A Florida real estate developer was dragged into the negative numbers in the first quarter by expenses from stock options, impact fee credits and donated land, the News-Journal reports.
The South Florida housing market decline has been well documented. Even as Florida mortgage rates remain low, a glut of inventory and sky-high prices have depressed sales greatly. Just the same, the commercial real estate market in the region continues to boom.
A sluggish North Florida housing market has two real estate execs heading toward commercial development. And they’re using lessons from the banking industry to anticipate their next move.
Harry Trevett and Jay Mock head Trevett-Mock Inc., a real estate investment company. Some of its developments include Marsh Lakes in Fernandina Beach and Villages of Valencia in St. Johns County.
Trevett-Mock’s portfolio mix flip-flopped about two years ago:
Whereas three-quarters of the company’s business was in residential Florida real estate then, business now is 75 percent commercial development, which includes shopping centers, offices and banks.
Trevett and Mock also have a hand in community banking, and led a group of investors that bought the First Bank of Jacksonville in 2004.
The heavy regulation that comes with banking has shed serious light on upcoming changes in the Florida mortgage market.
“We’re market-driven guys,” Mock said. “We go where the market takes us.”
Trevett and Mock have grown First Bank of Jacksonville from one Mandarin spot with $22.3 million in assets to two locations (the second is in Baymeadows) with $104.3 million in assets, according to its 2006 year-end report to the FDIC.
Two more bank locations are awaiting regulatory approval, one in Lakewood near the intersection of University and San Jose boulevards and the other in Trevett-Mock’s Village Shoppes at San Pablo.
Trevett and Mock were founding members of the First National Bank of Nassau County. But although banking is an investment, real estate development is their bread-and-butter income, Mock says.
Mock, who got his start as a Florida mortgage broker, said he switched to land development because it was more lucrative than selling homes.
“Instead of doing it for people for a fee, I started doing it for myself,” said Mock, who graduated from Fernandina Beach High School in 1986.
The company’s most anticipated commercial real estate project is a 108,000-square-foot addition to Amelia Station, a shopping center in the heart of Yulee. For years, the 13-acre property has been piles of dirt.
As development of surrounding property has picked up - a new golf community and Target and Home Depot shopping centers are all nearby - Trevett and Mock hope to break ground before the end of the year.
Mock says interest is high among tenants and envisions bistros, cafes and other neighborhood retailers to fill the mixed-use “village” center.
SOURCE: Florida Times-Union
Hurricanes have wreaked havoc on Florida insurance rates, but investors with billions of dollars are still chasing quality office and industrial buildings in the Tampa Bay area and beyond.
Case in point: Tuesday’s arrival in Tampa of Jeremy Katz, an analyst with New York’s Real Estate Capital Partners.
On a buying expedition for his company, Katz said investors, both foreign and domestic, still hanker for well-placed office development in Tampa and St. Petersburg.
Their hunger is limited only by the availability of good buildings for sale, he said. Florida’s balmy business climate, including 3 percent unemployment, overshadows the recent deadly storms sweeping through the area.
Hurricanes and tornadoes may scare off some individual Florida home mortgage applicants and push insurance rates too high for some prospective buyers, but it won’t derail big investors like teacher’s pension funds, Katz said.
“Our company represents mostly German institutional investors. They just love Florida,” he added.
Katz’s remarks came during an annual luncheon Tuesday hosted by the real estate firm Grubb & Ellis in Tampa. Except for the slow Florida housing market sector, executives bore good news about area real estate:
Tampa’s Westshore business district, where Florida mortgage loans remain affordable for commercial banks, remains the region’s healthiest market and one of the best in Florida.
Downtown St. Petersburg was a strong No. 2, with vacancy half the national average at about 7 percent. Kennedy suspects downtown St. Petersburg, with its restaurants and waterfront, will lure tenants this year.
Overall, with limited land for growth and rising demand for quality space, office owners are sure to charge more this year, some rents reaching $28 to $30 per square foot.
“It’s clearly a landlord’s market,” he said.
COMMERCIAL REAL ESTATE
Most of the big retail action is confined to what Grubb calls the “northern outlying submarket” - Pasco County.
In Wesley Chapel/Land O’Lakes, three commercial real estate developments will be competing for tenants this year. The Grove at Wesley Chapel, the Shops at Wiregrass and Cypress Creek Town Center are about three-quarters leased. New retail won’t bypass Pinellas County either. A 575,000-square-foot project called Largo Town Center is in the works.
The Tampa Bay area boasted 6 percent vacancy for warehouses, factories and other industrial space, below the 8 percent national average. The rental market rose the fastest in Hillsborough and Polk County, where leasing costs leapt about 25 percent.
VACANT LAND
Property prices still hover in the stratosphere after years of investor-fueled growth. But Grubb’s Bob Zegota dubs the land market dead this year, thanks to strapped home builders looking to liquidate.
“I think there’s going to be a little washout,” Zegota said.
That’s welcome news to Florida mortgage holders on the consumer end. At the same time, Florida’s most densely developed county, Pinellas County, had the highest average land price last year: $437,000 per acre. So it’s hard to know how much relief one down year will bring.
In Hillsborough County, with miles of vacant tracts south of Tampa, the average acre sold for $81,000 last year.
The housing slump across Florida and the nation won’t be severe enough to drag the economy into recession, a real estate researcher predicted in Orlando yesterday morning.
Speaking to an outlook meeting about the Florida housing market, Bob Bach Sr., V.P. of research and client services for Grubb & Ellis Co., a national real estate company, said that fear of a disaster has mitigated as the real estate slowdown is playing out.
Bach said commercial real estate markets should be strong this year. In the Sunshine State, job and population growth and stable Florida mortgage rates should boost markets, he said.
“That’s a recipe beneficial for commercial real estate,” Bach said.
Back 15 years ago, with commercial real estate markets overbuilt and with vacancy rates soaring, investors shunned them. Not so today.
Such investments “have gone from worst to first,” Bach said.
Though speaking to a crowd of commercial real estate brokers, Bach and another expert spent a lot of time talking about the state of residential real estate, given the nationwide slowdown in existing-home sales and the slump in home construction.
He insists that despite a rough 2006, the state’s steady economy, bolstered by still-low Florida mortgage loan rates and strong job growth, should make this a strong year for commercial real estate, where large amounts of money are chasing investment opportunities.
Mark Vitner, chief economist for Wachovia Corp., said a recent uptick in home sales doesn’t mean the residential market’s troubles are over.
“I don’t think so,” Vitner said. “There’s evidence the market still hasn’t hit bottom.”
Vitner said recent sales spikes were due to the holding power of relatively low Florida home loan rates and to home builder incentives. The market’s weakness is reflected in order cancellations, which still run high.
For example, Orlando home sales are experiencing a high 50 percent cancellation rate for new properties, while the nationwide average is 35 percent. On the plus side, he predicted that the housing market may bottom out by the middle of this year.
Vitner also said that, while housing prices will fall in some Florida markets, in most areas the rate of appreciation will simply slow.
There’s a positive aspect to slowing home prices, too. Florida is no longer inexpensive, which can hurt its competitive position in attracting new businesses from other states. Soaring costs of insurance and property taxes are adding to the problem, he said.
He noted that, in 1976, Florida’s home prices were 5 percent below the national median but, today, are 21 percent above the national median.
Vitner also argued that recent uproar over the nation’s dismal savings rate is overblown. He contends that American households are in better financial shape than ever with $54 trillion in home equity, IRAs, 401(k) retirement plans and other investments.
Fewer new homes are being built in the Volusia-Flagler housing market, but commercial real estate projects keep coming out of the ground.
“It’s still a housing boom compared to most of the country, but compared to what we’ve had, it’s a softening of the housing market,” said Rick Michael, director of Volusia County’s economic development department. “On the positive side, strong commercial permitting shows there’s still some good things happening from a business standpoint.”
Michael’s agency recently announced 638 new home permits were issued countywide in the third quarter of the year, slightly more than a third of the 1,814 issued in the same period last year by the county. City and county permitting officials predict less than 3,500 residential permits will be issued for all of 2006, roughly half of the 6,856 issued last year.
During that same third quarter, 49 commercial permits worth $54.1 million were issued by the county and its municipalities. For the first nine months of the year, 198 new commercial and industrial permits worth a combined $204.7 million were issued countywide, up slightly from $192 million posted in the same period in 2005. This at a time when the South Florida housing market is in decline and leaving many observers worried.
“Businesses are still growing, jobs are still going up (in numbers) and the workforce is still increasing. There’s no slowdown in immigration into Volusia County,” Michael said.
It’s a similar tale in Flagler County.
“I don’t have any figures, but I know from working around the area the commercial side has a lot in the pipeline,” said Byron Lalande, business resource specialist at Enterprise Flagler.
Housing construction in both counties has slowed to a crawl because there is so much inventory and many homes remain unsold, said one builder.
“We’ve been overbuilding for a solid 24 months,” said Bob Fitzsimmons, a West Volusia home builder. “Everybody’s inventory has grown, so they’ve got to slow down or stop building until the inventory is absorbed.”
Fitzsimmons cited a monthly report from the University of Florida’s Bureau of Economic and Business Research. In August, the latest figures available, 231 residential building permits were issued in Volusia County, and 78 in Flagler County. A year ago, Volusia recorded 561 residential permits and Flagler logged 388.
The year-to-date numbers aren’t any prettier for residential permits, the report said. Volusia County and its cities issued 2,370 permits the first eight months of this year, versus 3,782 in the same period of 2005. Flagler County and its cities issued 1,339 this year, compared with 2,433 in the same period a year earlier.
“Some of the problem can be placed on flippers and investors, but the building community was stupid drunk with demand and produced more homes than the market could consume. The underlying household creation is still growing 3-4 percent a year, (which is) a solid foundation to the economy,” Fitzsimmons said.
The rise in Florida mortgage rates and cooling of demand has resulted in a downturn that has led to layoffs at many home builders. But some builders are still holding steady, or at least are doing their best to.
KB Home, for instance, doesn’t build unless a buyer is under contract, said spokeswoman Cara Kane, so its inventory of unsold homes is smaller than many other companies.
“KB doesn’t build on speculation, so we have less inventory on hand,” she said.
Still, some buyers walked away from their contracts, so KB does have a few homes without ready buyers, she said.
The Southwest Florida housing market has seen sunnier times.
The region’s commercial real estate landscape, however, is a different story.
That being said, there is no question that Kevin Heiss and Stephen Scalione have landed in the right place at the right time. Heiss, 27, and Scalione, 23, head the Florida office of Largo Capital, a 17-year-old, Buffalo-based commercial mortgage broker whose revenues are mushrooming thanks to the ongoing commercial real estate boom.
Last year, Largo Capital helped clients across the U.S. come up with $570 million in debt and equity financing. This year, the company is on track to provide more than double that sum.
“So far, we’ve done $730 million out of the Florida office alone and we should pass $800 million by the end of the year,” Heiss said.
Both Heiss and Scalione joined Largo Capital in May 2005. But Scalione was originally employed in the company’s Buffalo headquarters and did not move to Florida until early 2006. As a result, Heiss has participated in more of Largo Capital’s big commercial real estate deals.
“We provided the acquisition financing for Meridian Cos.,” Heiss said. “We helped them get a three-year, $28 million mortgage loan to buy, rehab and re-tenant the complex.”
Heiss said securing the financing looked like it would be a challenge at first because the distribution center was empty.
“Lenders don’t like financing projects that don’t have income streams,” Heiss said.
But thanks to the general strength of the Southwest Florida market, Largo Capital was able to find a lender and close the deal in just 60 days.
“It helped that the market is so tight down here,” Scalione said. “There’s like a 5 percent vacancy. There’s no available space. So it’s easy to see the opportunity.”
Over the years, Largo Capital has developed strong relations with major national lenders, as well as life insurance companies, pension funds and Wall Street conduits. The company can provide from $500,000 to as much money as a client could possibly need, its staff claims.
For example, Heiss helped secure $100 million in joint venture equity for an unnamed Florida real estate developer that is shopping centers all over the state.
“The pension fund that provided the money loved the local real estate marketplace,” Heiss said.
Heiss and Scalione added that relatively low Florida mortgage rates should help to keep the Sunshine State’s commercial real estate market hopping in the year ahead, especially when it comes to office and retail projects.
“People are still coming here. There isn’t enough retail and office space. Just look at the new Target shopping center on University. It just opened and it’s so busy, you can’t get in the place,” Scalione said.
Scalione added that the major impediment to deals in the Southwest Florida commercial market is one of the reasons residential real estate is so pricey – the high cost of land.
“Land prices have to move lower before you see more construction,” he said.
That’s the question asked by USA Today. The results may surprise you. One Florida firm, Collman & Karsky Architects of Tampa, has increased its staff by nearly a third since late 2004, trying to keep pace with surging demand for sleek new office, condo and retail buildings.
“The vacancy rate for office space is in the 10 percent range (or lower). As that approaches down to the 6 percent range, we’re going to be seeing more speculative office buildings,” says Rodney Collman, a principal at the firm. “We still have about 1,000 people a day moving into Florida. We’ve got a lot of housing needs.”
U.S. commercial real estate is surging after several down years, with is good news for the economy and firms like Collman’s. But it’s worrying federal officials, as banks are carrying a heavier concentration of real estate loans today than they did during a heady 1980s boom — which ended in a bust, forcing many lenders out of business.
In Georgia, commercial real estate loan concentration (a definition that includes housing activity) is at record levels, soaring from $7.5 billion and 40 percent of bank assets in 1996 to $34.5 billion and 61 percent in 2005, the FDIC says. In Florida, construction and development loans grew 66 percent in 2005.
Nationally, in the mid-1990s, 15-20 percent of federally insured banks carried what regulators consider a heavy load of commercial real estate loans. In 2005, it was 40 percent.
“For banks in the moderate-sized ranges and smaller, what we’re seeing is that the amount of capital committed to commercial real estate has basically more than doubled from the year 2000 and that these loans today represent three times capital. Back in the worst times of the ’80s, it was one-and-a-half times capital.” says Federal Reserve Gov. Susan Schmidt Bies, a former bank official.
TIGHTENING STANDARDS
Determined to avoid a reprise of the 1980s, regulators are tightening real estate lending standards. While such loans are generally performing well and bank profits are healthy, Bies and other officials warn that the industry is entering a time of trouble.
U.S. interest rates are rising and a wave of just-completed office, condo and other buildings are coming on the market, which could affect rents and prices. Lenders are fighting the efforts, particularly smaller banks that see real estate as one of their best chances to compete effectively with huge, national lenders.
“Community banks are saying, ‘If you take this line of business from us, you’re running the risk of essentially putting us out of business,’” said Mark Tenhundfeld, Director of the American Bankers Association Office of Regulatory Policy.
David H. Wells Jr., president and CEO of K Bank, a $650 million commercial bank in Owings Mills, Md., says the federal effort has already affected his business. He’s decided to hold back a bit due to uncertainty about the regulatory climate and signs of softening in the housing market.
“What they’ve done is to throw a bucket of cold water over the whole business. We’re certainly not going to get any more concentrated,” Wells said.
Industry analysts agree that banks are more cautious than two decades ago, but given the up-and-down nature of the real estate market, there’s no substitute for tighter regulation of portfolios.
“The concentration in real estate exposure in the industry has always been fairly high, but right now it’s at an all-time peak,” says Khanh Vuong, a senior financial analyst at AM Best, which rates the financial condition of insurers and, increasingly, banks. It issued a report calling concentration a powerful risk to bank earnings, saying that conditions are softening.
CONSTRUCTION PICKS UP
Commercial real estate slowed several years ago but has been roaring back. U.S. office vacancy rates, now the lowest since 2001, will average 11 percent by the end of 2006. That’s down from more than 14 percent in 2005. An estimated 31,000 hotel rooms are expected to be added in 52 markets studied in 2006, up from 3,852 in 2005, according to the National Association of Realtors.
“There’s been a sense that this has been a more disciplined real estate cycle, compared with 10 to 15 years ago,” said Robert Murray of McGraw-Hill Construction, who added that with a greater share of buildings pre-leased or sold, more office buildings are under construction, which is “starting to generate some concern.”
The American Institute of Architects said that billing is showing signs of activity expanding, which is thought of as a leading indicator. Changes in activity usually indicate in about nine months that either a slowdown or speedup in construction activity is coming.
“We’ve seen no signs so far that acceleration (in commercial real estate) is starting to wane,” says Kermit Baker, AIA chief economist.
Michael Sullivan of OWP&P Architects in Chicago says things are healthy, with some firms constructing new office buildings in the suburbs.
“I certainly have not heard that clients are having difficulty on the financing side,” he said.
Rents for commercial real estate have surged, according to Global Real Analytics. Warehouse rates in Las Vegas rose 13.7 percent from the first quarter of 2005 to the same period in 2006. Retail rents in Honolulu were up 13.4 percent and office rents in San Francisco’s central business district were up 12.5 percent.
However, Detroit and Cleveland are struggling, while some commercial real estate properties in Atlanta, Dallas and Chicago are lagging with rents, according to Global Real Analytics. Further, the Florida housing market and other hot markets are cooling, and there are fears about increased inventory in many of these areas.
Commercial real estate has been a support to community banks, which have been losing traditional business to big institutions. In 1985, community banks had 33.6 percent of consumer home loans, midsize banks had 49.8 percent, while the nation’s biggest 25 banks had 16.6 percent. By 2003, the community bank share was down to 11.6 percent and the midsize share 29 percent, while the big banks had 59.4 percent, the FDIC said.
“I wouldn’t describe it as alarming, I would describe it as a natural reaction” to a good economy and record housing market, says Steve Fritts, Director of Risk Management Policy at the FDIC Supervision and Consumer Protection Division. “But loans may be very good loans individually, but as (concentration) has grown, banks haven’t necessarily built up the management systems.”
TAKING RISK INTO ACCOUNT
Overbuilding can force down rents. Rising interest rates may make it more difficult to sell a property or complete a project. Foreign capital and pension funds chasing investment properties, along with banks competing for business, may push prices too high and erode lending standards.
The regulators’ guidance is intended to ensure that banks consider a range of factors as their real estate portfolios grow, taking account of the broader risks. The Fed, FDIC, Office of Thrift Supervision and Comptroller of the Currency want banks to implement risk management controls such as beefing up capital, if they have significant commercial loans.
Commercial real estate is defined as loans secured by land, development and construction, and loans on existing properties like apartments, retail and offices. They emphasize their focus is on the most volatile slice of the business: loans whose repayment depends on rental income, proceeds of a sale, or permanent financing or refinancing of the property.
Neil Mohamed Husani shook up the Southwest Florida real estate market when he got a $16.25 million loan from Fifth Third Bank — on property whose value apparently more than doubled in a day. It appears the appraisal that Husani and his partners used to get financing for the proposed site of a $125 million development contains “misleading information,” according to two experts who reviewed the document for the Sarasota Herald-Tribune.
A deed filed this month by Husani on another deal overstated the purchase price of some Manatee County property by 250 percent and was used by one of his partners to get a $4.06 million loan from First State Bank in Sarasota. It’s not clear who provided the erroneous information in either case.
Regardless, filing incorrect or misleading information in an appraisal and using it to obtain a commercial real estate loan could constitute fraud and subject both the appraiser and the borrower to civil lawsuits and criminal charges. Overstating the price of property is not a crime in and of itself, but if part of a scheme to defraud a bank, it is considered illegal.
One of Husani’s partners, Robert J. Martin, said he played no part in the appraisal process on the Sarasota condo project and has never seen the document prepared for Fifth Third Bank. He also said he had no idea that Husani had overstated the value of the Manatee County ranch land. Another of Husani’s partners, Michael Tringali, also said he did nothing wrong.
Since January 2005, Tringali has participated in five multi-million dollar deals with Husani, including the Sarasota condo project. In those five deals, Husani bought 1,864 acres of land for $34 million, then sold it to limited liability companies involving Tringali for $96 million. Those companies then accumulated nearly $71 million in bank loans.
Several of the deals were involved the same appraiser, Julian Stokes of Integra Realty Resources-Southwest Florida, who stands by the validity of his appraisals. If he was wrong, Stokes says, it was because he was deliberately deceived. In the meantime, questions about Stokes’s appraisal and the resulting loan have impacted Florida commercial real estate.
It will be interesting to see how this situation is resolved. Are the questions raised simply due to miscommunications, or is this yet another case of reckless development and fraud? Florida Home Loan has faith in the judicial system and believes that people are innocent until proven guilty, but it’s clear that the state and federal government both need stronger commercial loan regulations if they want instances like this to stop happening.
While various reports indicate a downward trend on Florida housing activity, investor interest in commercial properties remains strong, a broker said Friday during a forecast meeting in Orlando.
“This is a white-hot investment market,” said Jeff Sweeney, president of Grubb & Ellis/Commercial Florida, the brokerage sponsoring the forecast session at the Marriott Orlando Downtown hotel. “It’s still frothy.”
Sweeney said the region’s office markets, rebounding strongly from a slump, could see vacancy rates slip below 10 percent this year. Landlords should be able to impose hefty rent increases as a result.
Nationally, office rents are expected to rise 5 percent to 6 percent, but Orlando’s landlords may get more than that, the broker said. New construction is being held back somewhat by escalating construction costs — up about 40 percent during the past year. Sweeney said Orlando’s commercial market also could peak this year, with rising rents and a shrinking inventory. The area’s retail sector — already very strong, with the lowest vacancy rates in four years — could cool somewhat as the housing market slows from its feverish levels of the past two years, he said.
Retail rent increases could actually moderate this year, he added. Bob Bach, Grubb & Ellis’ national director for market analysis, said real estate investor demand for commercial properties should continue as long as interest rates remain relatively low. The investment returns on commercial property have been beating those of both stocks and bonds, he noted.
Mark Vitner, chief economist for Wachovia Corp. in Charlotte, N.C., predicted that economic growth this year would be slightly slower but still robust.
Housing markets are cooling nationwide, Vitner said, but he doesn’t expect home prices to collapse — especially in Florida, which has been leading the nation in job growth.
“Virtually every area of the state is booming,” the bank economist said. He predicted that single-family home appreciation in Orlando will drop this year from the sky-high, double-digit levels of 2004 and 2005 to more sustainable increases of 5 percent to 10 percent. Vitner said it would take a “significant recession” to cause housing prices to drop in markets such as Florida.
Therefore, as we’ve reported before, there is no reason to worry about the state of the Florida home loan industry.
