What to Expect in 2008

The Miami-Dade County investment market continues to perform well even though investors are now demanding higher initial returns for greater perceived risk. This re-pricing of assets started in the summer of 2007 when risk became a reality with the collapse of the credit markets, economic contraction and an overall decline in the liquidity of real estate assets. Corrections occurred quickly and will likely carry into the first two quarters of 2008 as risk is being re-priced resulting in an increase in cap rates, and a decrease in asset values. A flight to quality assets with lower risk has changed what was previously a homogenous and commoditized environment. Cap rate pricing over different property types, classes and locations are no longer virtually equal as non-core, and sub-investment grade product has seen cap rate increases in excess of 100 bps while core assets remain at compressed levels.
From a historical perspective, 2007 was a good year for the Miami Commercial Market as a whole. Rents continued to rise to new levels spurred by low vacancy and conservative development. According to our data 60 office properties traded with an average price per square foot of $247 (5.9% cap rate) versus 74 properties with a price per square foot of $230 (6.3% cap rate) the year before. The total sales volume in 2007 ($1.0 billion) was less than 2006 ($1.47 billion). On the industrial side, 98 properties traded in 2007 with an average price per square foot of $83 (6.1% cap rate), which was approximately 9% higher than the pricing achieved in 2006. Nonetheless, the sales volume in 2007 ($747 million) was considerably lower than 2006 ($969 million).

“The third quarter in 2008 will likely bring looser lender guidelines, better
asset valuation and overall economic stimulus sparking a flurry of activity to
end the year as capital needing to be placed competes for deals.”

Miami-Dade County remains a unique market as it is partially-insulated from macro economic changes. An international economic base continues to diversify the economy partially immunizing the market from domestic economic and dollar fluctuations. More importantly, rapid demographic inflow and land constraints have made Miami-Dade County virtually an island contributing to continued single digit vacancy rates, rental rate appreciation and subsequent appetite for investment product. Miami-Dade County has become a pin on nearly every institutional investor’s map as their longer underwriting timelines project continued ability to achieve opportunistic returns following upcoming corrections. Despite a slowdown in the third and fourth quarter, 2007 will be remembered as a banner year for investment product with record pricing and healthy sales activity. Look for 2008 to start slowly with stagnant conditions as a buyer and seller pricing disconnect will cause a slow down in transactions. Windstorm insurance premiums will decrease 10-30% during the year leading to a much needed decrease in operating expenses for non-institutional owners. However, flat rent growth and a moderate increase in cap rates will counteract NOI growth. The third quarter will likely bring looser lender guidelines, better asset valuation and overall economic stimulus sparking a flurry of activity to end the year as capital needing to be placed competes for deals.
 

Market Trends

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