Retail property operations in Miami-Dade County will continue to stabilize in the second half of 2010 as the grip of a deep recession gradually eases, reports FREJ.
The first half of the year likely signaled the end of the worst phase of the downturn, a period characterized by rapid declines in rents and a significant increase in dark space. Job creation over the remainder of 2010 will continue to stimulate spending, helping to sustain property performance and averting another round of substantial store closures.
Net absorption was positive in the first half of this year, but soft space demand will persist in the months ahead. Many retailers remain hesitant to expand due to uncertainty over the strength of the recovery, and building confidence sufficiently to improve space demand will require several more quarters. Continuing declines in rents, though, will help release a modest amount of pent-up demand by providing expansion opportunities for retailers who had difficulty finding cost-effective locations in the years before the recession.
In Miami-Dade, low interest rates and expanding financing capacity ensure single-tenant properties will receive considerable attention when brought to market. Properties net-leased to national brands such as Walgreens or CVS often generate intense bidding when brought to market. Cap rates for this type of property contracted 50 basis points in the first half to less than 7% on strong buyer demand.
Multi-tenant transactions continue to gain momentum, driven by competitive pricing and the greater availability of financing for stable properties in sound physical condition.
Generally, cap rates for Class B multi-tenant assets start in the low-8% range, while institutional-grade properties can trade at 7% or less. Current pricing and first-year returns offer attractive investment opportunities, but additional transactions over the remainder of the year may also be driven by sellers seeking to lock in profits under current capital gains tax rates.
The addition of 2,500 government jobs accounted for most of the 3,400 positions generated in Miami-Dade County during the first half of 2010. The elimination of temporary census positions and local and state government cuts over the remainder of the year will likely erase the government job growth recorded in the first two quarters.
Among private employment sectors, greater port activity contributed to the gain of 2,500 workers in trade, transportation and utilities in the first half. In addition, 800 leisure and hospitality positions were created as hotel occupancy jumped 540 basis points to 73%.
High unemployment and extended periods of joblessness for many residents fueled a 4.2% drop in the median household income over the past year to $40,700 annually. As a result, retail sales increased a slender 0.4% during that time, although conditions improved in the last six months.
Outlook: The pace of hiring will increase in the second half, helping offset the expected loss of government positions. As a result, total employment will expand 0.7% in 2010 with the addition of 7,200 workers.
Retailers remain hesitant to expand, curtailing the development of new properties. In the past 12 months, 747,000sf of space was completed in the county, down from 1.3 msf in the prior year.
Year-to-date completions total 126,000sf and consist of some smaller properties and the 81,000sf Eureka Promenade in the South Dade submarket. The latter was delivered in the first quarter and was 31% vacant at mid-year.
The 400,000sf Palms at Town & Country power center and the 35,000sf Vicenza Plaza in Miami remain under construction. The delivery of both projects is slated for the fourth quarter.
Outlook: Developers will complete 600,000sf of retail space in 2010, down from 800,000sf last year.
Approximately 192,000sf of positive net absorption offset additions to stock during the first half, resulting in a 10 basis point drop in vacancy to 8%. The current level, however, is 60 basis points more than a year ago.
Properties delivered in the past 12 months were 14.5% vacant in the second quarter. The vacant space in these buildings accounts for 40% of the increase in vacant space during the period.
In the South Dade submarket, neighborhood / community center vacancy fell 60 basis points to 5.8% in the first two quarters of this year on positive net absorption of 82,000sf. Other submarkets registering decreases in neighborhood / community center vacancy were Opa-Locka/ Hialeah and West Dade.
Outlook: Countywide vacancy will climb 40 basis points this year to 8.5% due to soft space demand; vacancy spiked 140 basis points in 2009.
Store closures and the accumulation of vacant space have moderated, but property owners still lack leverage to raise rents. Year to date, asking rents decreased 0.8% to $23.04 psf, while effective rents slipped 0.9% to $19.47 psf. Since the recession began, asking rents have fallen 5.1%, and effective rents have plummeted 11.3%.
Concessions equaled 15.5% of asking rents in the second quarter, the highest rate ever. The rate of increase has eased, as concessions were up 50 basis points year to date, following an 80 basis point jump in the preceding six months.
As vacancy declined in the South Dade submarket during the first two quarters this year, concessions held steady. Leasing incentives of 17.7% of asking rents in the second quarter were unchanged over the first half of 2010 but were up 310 basis points year over year.
Outlook: Asking rents will decrease 2% this year to $22.75 psf, the lowest level in four years. Effective rents will recede 3.2% to a five-year low of $19.11 psf.
Single-tenant sales trends
Deal flow tapered off in the second quarter, following a brisk pace of activity in the first three months of this year. As a result of the recent slowdown, transaction velocity fell 25% over the past 12 months.
The median price of properties sold in the last year was $211 psf, a drop of 23% from the preceding 12-month period. Several owner-user properties sold in the most recent stretch, while only a few sales of assets net-leased to prominent national brands were executed.
Estimated cap rates for properties net-leased to top-rated credits start at about 7%, although rates vary widely in the market. Cap rates on assets with imminent lease expirations in high-traffic areas, for example, can settle in the low-6% range or less.
Outlook: Assets net-leased to highly rated credit tenants or located at prime intersections will continue to command high prices due to steadily improving financing capacity.
Multi-tenant sales trends
While the pace of single-tenant property sales ebbed recently, deals involving multi-tenant assets accelerated. In the past 12 months, multi-tenant transaction velocity increased 30%.
Over the last year, the median price of properties sold declined about 4% to $203 psf. The current median price compares favorably with the peak value of $214 psf reached two years ago.
Cap rates on well-located assets with solid tenancies generally start in the low- to mid-8% range. Relatively low interest rates and keen competition for quality properties could push down rates slightly in the quarters ahead.
Outlook: As in other markets, some concerns will persist among owners and prospective investors regarding properties with above-market rents and where those rents will settle as leases roll over.
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