third#mostDpopulous# state#in#the#union#by#2016.# Near1Term*Improvements*in*Housing,* Government** One# need# not# look# too# far# into# the# future# for# signs# of# improvement.# Florida s# overdependence# on# singledfamily# construction# and#investment#has#been#the#major#drag#on#the# region#so#far.#modest#increases#in#sales#volumes# and#home#prices#portend#fewer#headwinds#for# consumer#sentiment#and#spending,#as#well#as#a# slow#turnaround#in#one#of#the#state s#keystone# growth# drivers.# State# and# local# government# cutbacks# may# also# ease# somewhat.# Following# repeated# spending# cuts,# rising# receipts# have# brought#the#state#budget#back#into#balance#for# the#first#time#since#2007.# Change in Non-Farm Employment Source: Bureau of Labor Statistics - One-Year Change ('000) One-Year Change (%) Change From Trough (%) -8% 100 95 90 85 Consumer Sentiment Small Business Optimism Index Source: Thomson Reuters/University of Michigan NFIB 105 100 95 Florida 64.6 +0.9% +3.1% Miami 3.8 +0. +1.9% Tampa 17.0 +1.8% +3. Fort Myers 0.1-0.1% +1. Orlando 9.7 +1. +1.8% 80 75 70 65 60 55 50 90 85 80 75 70 Jacksonville 0.9 +0. +0.8% Fort Lauderdale 4.7 0. +0. West Palm Beach 3.5 +0.7% 0. Sarasota 1.7 +0.7% 0. Gainesville -2.1-1.7% 0. Ocala 1.1 +1. +0.1% Tallahassee -2.2-1. 0.
Page 3 NATIONAL REAL ESTATE Heading*Into*the*Year s*final*stretch,* Apartment*Yield*Compression*Supports*Broader*Investment* The# volume# of# national# commercial# property# sales#cleared#$50# billion# in#the# second#quarter,# down# 15# percent# from# a# year# earlier.# Preliminary#counts#for#the#third#quarter#show#a# further# slowdown,# attributable# in# part# to# disruptions# emanating# from# Europe# and# domestic# headwinds# such# as# the# unresolved# fiscal# cliff.# The# former# had# a# particularly# negative#impact#on#the#availability#of#financing# for#smaller#transactions.#while#riskdfree#interest# rates# have# tumbled# in# response# to# global# market# instability,# corporate# and# CMBS# bond# spreads# saw# heightened# volatility# through# the# summer#months.#in#markets#where#banks#have# been# slow# to# reengage,# constraints# on# conduit# lending#have#slowed#momentum#for#smalld#and# middcap#properties.# REITs# have# dominated# buying# activity# for# the# largest#properties#and#portfolios,#supported#by# recorddbreaking# fundraising# that# will# see# offerings# of# securities# in# 2012# surpass# their# previous# highs.# Aided# by# historically# low# benchmark# borrowing# costs,# REITs# have# continued#to# push# prices# indices# higher# in# the# second#and#third#quarters.# A# broader# class# of# investors# drove# nominal# apartment#cap#rates#to#new#lows#in#the#second# and# third# quarters,# leveraging# the# availability# of# agency# financing# and# anticipating# everd stronger# cash# flow# gains.# By# the# end# of# the# summer,# those# expectations# were# testing# the# limits# of# some# investors # favorable# views# of# multifamily#acquisition#opportunities.#with#cap# rates#regularly#falling#below#5#percent#for#high# quality#apartments,#investors#with#the#capacity# to# diversify# into# other# sectors# are# finding# the# wider# yields# in# the# small# office,# retail,# and# industrial#sectors#more#enticing.# Interest#may#be#high,#but#the#small#asset#market# still# offers# favorable# returns.# Apart# from# the# slower# pace# of# cash# flow# recovery,# higher# borrowing# costs# and# stricter# underwriting# criteria# have# limited# price# improvements# for# smaller# commercial# properties.# For# investors# with# a#longer# time#horizon,#strong# operational# capacities,# and# preferred# access# to# equity# or# debt,# the# riskdadjusted# returns# in# these# segments# of# the# market# are# increasingly# compelling#as#apartments#price#to#perfection.# 3% 1% Ten-Year Treasury Yield Source: St Louis Fed 2006 $80 $70 $60 $50 $40 $30 $20 $10 $0 $80 $70 $60 $50 $40 $30 $20 $10 Historical Offerings of REIT Securities 2012 Total is Annualized In Billions Source: NAREIT, Chandan 2004 2006 2008 2010 2012 CMBS Issuance by Quarter Through Q3 2012 In Billions Source: Chandan $0
4 FLORIDA APARTMENT Page 4 FLORIDA ECONOMY Apartment*Investors*Navigate*More*Aggressive* Pricing*and*Rising*Development*Pipeline** Florida s# apartment# fundamentals# were# generally#improving#in#the#second#quarter#and# through# the# summer,# though# vacancy# rates# increased#in#some#key#markets.#the#outlook#for# apartment# demand# is# favorable,# but# the# growing# construction# pipeline# is# an# increasingly# important# consideration# for# investors,# operators,# and# construction# lenders# alike.# Projects#moving#from#planning#and#proposal#to# construction# are# dotted# across# the# state.# In# Tampa,# where# vacancy# rates# held# steady# midd way#through#the#third#quarter,#north#carolinad based# Crescent# Resources# kicked# off# a# $68# million,# 367Dunit# development# in# September# that#will#see#delivery#in#2014.# In# some# cases,# additions# to# inventory# are# leading# demand,# resulting# in# 7. slower# stabilization# than# will# 7. characterize# Tampa s# best# new# assets.# In# the# niche# student# housing# space,# for# example,# vacancy#rates#in#the#vicinity#of#the#university#of# Central# Florida# in# Orlando# have# jumped.# The# addition# of# roughly# 1,500# units# has# been# absorbed#reasonably#well.#but#with#as#many#as# 6,000# units# in# various# stages# of# planning,# it# is# unclear# if# enrollment# will# keep# pace# with# the# availability#of#offdcampus#housing#options.# With#aggressive#pricing#and#more#construction,# are# new# investors# too# late# to# the# strategic# apartment# play?# Not# at# all;# the# sector s# underlying#thesis#remains#intact.#opportunities# to# acquire# apartment# buildings# with# strong# cash# flow# potential# are# still# numerous;# as# compared#to#previous#quarters,#it#only#requires# more#careful#sorting#through#a#large#number#of# aggressively#priced#offerings.# Florida Apartment Cap Rates Source: Chandan Q3'12 is Preliminary Florida Apartment Rent and Rate Trends 6.8% Mid-Q3 2012 Rate Rate Change Effective Rent Change 6. Fort Lauderdale 5.1% -0.8% +2. Fort Myers 6. -0. +2. Gainesville 9. +0.8% -5.1% Jacksonville 7.8% -1. +2.3% Miami 3.8% -0.3% +2. Naples 3. 0. -0.3% Orlando 6. -0.9% +4. W Palm Beach 5.7% -1. +5.1% Sarasota 3.8% -0.9% +4.7% Tallahassee 8.1% +1. +1. Tampa 6. -0.1% +3. 6. 6. 6. 5.8% 7% Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12* Florida Apartment Lending Rates v Corresponding 10-Year Treasury Yield Amortizing Mortgages Source: Chandan Q3'12 is Preliminary Interest Rate 3% 1% Treasury Yield Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12*
FLORIDA APARTMENT Page 5 FLORIDA OFFICE Florida s*office*sector*faces*long*road,* Favorable*Pricing*for*Long1Term*Investors* Florida s# office# market# continues# to# struggle# under#the#weight#of#disappointing#officedusing# job# creation# and# related# space# demand.# Whereas# population# growth# has# benefited# apartment#rental#demand,#helped#to#put#a#floor# under# some# housing# markets,# and# has# lifted# yeardoverdyear#retail#sales,#immigration#into#the# state# is# weighted# to# retirees# that# do# not# factor# directly#into#the#standard#office#equation.## As# compared# to# peer# markets# in# other# large# states,# Florida s# slower# office# recovery# is# observable#across#every#one#its#major#markets.# As#of#midDquarter,# vacancy# rates# were# near# or# above# 20# percent# across# most# of# the# state.# In# Tampa,# which# is# performing# well# in# other# areas,# the#office# vacancy# rate# was# closer# to# 30# percent.#even#in#miami,#the#vacancy#rate#across# all#submarkets#remains#elevated.# There# are# certainly# exceptions# to# Florida s# general# weak# office# trends.# But# outside# of# Miami s# highdflying# submarkets,# such# as# the# Brickell# financial# district,# they# are# limited# to# specific# submarkets# and# tenant# relocation# decisions# rather# than# macro# trends.# In# Ft.# Lauderdale,# for# example,# the# 410,000# square# Florida Office Rate and Rent Trends Mid-Q3 2012 Rate Rate Change (BPS) Asking Rent (PSF) Fort Lauderdale 19. +20 $25.7 Fort Myers 22.9% 0 $16.8 Jacksonville 18.8% -30 $17.7 Miami 18.3% -40 $30.2 Orlando 17.9% -40 $20.9 Palm Beach 23.7% -20 $29.1 Sarasota 21. +40 $13.7 foot# Las# Olas# City# Center# # purchased# by# JP# Morgan# Asset# Management# for# $164# million# last#year# #has#seen#its#occupancy#rate#rise#to#99# percent.# Ft.# Lauderdale s# vacancy# rate# was# 19# percent#at#middquarter.#in# comparison,#the#las# Olas# submarket# reported# a# vacancy# rate# closer# to#6#percent.# Investors*Look*to*the*Future** Third# quarter# office# property# trades# reflect# investors # expectations# that# fundamentals# will# improve.# Citing# early# signs# of# stronger# absorption,#a#fourdproperty#portfolio#located#in# Ft.# Lauderdale s# Sawgrass# International# Corporate# Park# traded# in# August# with# a# reported#occupancy#rate#of#just#65#percent.## In# Orlando,# the# biggest# lease# signings# over# the# summer# traced# back# to# the# market s# foundational# tourism# industry.# Disney# absorbed#just#over#100,000#square#feet,#followed# by# Planet# Hollywood# and# Internet# travel# site# priceline.com.# Apart# from# tourismdrelated# spillovers,# the# demand# drivers# for# medical# office#space#and#insurers #backdend#office#needs# remain# critical# components# of# Florida s# longd term#office#equation,#as#well.# Pricing#trends#are#improving#slowly#across#the# state,# with# cap# rates# in# the# second# quarter# inching#down#to#7.2#percent.#investors#and#their# lenders# will# need# more# convincing# before# capital# flows# to# the# sector# rebound# more# strongly.# Apart# from# buyer# hesitancy,# assets# coming# to# market# face# challenges# related# to# weak# price# discovery# and# conservative# underwriting.# Investors# with# longer# time# horizons# and# the# inside# track# on# welld positioned#assets#stand#to#benefit#from#the#lack# of# competition,# provided# access# to# equity# and# debt#is#not#a#constraining#factor.# # Tallahassee 15.1% +30 $27.2 Tampa 29.3% -80 $20.7
6 FLORIDA RETAIL AND INDUSTRIAL Page 6 1 1 - -1 Year-Over-Year Change in Taxable Florida Tourism Sales Source: Florida Office of Economic & Demographic Research -1 With*Few*Exceptions,*Florida*Retail* Spending*Picks*Up* # rates# in# Florida s# major# retail# centers# fell#during#the#second#and#early#third#quarters,# with# only# TampaDSt.# Petersburg# reporting# an# increase# in# available# space.# Continued# growth# in# tourism# remains# a# key# driver# of# modestly# positive# retail# absorption.# But# spending# by# residents# is# also# rising,# supporting# performance# improvements# across# a# broader# range# of# neighborhood# community# and# shopping# centers# and# regional# malls.# Statewide# sales# were# 6.6# percent# higher# than# a# year# earlier# in# July,# besting# national# trends.# Reflecting# a# bottoming# Florida Retail Rate and Rent Trends Mid-Q3 2012 Prices*and*Investment*Trends*Lag** Improving*Industrial*Fundamentals* out# of# some# housing# markets,# sales# of# building# materials# and# home# improvement# goods# were# up# more# than# 10# percent.# Consumer# durables# and# nonddurables# registered# improvements# on# par# with# a# 6.5# percent# increase# in# tourism# and# recreation# spending.# Miami# and# Ft.# Lauderdale# are# leading# the# pack,# but# Lakeland,# Pensacola,# and# Sarasota# have# registered# healthy# improvements,#as#well.# Rate Rate Change (BPS) Asking Rent (PSF) Fort Lauderdale 9.7% -10 $18.5 Jacksonville 11. -40 $15.0 Miami 6. -60 $23.7 Orlando 9.7% -10 $17.0 Palm Beach 9.9% -20 $21.2 Tampa 8. +30 $14.2 However# modest# the# improvements# in# the# Florida# housing# market,# spillovers# into# other# sectors# are# already# noticeable.# # rates# for# local# warehouse# and# distribution# facilities# fell# in# the# second# and# early# third# quarters,# owing# in# part# to# a# rise# in# space# demand# by# smaller#and#newly#established#companies.#still# in#their#early#stages,#improvements#in#property# cash# flow# have# not# yet# motivated# comparable# increases# in# property# prices.# North# of# Miami# and# Ft.# Lauderdale,# there# is# a# relative# abundance# of# assets# available# for# sale# at# welld cushioned#offering#cap#rates.# The*Promise*of*Florida s*ports* Apart# from# localized# gains# attributable# to# housing# and# improving# consumer# trends,# the# impact# of# the# Panama# Canal# expansion# on# Florida# port# activity# is# coming# into# greater# focus# as# the# 2014# milestone# draws# closer.# Traditionally# a# port# for# cruise# vessels# more# than# cargo,# only# Miami# will# be# ready# for# the# larger#ships#due#to#cross#the#canal#in#2015.#but# projects# are# underway# across# the# state s# other# major#ports,#as#well.## At# the# Port# of# Jacksonville,# for# example,# two# New#Panamax#cranes#were#installed#last#year.# Roughly# $600# million# has# been# targeted# for# projects#that#will#deepen#the#jaxport#harbor,# a# critical# component# of# the# port# authority s# goal# of# capturing# crossdcanal# container# traffic.# At# the# federal# level,# the# administration# announced#in#july#that#miami#and#jacksonville# were#among#the#ports#that#would#benefit#from# expedited#reviews#of#infrastructure#projects.##
Page 7 FLORIDA HOSPITALITY AND DISTRESSED Central*Florida*Hotels*Register*Larger*Gains* South# Florida s# hotel# occupancy# rate# slipped# activity# has# greased# the# wheels# for# hotel# towards# the# end# of# the# summer,# according# to# financing.#among#recent#smalld#to#mediumdcap# data# for# August# published# by# Smith# Travel# deals,# the# Royal# Bank# of# Scotland# provided# Research.# In# Central# Florida,# however,# the# fresh# financing# for# Lakeland s# Hilton# Garden# recovery#remains#slow#and#steady.#yeardtoddate# Inn.# The#fixed# rate#loan# carried#an#interest#rate# occupancy# and# overnight# rates# are# up# in# of#just#over#4.9#percent,#significantly#lower#than# Daytona# and# Orlando,# and# even# more# so# in# prevailing#rates#only#one#quarter#before.## TampaDSt.#Petersburg.#On#its#current#trajectory,# Armed# with# improving# access# to# financing,# revenue# per# available# room# will# recover# to# its# investors#are#busy#uncovering#assets#in#the#subd early#2008#peak#by#the#end#of#2013.# $10# million# segment.# But# reinvestment# into# Discount#and#economy#hotel#transactions#have# larger# assets,# such# as# the# Coconut# Grove s# dominated# the# last# two# year s# improving# pace# Mayfair# Hotel# and# Spa,# portends# a# healthy# of#sales.#after# a#summertime# lull,# September s# outlook#for#the#top#of#the#market,#as#well.# rising# conduit# lending# and# CMBS# issuance# Bad*Construction*Loans*Still*Weighing*on*Florida s* Balance*Sheet*Lenders* weighing# on# banks # capacity# to# extend# new# credit# in# support# of# smalld# and# middcap# The# default# rate# on# multifamily# loans# held# by# transactions,# in# spite# of# historically# low# Florida# banks# has# been# declining# rapidly,# benchmark#lending#rates.## narrowing# the# gap# between# regional# and# national# trends.# The# sharp# improvement# in# legacy# apartment# performance# reflects# the# impact# of# rising# cash# flow# and# value# on# borrowers # ability# to# meet# principal# and# interest# obligations# and# to# refinance# maturing# Given# theses# constraints# on# bank# lending,# the# resumption# of# CMBS# issuance# in# September# bodes# well# for# smaller# borrowers # access# to# financing.#florida#has#been#well#represented#in# the# recent# spate# of# new# issues.# In# the# most# mortgages.# recent# deal# to# come# to# market,# Florida# properties# accounted# for#8# percent#of# the#debt# In# contrast# with# apartment# loans,# the# default# in#a#latedseptember#issue#from#jp#morgan.#with# rates# on# commercial# mortgages# and# a# property# type# mix# weighted# to# retail,# office,# construction#loans#are#holding#stubbornly#near# and# hospitality,# investors# looking# beyond# their# highest# levels# of# the# cycle.# That# is# apartments# will# benefit# the# most# from# a# healthier#conduit.# 7% Florida CRE Default Rates Florida National Source: Bank Call Reports, Chandan 1 1 1 Multifamily Default Rates 2 2 2 Construction Default Rates 8% 2 18% 1 3% 1 1 2009 2010 2011 2012 2009 2010 2011 2012 1 2009 2010 2011 2012