Miami Seeking Budget Relief Courts Commercial Developers Abroad
Miami is looking abroad for developers to revive its commercial real-estate market, counting on revenue from new projects to relieve a fiscal hangover left by the collapse of residential prices.
Asian companies are behind the two biggest commercial ventures this year. Hong Kong-based Swire Pacific Ltd. (19) got initial approval June 23 for Brickell CitiCentre, $700 million of retail, hotel, residential and office space. Genting Malaysia Berhad agreed in May to pay $236 million for the Miami Herald newspaper headquarters owned by McClatchy Co. (MNI) It plans a $3 billion waterfront resort and casino for the 14 acres.
The Swire project alone will bring Miami as much as $2 million in permit fees in the next year and, eventually, annual property taxes of $5.5 million, Mayor Tomas Regalado said in an interview. The city of about 400,000 people can use the money: it faces a projected 2012 budget deficit of about $54 million and possible employee furloughs amid declining revenue.
Miami “will have no fear of being broke in the next five to 10 years,” said Regalado, 64, who visited Taiwan in May. City officials plan a Peru trade trip by November. “We’ll be presiding over the next boom of the city of Miami with all these mega projects.”
The city’s bond rating was cut by the three major credit evaluators last month after shrinking revenue opened operating deficits in five of six fiscal years through 2010. Tax income fell as home prices tracked by an S&P/Case-Shiller index plunged 51 percent through April from a 2006 peak.
Signs of Life
Commercial property is showing signs of life as overseas buyers purchased $447.9 million worth in the first six months of 2011, according to Real Capital Analytics Inc., a New York-based researcher. That’s almost 10 times the $48.1 million in all of 2010 and twice the $209.5 million in 2009.
Drawn by a weakening dollar and low prices, overseas commercial-property investors probably aren’t looking for profits from quick resales, a practice that helped fuel a condominium-building boom, said Ben Thypin, Real Capital’s market-analysis director.
“The large-scale projects indicate the interest to stay in the market a significant amount of time,” he said in a telephone interview. “I think of Miami more along the lines of a San Francisco or Manhattan.”
Among other deals this year: Cube Capital, a London-based investment fund, said in April it and InSite Group, a Weston, Florida-based investment firm, paid $61 million for the Continental Oceanfront South Beach Hotel in Miami Beach. RREEF, the real-estate investment-management unit of Deutsche Bank AG, paid $95.2 million in January for a shopping mall in West Kendall, outside central Miami.
Even after the end of Miami’s condo explosion, in which 22,000 units were built from 2003 to 2008 as home prices doubled, developers continued to construct offices. The central business district got 1.23 million square feet (113,800 square meters) of office space since the third quarter of 2008, an 11 percent increase, according to Jones Lang LaSalle Inc. (JLL), a Chicago-based real-estate services company.
The district’s office-vacancy rate was 22 percent at the end of June, with 2.86 million square feet empty, according to Jones Lang. That compares with 12 percent in midtown Manhattan and 17 percent in Chicago.
Business-district rents dropped to $35.35 a square foot in June, down 13 percent from a peak in the third quarter of 2008, Jones Lang said June 30. Actual leases are as much as 30 percent cheaper when concessions such as free rent are included, said Richard Schuchts, senior vice president at Jones Lang in Miami.
Job Growth Needed
Absorption of space and price increases won’t happen until job growth returns, especially in the financial, legal and insurance industries that occupy prime space, Schuchts said. The Miami-Fort Lauderdale area’s unemployment rate was 11.4 percent in May, exceeding the 9.1 percent national rate that month, according to the Labor Department.
The office market now is “like musical chairs,” with new buildings cutting rents to pull tenants from older ones, Schuchts said.
“There are law firms in new buildings, but there’s the same number of lawyers,” he said in a telephone interview. “Financial services are just moving around.”
The $300 million 40-floor tower at 600 Brickell Ave. in the financial district, which opens in August, has leased only 20,000 of its 600,000 square feet, said Tracy Story, president of management and leasing at the Foram Group Inc., the building’s Miami-based developer.
The first tenant is French bank Credit Agricole SA. (ACA) Leases totaling another 300,000 square feet are being negotiated, with many prospective clients from international companies, Story said. The widening of the Panama Canal in 2014 will attract more Asian trade and investment, she said.
Sales of Miami homes and condos climbed 61 percent this year through May to 10,439 units, according to Florida Association of Realtors data. Condo prices fell 1 percent in May to a median $124,300, the smallest decline from a year earlier since June 2008.
“While office is showing oversupply, the big oversupply of residential was two years ago,” Perez said in a telephone interview from Miami. “That’s been largely consumed by foreign buyers, who are either keeping them as second homes or renting them for investment.”
Related, which wrote down $1 billion of condo losses in 2008, invested in commercial property through a partnership that paid $100 million in May for the $161 million senior promissory note on Miami’s Omni Mall and Hilton Downtown hotel, which faced foreclosure.
Genting Malaysia bought the Herald property anticipating Florida will license casino resorts. That’s risky considering the Legislature hasn’t approved gaming outside Indian reservations, horse and dog tracks and jai alai frontons, said Nick Iarossi, a Tallahassee lobbyist for Las Vegas Sands Corp. (LVS)
“We have no assurance it’s going to happen,” Iarossi said in a telephone interview. “They’re going to have their work cut out for them to win that license, and they could be left with a very, very expensive piece of property.”
Genting, which owns 50 percent of Miami-based Norwegian Cruise Line Ltd., will develop the Herald site for long-term growth with or without a gaming license, said Neisen Kasdin, a Miami-based land-use and entitlement attorney for the company.
“They view Miami as the Singapore or Hong Kong of the Americas,” said Kasdin, who is with Akerman Senterfitt LLP and is vice chairman of the Downtown Development Authority.
Swire, which developed Miami’s Brickell Key in the 1980s, is planning the five-million-square-foot CitiCentre for 2015, not today’s market, said Megan Kelly, senior vice president of the U.S. unit. CitiCentre’s first phase will be mostly retail and hotel space, which is more in demand than offices and condos, she said.
Downtown Miami’s retail vacancy rate was 3.6 percent in the second quarter, according to CoStar Group Inc. (CSGP), a real-estate information company in Washington. The occupancy rate of Miami- area hotels was 79 percent in the first five months of 2011, up from 69 percent two years earlier, according to Smith Travel Research Inc.
“If you’re selling eight of every 10 rooms, that implies there’s more room for growth,” Jan Freitag, vice president at Smith Travel, said in a telephone interview from Hendersonville, Tennessee. “Miami, because of its geographic location, attracts leisure, business and international travelers. It’s very, very hard to compare with other markets.”