Posted by: BayAreaComRE | February 12, 2010

Bay Area Com RE on the Road: The South Coast of Florida

We here at Bay Area Com RE are always interested in how other markets outside of the Bay Area function. Recently, one of the writers had a chance to travel to the South-East, namely the South Coast of Florida, and the differences from our local Bay Area market were astounding.

Florida is known for its swampy terrain, dotted with everglades and tropical coasts. Not surprisingly, this lends well to vast amounts of urban sprawl. As we traveled through Ft. Lauderdale, to Hollywood, FL, to the more remote suburban areas, like Tamarac and Sawgrass, it was apparent that tract developments and strip malls were in high supply, almost to a nauseating level. Not to demote the Southern coast of Florida because there is certainly evidence that cities like Miami and Boca Raton are vibrant hubs of culture and commerce. It was more a reassurance that there seems to truly be a “prototype suburban market” that Americans have become accustomed to. Big box retail, strip malls, community assembly locations, parks, churches / synagogues and the general intermingling of all these components at a generic level are re-created from township to township.

This got us to thinking; when cities and neighborhoods are planned, how much thought goes into the commercial components? Is it the chicken or the egg first? In other words, is residential and housing real estate planned prior to commercial real estate or vice versa or even simultaneously? It seems apparent that people are drawn to well planned cities and suburban communities, but is there a magic potion? Large international cities like San Francisco, Miami, Los Angeles and New York, are all located near large bodies of water allowing for easy intercontinental travel; when settlers first planned for this did they envision vast cityscapes with complimenting suburban sprawl? Or was the access to clean water and transportation the central factor to creating communities and hence trade, commerce and business? Were these settlements that bloomed into international trade hubs simply an end to a means?

It was interesting to see the amount of raw land / assembled development parcels that were actively marketed, a lot by Cushman & Wakefield I might add, throughout the Florida suburban landscape. We would venture to guess that development parcels, in today’s market are in the lower tranche of demand. There are plenty of existing commercial developments available for sale at well below replacement cost that often times were constructed in this last cycle. Taking the risk of starting a new speculative development, and further securing a construction loan to do so, are not going to bear compelling returns over the short or long-term. There is just no way to make it “pencil“, especially in secondary and tertiary markets unless there is a clear path to capitalizing on an unrealized inefficiency (ex:  assembled development opportunity zoned for a grocery store across the street from recently completed and fully occupied gated family development).

Below you can see a “heat map” for different commercial / residential investment classes as compiled by the Rosen Consulting Group. This is from September of 2008 (if anyone has the updated slides, please pass along). Interestingly enough, even in the fall of 2008 “residential land” was already in the declining phase where we believe it will remain for quite some time.

We will continue to monitor the trends of raw land as real estate begins its slow recovery phase.

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