UF study: Outlook for Florida real estate market not entirely negative

December 5, 2006

GAINESVILLE, Fla. — While the outlook for sales of homes and condos in Florida is bleak, the real estate prognosis for business properties is much better as it rides on a still-strong state economy, according to a University of Florida study released today.

Nearly half of Florida real estate experts say it’s a poor time to build single-family housing and more than two-thirds say so about condos, but they are more optimistic about all other types of properties, said Wayne Archer, director of UF’s Bergstrom Center for Real Estate Studies. The results are from the center’s fourth quarterly survey of Florida real estate trends that was completed in October.

“Condominium markets are clearly struggling and single-family markets are softening, although, contrary to some news reports, we don’t see evidence of prices tumbling,” Archer said. “But the picture is pretty healthy when you look at everything else. One important indicator of the real estate market is occupancy rates, and these appear to be stable or increasing in most markets, including apartments, office buildings, retail space, and industrial warehouse and distribution space.”

More than 70 percent of those surveyed said now is a bad time to build condos, and 46 percent said the same thing about single-family housing, but for 10 other property types the respondents were predominantly neutral or even positive, he said.

The foundation for the upbeat view about business property is the relative health and growth of Florida’s economy, Archer said.

“Employment is very good and the fundamentals that drive rental income and occupancy are still very strong,” he said. “In addition, interest rates have remained perhaps a little more stable than some people expected.”

The share of respondents expecting future declines in absorption rates – the rate at which properties are able to be leased or sold – remains unchanged for single-family housing at 61 percent since July, Archer said. It inched up slightly for condos, from 69 to 71 percent.

“The main question we focused on is how bad it is,” he said. “There have been so many news reports and rumors flying about how the condo bubble has burst and how the length of time it takes to sell a house has increased dramatically.”

The results were somewhat more sobering for prices. The percentage of respondents expecting single-family residential prices in Florida to drop doubled from 24 percent in July to 47 percent in October, he said.

For condominiums, the rate of decline was not as dramatic as it was for single-family homes because expectations had already dropped in July, Archer said. Forty-four percent of respondents said they expected condo prices to decline in October, compared with 38 percent in July, he said.

“Condos have always been one of the most volatile markets in real estate,” he said. “They’re a place where naïve investors find it easy to jump in and speculate.”

The condo market is probably overbuilt at the moment, with properties taking longer than usual to sell, Archer said.

“If history is any indication, condos that have special attributes, such as waterfront or lakefront, are those that are going to survive the best,” he said.

One sign that pessimism about single-family housing and condos does not extend to other real estate markets in Florida is in capitalization rates, the measure of how fast an investment will pay for itself in net cash, Archer said. If there is growing apprehension about rental markets, capitalization rates should increase in response to rising perceived risk, but respondents reported capitalization rate increases of less than a third of a percent and even some decreases among 10 major property types since July, he said.

The increasing cost of homeowners’ insurance in Florida was again a major concern in this survey, as it was in the previous quarterly survey released in September. “However, the fact that the investment outlook remains stable to positive for most property types and the fact that cap rates remain stable, signaling continued investor confidence, are both indicators that the immediate insurance crisis is not yet being viewed as so bad that it has changed real estate markets,” Archer said.

For the survey, UF’s Survey Research Center asked a series of questions of 183 industry executives, real estate lawyers, market analysts, title insurers, financial advisers, market research economists, real estate scholars and other experts in the field.

For more information, contact the center at 352-273-0311 or cres@cba.ufl.edu. More information is available on the center’s Web site at www.realestate.ufl.edu.