Miami industrial poised for U.S. infrastructure push

It is now clear that Miami’s economy is in the midst of a global market correction. Subsequently, unemployment has risen to 6.5% in South Florida, according to the U.S. Bureau of Labor Statistics.

The market drivers of the region are anchored by pro-cyclical industries such as finance, trade and tourism. As a result, Miami is profoundly affected by a broader-based slowdown in other global economies that invest in the region.

Miami’s trade infrastructure to this point has allowed Miami to weather the economic storm. However, the prognosis is gloomy, with 2009 indictors such as the Port of Miami seeing a slight decline in trade volume for imports and exports.

Overview

Vacant inventory increased by 2.6 msf during 2008, only 2% of the total industrial market. The new spaces were highlighted by Lincoln Logistics Park’s completion of 669,350sf of buildings in Medley. As a result of this, combined with lack of growth, the overall vacancy rate in Miami increased 1.4 percentage points to 7.6% by 4Q08.

The Airport North/ Medley submarket has been profoundly affected by the construction completions and softening of demand, seeing an increase of 1.7 msf this year and pushing the overall vacancy rate from 4.1% in 2007 to 10.2% in 2008.

The Airport West submarket, which is the traditional barometer of Miami and the largest submarket, has shown that it is not immune from market fundamentals either - reporting a slight increase in overall vacancy but still healthy at 6.8%.

Rental rates fluctuated as pricing gaps continued to narrow between landlords and tenants. New market equilibriums come to the forefront as rental rates dropped from $9.15 psf in 2007 to $ 8.54 psf direct gross. This trend will continue through the first half of 2009 as landlords offer more concessions in order to secure tenants and weather the current real estate cycle.

Leasing activity remained stable throughout the first three quarters of 2008, each totaling between 1.5 and 1.8 msf, with the fourth quarter slowing to 1.3 msf highlighted by Lagasse’s lease of 239,690sf in Medley. The second half of 2008 was hindered by the credit freeze, which also slowed leasing down as many companies that tried to relocate into new space had lease contingencies based on obtaining financing for new equipment.

The largest lease of the year was Gordon Food Service, Florida LLC, represented by Cushman & Wakefield for 242,000sf. The Airport West submarket led the way, capturing 41% of the total leasing in 2008 due to its strategic location near major trading hubs.

Sales activity measured 6.7 msf in 2007 compared to 4.3 msf in 2008. The 36% drop in sales volume from a year ago can be attributed to declining investment sales, which were down 46%. The lack of liquidity in the financial markets has hindered the commercial markets’ ability to buy and sell industrial properties. Only highly liquid institutions have the elasticity and capital necessary to close and acquire properties in the current market.

Forecast

Although Miami is feeling the country’s economic slowdown, the region is still maintaining a high level of activity that bodes well for the industrial market. With the Obama administration pledging one of the largest infrastructure endeavors in United States history, the industrial market may be nearing the bottom of the real estate cycle as those supplies will need to be created, shipped, stored and then used. This will stimulate growth in the industrial market sometime in the third or fourth quarter of this year.

Leasing is expected to continue at its current pace through the first half of 2009 as landlords offer aggressive concessions to keep current tenants. Sale-leasebacks will continue to increase as cash-strapped businesses look to monetize their real estate holdings to free up capital needed to operate their businesses.