2005 was an extraordinary year for sellers, where it was not uncommon to see buyers paying well over appraised values, many ‘as is’ contracts and an inability to keep up with buyer’s needs with low interest rates fueling a hot market. Properties in Florida appreciated as much as 40% in some areas making investors a small fortune. In spite of the US being at war, energy prices rising, natural disasters in the gulf region of Florida and a recovery of the stock market, real estate is still the soundest investment.
What will the real estate market be like in 2006? To understand and make a decent hypothesis, we have to look at the national backdrop and apply the residual factors that will be felt into 2006. Finally, Aswin has suggestions for your investment portfolio for the New Year.
• The US economy continued to show remarkable resilience in spite of vacillating consumer confidence,
unprecedented oil price increases and devastating hurricanes in Texas and Florida
• 2005 saw the fifth consecutive record high in residential real estate
• Home appreciation set record highs with metropolitan areas experiencing growth of 10% or more
• The nations home ownership rate was 69%
• Job creation, especially in home construction, was increased substantially
• 200,000 jobs were created due to increased consumer spending due to healthy home price appreciation enabling
consumers to spend more freely
• Recovery of the stock market with the S & P 500 approaching a 3 year high at the end of 2005 the Dow Jones
Industrial Average is set to cross the key 11,000 for the first time in 5 years
• Interest rates remained at 45 year lows in 2005, inflation is under control and the Federal Reserve continued its
measured approach to interest rates
• Commercial real estate market is increasing due to nearly 4 million jobs being created in the past 2 years –
primarily in the financial services and professional markets
• International trade agreements will propel the demand for industrial real estate in Florida – vacancy rates have
declined and rental rates are accelerating
• Affordable housing market is hot as mortgage rates start to creep up creating demand for multi-family housing
for the 20-29 year old demographic starting new families
• Oil prices increased dramatically causing a general drag on the economy
• Florida’s population will increase 80% in population from 15 million to 28 million between the years of 2000 and
2030. More people equates to a greater need for housing and business space.
• A general migration to Florida (now almost triple that of California), it is quite possible that by 2020, Florida
will outrank California and New York as first place for relocation.
• The US population is expected to increase from 281 million to 363 million with almost 8% of the total population
of the USA residing in Florida. This excludes second home owners in the state of Florida. By the year 2030, it
is anticipated that almost 25% of all USA residents may have either their primary residence or a second home in
Florida. This equates to 50% of Americans with disposable income owning a home in Florida.
• Despite last year’s spate of hurricanes, Florida was the Top Magnet State of 2004, a testament to its reputation
as a great place to work and play due to the temperate climate and favorable business environment. The Sunshine
State experienced the largest net relocation gain (inbound moves minus outbound moves) in the country.
• Florida has jumped to number three in the national rankings for the most million dollar homes edging
• Investors and people relocate will appreciate that Volusia County (Daytona Beach Area) is the least expensive
county in Florida.
Commercial Real Estate:
• Lease rates in North Dade have surpassed $6 per square foot, an increase of 40% over the last two years
• Industrial land prices will continue to increase as industrial condo developers pay double digit prices
• Sale prices for warehouse buildings will continue to rise
• Small warehouse condos (2,500-10,000 square feet) will continue to be a thriving market with sales prices
reaching $200 per square foot
• Rental rates will continue to increase making commercial investments more lucrative – though this is tempered
by increasing interest rates. This may result in many owners opting to stabilize their rental streams
rather than on increasing revenue by raising rents
• Demand for income producing retail properties and land suitable for development will continue to experience
demand from developers and investors domestically and internationally
Residential Real Estate:
• Listing prices are to be more realistic
• Shift from a sellers market to a more balanced market
• Prices will reflect comparables rather than above the comp pricing
• Reduction in the number of ‘as is’ contracts will be seen
• Modest growth in the $1 Million plus market
• A record number new buyers will be purchasing property in 2006 with the main
source of buyers being second home buyers from the northeastern United States
and Western Europe
• Fewer leases were created in 2005, yet the number of renewals and expansions provided good market
activity for 2006
• Jacksonville office market boasts a vacancy rate of 17.5% - slightly higher than the third quarter of 2005
• Employment increased - the jobless rate was down 3.8% from 3.9% - the fifth lowest rate of all large
metropolitan areas and well below the national average of 4.9% in the third quarter
• Jacksonville continues to offer an abundance of large office blocks of space – therefore, with these large
vacancies, rents should keep from increasing although there may be a trend for landlords to increase rents as
construction costs continue to climb
• More attention is being diverted toward the St John’s county line and beyond as investors, developers and site
selectors realize the unbridled potential of The River City
• The industrial market continues to lease enough space to create sufficient absorption to stay ahead of new
• Jacksonville Port Authority signed a 30-year lease with Mitsui O.S.K. Lines, Ltd, that will connect Jacksonville
to an Asian trade line, create thousands of jobs and make Jacksonville port one of the busiest in the nation –
creating new housing needs in the Westside, Ocean Way and Northside communities
• Median house prices increase every month in Duval, Clay, Nassau and St Johns Counties
• Existing home sales in the Jacksonville area rose 20% in the 4th Quarter
• Median sales prices rose 17% from 2004 to $190,000
• There was a 20% increase in sales – the second highest in the State
• The median sales price rose by 12% in all markets
• Northside, Westside and Ocean Way sub markets in great need of housing for the 3,800 new jobs that have been
created by the Mitsui contract
2005’s economy remained fairly stable in spite of hurricanes, war, high energy prices and a volatile capital market. These factors will have an impact on 2006.
1. Rising Energy/Construction Costs:
Despite the drop in gasoline prices mid-November, the price of gasoline was 32.7 cents per gallon higher than in 2004 according to the Energy Information Administration. This has a knock on effect to the construction industry. Even before Hurricane Katrina, construction costs were climbing due in large part to demand for materials from China and India, according to the Associated General Contractors of America. Additional increases from the rebuilding of the hurricane torn Gulf coast will be felt in 2006. Prices for concrete and gypsum will continue to rise, with some experts claiming a 1% increase each month will be experienced.
In spite of this, it is believed that the high construction costs, development will not be abandoned altogether. Many developers will be encouraged to convert well-positioned homes and office space to other uses such as retail/residential/mixed use. Commercial tenants may be opting for finished spaces over shell space due to the high price of interior finishes.
2. Consumer Spending
Mortgage refinancing has given homeowners on average 25% more disposable income without a correlating wage increase, claims the Economic Forecasting Center. With a steady increase in mortgage rates, this spending spree may come to a close. The area for concern is if the 10-year Treasury bond yield is 6% by mid-2006, then the consumer will run out of cash from his housing equity ATM before growth replenishes the coffers. The connection between consumer spending and commercial real estate is retail. The demand for new retail space may taper next year as spending decreases.
Higher interest rates mean good news for developers refurbishing or developing in the multi-family sector. This sector saw limited construction in 2005 in favor of the more lucrative residential condo projects. These will be the affordable homes for young families getting their footing on the property ladder (small 3BR/2BA homes near schools and interstates).
Preliminary estimates show the nation added 1.9 million jobs in the 12 months ending October 31, 2005 Economists from the Torto Wheaton Research suggest that companies are attempting to run more efficiently with less new hires, particularly in manufacturing. As a result, corporate efficiency has changed office requirements. For each employee, square footage has dropped as low as 80 sq feet from 250 sq feet. As a result companies require less space for increased production.
The good news for developers is that distribution centers should enjoy healthy demand as retailers ship food and consumer goods to a growing US population. Industrial space fell 20 basis points to 8.4% nationwide in the third quarter despite an influx of 27 million sq ft of new space. This is a huge drop in vacancies despite the growth of new space.
(Source - NAR third quarter results)
Is there a bubble about to burst in Volusia County?
Not if you consider that homes have not been viewed as a luxury item – rightly or wrongly. Where there are jobs, there is a need to be housed. Construction, manufacturing and tourism remain in the highest demand in Volusia County. As the businesses expand – and they are – more housing will be needed and canny developers have been not only watching this trend, but are cashing in on it.
Volusia County is bucking the slowing nationwide residential construction trend. There were more residential construction permits issued in the third quarter than in the first two quarters of 2005. The Department of Economic Development reports 1,814 residential new starts worth $369.5 million in value. In the City of Daytona Beach Shores, where condominium construction reins king, $78.1 million worth of permits were granted. Interestingly, this total formed only 179 permits – indicating that there are still major condo buildings being built. There were 409 residential permits issued in Volusia valued at $68.8 million.
The resale market for single family homes had doubled in terms of inventory leveled against the backdrop of reduced buyer demand. Interest rates have responded to this change by rising causing a cooling off period. The key is for sellers not to panic and cash in on the tail end of the hot selling summer period. In the words of Donald Trump, ‘Well, real estate is always good, as far as I’m concerned.’ History repeats itself time and time again….people need places to live and real estate is always the safer investment over stocks and shares.
Daytona Beach had the largest amount of commercial construction in the quarter with $50.1 million. According to a study conducted by University of Pennsylvania, Volusia County currently has 782,644 acres of undeveloped land. It is anticipated that by 2050, only 211,541 will still be remaining. This speaks volumes of the explosion of development that will continue over the next 50 years. Daytona Beach had the highest amount of commercial construction in the quarter with $50.1 million. The $11.6 million in commercial construction in Volusia was the second highest in the third quarter. Altogether, through the three quarters, commercial and residential construction has been in excess of $1.1 billion.
Money is being spent by developers in Volusia County and this shows no sign of declining. Conversely, with a race to acquire what developable land is left, builders are happy to buy now and sit on lots, as necessary, which gives the illusion of a slow down in this market.
The county Department of Economic Development has piloted a new initiative to promote and market area manufacturers to national defense contractors and other key industry contacts. The program identifies key subcontracting capabilities and capacities such as machining, tooling, milling, casting, welding, heat treating, plating, and electronics for 30 local manufacturers qualified to meet various quality control and production requirements. This all leads to greater economic development for us as a county with national recognition for quality. Again, the link between employment growth and the need for real estate is undeniable.
Finally, Daytona Beach has been sited by Inc. Magazine as the 20th-best medium sized city in the U.S. for doing business, and 12th for fastest, most sustained growth, Volusia County is a reflection of the healthy business economy prevalent throughout the state of Florida.
Commercial real estate is far from finished in Volusia County and developers nationwide are visiting the greater Daytona area for unique buying opportunities.
The overall message is:
• that sellers need to be realistic in their selling prices
• inventory will be withdrawn as sellers have to re-think their selling price
• residential and commercial construction is still climbing
• there is a limited amount of developable land left in Volusia County causing a natural price rise
• economic outlook for Volusia County is excellent – jobs mean housing
As expected, not all homes that are listed, actually sell. One would expect that for 2005, there should be a drop on the % of homes listed that actually sold since the envelope was pushed to the limit and in some cases pushed beyond the limit in 2005. To get a more accurate analysis of the market, we look at the total percentage of homes that are listed and their ability to sell.
Upon analyzing all sold and listed data back to 2002, one may discern that in the under 400k price range, we actually have a rise in the number of homes listed that actually sold. This is indicative of very healthy and strong long term market. If we turn our attention to the luxury market (homes above 800k), we find that there is a minute drop in the number of homes that listed and sold. This indicates a very healthy luxury market. Luxury is a relative term, and as many of you are aware, our high end market is still very affordable as compared to other parts of the country and even within Florida itself. With over 1000 individuals moving to the state of Florida on a daily basis, even our very own Volusia county high end market will continue to flourish for years to come.
By “gap” we mean the difference between an inflated price placed on a unit and its eventual selling price. For example, there are now condos in several buildings which have a history of selling in the $400,000 range, but the condos presently are listed in the $450-$500,000 range. If the next sale occurs at $425,000 this does not indicate a drop in the condo’s real value. The price appreciation is still increasing, but the gap is closing. Also, there have been a few sales lately, driven by fear, but the far majority of sales that have occurred for almost all of 2005 and into the first part of 2006, are at a higher value than a prior sale, but much less than the “listed price”.
The last half of 2005 dramatically illustrated the short term outlook for condos. After several years of sustained condo sales, the number of 2 BR condos sold in 2005 was no greater than the last two years. Due to a surge in new construction, however, a 50% increase in supply has grown, producing a glut of new condos on the market. There are thousands more are in the planning stages to be built. Those that have been ‘flipping’ pre-construction condos should be extremely cautious and be prepared to hold these properties for a period of time. Long term, condo sales will be healthy and the usual robust sales of February and March will give a boost to this market, but the gap in prices will now close.
Recently, material costs and stringent codes have gotten to the point that oceanfront new construction is pricing itself out of the budget of many buyers. This has opened up the way for new markets; such as downtown Beach Street and Holly Hill areas. These new markets should see a higher return on investment (ROI) for both long term buyers and also investors. These types of areas will cater to the migrating baby boomers that can not afford or do not desire ocean frontage and the associated property tax responsibilities. It is also possible that the size of these condos may also increase since we have already seen that the first wave baby boomers preferring low maintenance but larger living areas.
2BR versus 3Br Phenomenon
We are also seeing a general shift in a greater number of 3BR condos being purchased in lieu of 2BR. These condos have not yet recorded as “sold”, but are presently under contract. Clients seeking to downsize are looking for the perfect mix of low/no maintenance and space, hence the trend towards 3 BR condos. It will be interesting to see if this trend continues and whether builders will be forced to build oversized 2Br condos.
Buying Florida Real Estate in 2006:
• Focus on sectors that will reap immediate benefits from a strong economy
• REIT’s (real estate investment trusts) that own hotels or apartments that can raise their rents relatively quickly
in a strong economy as opposed to office building owners whose tenants are protected by long leases
• REIT’s that benefit from global trade businesses
• Invest in the heartland – rental properties in blue-collar neighborhoods have been relatively unaffected by the
housing sector’s gold rush
• Buying homes in need of TLC in good locations for refurbishment for rental market
• New build housing in Jacksonville’s Northside, Westside and Ocean Way
• Small warehouse condos (2,500-10,000 square feet) in southern Florida for rental market
• Buy land anywhere in Florida for medium/long term investment
• Industrial Real Estate in Florida due to major global contracts being signed creating jobs in Northern Florida
• Downtown properties that utilize condo living accommodation and office space (office condos)
• Luxury homes in Volusia County
• Buy long term investment properties now for holding a minimum of 5 years
Selling Real Estate in 2006:
Seek the advice of a qualified REALTOR® to assist you with:
• Marketing your home to the appropriate people
• Aggressive, targeted advertising
• Negotiating the best price for your home, business or lot
• Internet exposure for the world wide marketplace
• Excellent communication skills to ensure the deal is completed
• Reducing your stress and demands on your time
• Personal security – your REALTOR® will escort all potential buyers through your home/business
• Improving your knowledge of the market
• Tips and suggestions on preparing your home/business for sale
• Keeping your enthusiasm up for the sale
• Ongoing service after your sale