Market Watch 2010 – Commercial
March 9, 2010
On February 25th, I attended the Market Watch event at the Harborside Convention Center in downtown Fort Myers, FL. Market Watch has become a major annual business event in Lee County and is sponsored by the Fort Myers News Press.
This year’s event was attended by over 700 real estate professionals and featured presentations on both the residential and commercial real estate markets. In this posting I will focus on the commercial segment of the SW Florida market and examine the presentation by Stan Stouder, a local commercial real estate agent with CB Richard Ellis. Next week on will focus on the residential segment of the presentation.
Like many other investment professionals, Stouder believes that the commercial real estate market has yet to hit bottom and the coming year will see increased foreclosures.
His presentation focused on the cause of much of this distress; high unemployment and shaky capital markets. One of his presentation slides quoted a recent Newsweek article written by George Will which stated “Today’s unemployment rate is 10 percent; the underemployment rate – the unemployed, plus those employed part time, plus those discouraged persons who have stopped looking for jobs – is 7.3 percent.” He noted that between December 2008 and December 2009, Lee County lost 32,000 jobs.
His information showing the massive increase in government jobs startled the crowd. Quoting a December 2009 article from USA Today, a slide showed that in 2007 the Defense Department had only 1,868 civilian workers earning more than $150,000. As of June 2009, the Defense Department had 10,000 workers earning more than $150,000. The statistics were similar for the Department of Defense. In December 2007 there was only one employee earning more than $170,000. As of June 2009, there were 1,690 employees earning more than $170,000.
On financing, Stouder believes that a “Hurricane” of Commercial Real Estate defaults is coming, noting that it is estimated that between 15-20% of all commercial notes will become delinquent in the next two years. This has caused commercial lenders to pull back on financing as they found themselves unable to lend because of the increasing numbers of bad debts.
He stated that this has led to a collapse of commercial construction, noting that for the first time since they were keeping records, in January 2010, there were zero commercial permits pulled in unincorporated Lee County. In 2009, commercial permits in Lee County fell 46% from 2008.
Stouder predicted that although the commercial market is in bad shape now, it will recover more quickly because owners are businessmen who will make decisions a lot quicker to let go of properties if it doesn’t make sense to hold on.
Although this may be true, many of the decisions to let go will be in the hands of commercial lenders who are traditionally slow to make these types of decisions.
The market data information was probably the most informative portion of Stouder’s presentation.
According to the data presented, the commercial real estate market is cratering both in terms of vacancy rates, net absorption, lease rates and sale prices per square foot. All areas are being affected including Industrial, Office and Retail properties and the median per square foot price of land has dropped over 68% since 2009. In 2009, there was negative absorption in all asset classes.
He noted that SW Florida International Airport served more than 7.4 million passengers in 2009 and was among the top 50 airports in the U.S. for passenger traffic. Although passenger traffic was down 6.8% nationwide, it was only down 2.5% at SW Florida International.
The information Stouder prepared on the area’s sales spoke to the dramatic decrease in the overall sales activity throughout 2009. As noted in this slide, only 13% of all commercial listings sold in 2009 of which almost 12% were bank sales. According to the information provided, there were 19 commercial foreclosures in 2009.
As to the future, Stouder stressed the need for the area to diversify its economic base from being totally reliant on construction, tourism and agriculture to “clean tech” industries. He noted that he global clean energy market is projected to reach $500 billion per year by 2020 and 55% of clean energy firms surveyed had seen an increase in sales. The potential to attract these firms is enormous since Florida has 85% of the maximum photovoltaic (solar) potential of any place in the U.S.
He noted the recent awarding of a $10 million grant through the FIRST incentive program to Algenol, a company that produces ethanol from algae as a major breakthrough to help diversity the area’s economy. The First incentive program is an initiative by Lee County to encourage business growth and community development for these types of industries.
Stouder also mentioned the Fort Myers Regional Partnership which is offering tax exempt financing for Lee County businesses to help the local economy. The financing is offered through an allocation of $56 million in Federal Recovery Zone Facility Bonds by the American Recovery and Reinvestment Act.
Ending the program, Stouder tried to coax the audience into action and stated his belief that “commercial real estate transaction volume will be up in 2010 as banks purge their balance sheets”.
Posted by Scott R. Lodde