Given the level of economic and real estate carnage South Florida has suffered in recent years, trading in distressed small-balance properties and commercial real estate assets generally has remained surprisingly subdued.
But not for lack of investor demand.
As has been the case in other economically struggling metros, many lenders here have remained reluctant to take back distressed income properties. And most have taken a prohibitively conservative approach to acquisition financings, observes investment broker Marc Strauss, vice president/investments with Marcus & Millichap in Ft. Lauderdale.
But Strauss and other pros note a marked jump in foreclosure initiations in recent months, and cautiously anticipate a welcome boost in for-sale listings ahead - especially for distressed small-balance retail and office properties.
However, there's little doubt investors willing to take the plunge will continue facing the same economic risks that have caused so much real estate distress here. Amid continued net employment losses, space fundamentals remain heavily tilted toward tenants.
The Ft. Lauderdale area just north of Miami remains particularly occupancy challenged, with an overall business space vacancy rate at 14 percent, compared to the nationwide average of 10.8 percent, according to Boxwood Means, Inc. But at least the near-in Miami rate is more manageable at 10.2 percent.
“It all starts with employment," Strauss laments. “We've lost a lot of jobs here, and they're not coming back in a hurry."
Fewer jobs means softer demand for offices, as well as retail space dependent on consumer spending, Strauss continues, adding that employment in the region's boom-and-bust construction sector has been particularly hard-hit. Indeed in that bellwether employment category alone, South Florida employment fell by more than 22,000 jobs last year, Associated General Contractors reports.
Hence, investors can expect downward pressure on net operating incomes as leases roll to lower effective rental rates in coming quarters, researchers at Strauss's firm conclude.
The better news for opportunists willing to live with those risks is that the recent spike in foreclosure activity suggests a bulging inventory of small-balance commercial properties coming to market in coming months.
But, as Strauss cautions, rampant residential and now commercial foreclosure cases are clogging county courts, and officials today can't offer any certainty with respect to timing of sale notices.
Uncertain timetables notwithstanding, it seems a lot more struggling small strip centers will be trading hands than has been the case in the slow period of late.
And they'll necessarily be priced to move, what with the retail category's continued market challenges. In Miami, for instance, small-cap retail rents, at $22.86 psf, were off 4.0 percent first quarter and 12.3 percent over 12 months according to Boxwood Means. Fort Lauderdale's retail rents, averaging $18.11 psf, are relatively more stable, down 1.4 percent and 8.1 percent, respectively.
The mostly private, cash-heavy investors willing to risk their capital in this environment are finding attractive going-in returns on multi-tenant and net leased retail properties. Capitalization rates are typically in the 8.5 to 9 percent range, Strauss specifies.
The recent non-distressed sale of a roughly 25,000-square-foot strip center along N. Federal Highway in Ft. Lauderdale set what Strauss considers a revealing comp. With private seller financing, the center, which was 75 to 80 percent occupied, sold at a cap of just over 8.4 percent.
Perhaps another market signal will come with the 7,881-square-foot Collins Avenue building housing South Beach's Oyuko clothing boutique, which is scheduled for online auction Aug. 19. FirstBank Puerto Rico foreclosed in connection with a $2.8 million mortgage it made against the property - which traded for $1 million in 2003.
More small-balance office properties will also be coming to market - but there's no shortage of risk in store for buyers in this category as well. Vacancies are extremely high - approaching 20% and effective rents are still falling.
Nevertheless attractive pricing is generating investor interest, as the office sector's average capitalization rates have leaped 2 full percentage points during the recession - 50 basis points more than retail comps have risen, according to M&M's research.
But again, as Strauss stresses, any investor looking to finance will likely have to live with low leverage - and demonstrate successful ownership and management experience in the corresponding property product.
Those able to buy now, and survive for another couple-three tough years, can at least take comfort that South Florida's population and economy will almost certainly see disproportionately strong growth over the longer term.