Real estate market hits era of good feelings

• %24175%2C000 was the median existing-home sales price in Lee County%3A up 15 percent year over year
• 4 office properties were sold in distress sales in Lee County in the third quarter%2C down from 17 a year earlier
• 11.7 PERCENT of industrial space in Lee County was vacant at the end of the third quarter%2C down from 15.6 percent at the end of 2013
• 312%2C000 SQUARE FEET of office space had been absorbed in Lee County in 2014 by the end of the third quarter%2C almost as much as the 355%2C400 in all of 2014

It's steady as she goes for Southwest Florida's real estate economy as it slowly recovers from the recession, the three presenters for The News-Press Market Watch say in their third-quarter review of the area's real estate economy.

Among other trends, there's been a steady resurgence of the commercial sector, which fell hard about two years after the 2006 implosion of residential construction.

The presenters — Randy Thibaut of Land Solutions Inc., Denny Grimes of Denny Grimes & Co. and Stan Stouder of CRE Consultants — examine how each quarter has treated the real estate sector.

This is the latest quarterly report in Sunday Business to keep our readers on top of recent trends in real estate. The News-Press holds its annual Market Watch presentation every year in February – this year's date is Feb. 25.

Stouder said commercial's comeback is an "echo" of an earlier residential revival that reflects the central role that home building plays in the local economy.

"When people start buying houses, people in all sectors go back to work," he said: "lenders, title, air conditioning contractors, drywall, plumbing, electrical contractors. All those guys now need space."

Newly flush residents are also fueling a wave of construction of new retail space such as the Harley-Davidson and Audi dealerships at Daniels and Interstate 75 in south Fort Myers, Stouder said.

The balance of supply and demand for the residential market itself is remarkably stable, Grimes said. "You think it's stuck, it's not moving. We're probably as rational as we've ever been. The market as a whole is predictable, almost boring."

Thibaut, who specializes in large sales of land for residential development, says the first wave of that market was fueled by builders who had the foresight to buy land cheap at the bottom before things got going again.

Now, he said, there's a leveling off of big land sales as sellers realize construction is back and they don't have to sell for a song.

Gary Jackson, economist and director of the regional Economic Research Institute at Florida Gulf Coast University, said the overall picture is favorable nationally with employment and manufacturing on the rise. "I expect the economy to continue to recover."

That's crucial for Southwest Florida with its reliance on out-of-towners to buy homes and come here as tourists. "Our economy is very dependent on what's happening nationally and internationally."

Connect with this reporter: @DickHogan (Twitter).

Commercial real estate

There are a lot of positive points to make about commercial real estate, but before getting into the local market, let's look at what is happening nationally.

A consensus survey composed of 43 experts representing 32 of the U.S.'s leading real estate investment, advisory and research firms was convened by the Urban Land Institute and EY Real Estate. They predict that U.S. Commercial Real Estate (CRE) will see a steady strengthening with solid but not spectacular returns. Their sentiment was that things feel very good and there's plenty of price and rent growth left. Overall global economic growth is creating anxiety but the U.S. remains a strong haven for cross-border investment. Some key findings from the ULI/EY Real Estate Consensus Forecast include the following:

• Commercial property transaction volume will grow, although at a declining rate, and exceed 2006 volume, which was the second highest pre-recession annual volume, by 2016 to $445 billion.

• Commercial property prices are predicted to nationally increase by 10 percent in 2014. Price increases will then moderate to 6 percent in 2015 and 5 percent in 2016.

• Vacancy rates are expected to fall modestly for office, retail and industrial properties.

• Rent increases for all property types are projected to rise by 3 percent in 2016.

• Single family housing starts are projected to increase to 912,500 units per year by 2016, remaining below the long term annual average.

Here in the Southwest Florida commercial real estate market we are seeing through the end of Q3 2014 market activity consistent with the above national forecast.

• The office market has already absorbed nearly as much square footage by the end of Q3 2014, 312,000 square feet, than the office market absorbed for all of 2013 (355,400 square feet) with rents stable to increasing.

• Distressed sales (REO) of office property in Lee County are now at a negligible level dropping from 17 in 2013 to just four as of Q3 and only two in Collier and one in Charlotte counties.

• Industrial vacancy overall in the region has dropped with Lee County seeing its vacancy drop most appreciably from 15.6 percent at the end of 2013 to 11.7 percent at the end of Q3 2014.

• The industrial market has already absorbed more square feet (599,300) by the end of Q3 than in all of 2013 (557,900).

In the retail market, the centers with more national tenants have the lowest overall vacancy at 9.7 percent. These are called Power Centers as opposed to progressively smaller Community Centers 10.5 percent or Neighborhood Centers 12.7 percent.

The number of commercially zoned land sales continues to be as robust in 2014 as they were in 2013. Charlotte County has already had 51 transactions as of Q3 2014, compared to 35 for all of 2014, albeit at the same $1.43 per square foot median price.

The median sales prices for commercial land continues to show dramatic disparity increasing as one goes south, from Charlotte at $1.43 per square foot, to Lee at $2.14 and Collier at $8.83.

If residential real estate development creates the boom, then commercial real estate is its echo. It will be interesting to see how many residential units get absorbed through this coming season as it, though to a lesser extent than in years past, is a harbinger of the ongoing sustainability of this commercial real estate recovery in Southwest Florida.

It is so nice that once again things do indeed feel good in the Southwest Florida commercial real estate market. Will it speed up or slow down? How will this affect you? Clues to those answers await you on Feb. 24 at the 15th annual Market Watch. As you can see, we've already begun preparing. You are invited. Won't you join us?

— Market Watch presenter Stan Stouder, CCIM, is a founding partner of CRE Consultants.

Existing Home sales

The Southwest Florida existing home market continues to be void of extremes through the first three quarters of this year. Prices are rising, but not too fast. Inventory is at lower levels than most buyers and real estate agents would like, but not too low. And homes are selling, but not at a rate that would deplete what little inventory there is, thus causing an unhealthy spike in prices.

According to Florida Realtors, Lee County's median sales price for September was $175,000, up almost 15 percent year over year. At this stage in our market's recovery, that would be a danger signal for us, because we all know what too many 15 percent increases lead to. In this case, there is no cause to worry because our market's improvement from a year ago is greater than its improvement over the past several months.

Over the last quarter, the median was $179,900, $182,500 and as stated above, $175,000. The plateauing of the median is a sign the market is leveling off and should be a message to home sellers that during the next 12 months prices will not be increasing as fast as they did in the previous 12 months. I would encourage the sellers who are anxiously waiting for season in order to raise their asking price to read that twice. Data was not available for Collier County.

There are many other metrics to consider when assessing the true health of the market. However, the median price is equivalent to a car's dipstick in that it's a quick and simple way to check the market's performance and plot its direction. For our market, the "oil" is up to the line.

The amount of oil in the crankcase will not determine how far the car will travel. That's determined by how much fuel is in the tank. Looking forward, our market will be fueled by what is happening around the U.S., especially north of us. Here are a few of the factors that are pointing to us having a stellar season:

• U.S. existing home sales have risen five out of the past six months

• The U.S. median home price is up 5 percent

• 65 percent of sellers are confident they would get their asking price, up from 40 percent in 2010

• 53 percent of people believe home prices will increase over the next twelve months

• Confidence in the housing market is strong

• Interest rates have yet to move up as predicted

• Baby boomers are older and colder, and another cold winter is predicted.

If the additional traffic on our roads is a precursor to the season ahead, then we'd better be buy a comfortable pair of shoes, because shivering home buyers are coming. And after all, we still offer water, warmth and a way of life that is exactly what they are looking for.

As 2014 comes to an end, we will be far from the record sales of 2012, but our market is as healthy as it's ever been.

— Market Watch presenter Denny Grimes is president of Denny Grimes and Co.

Land transactions

Welcome to the second generation of post-recession land sales. The first generation included a deluge of distressed deals from lenders and over-leveraged land owners sold to buyers with the capital, risk tolerance, foresight and a dose of good timing.

Since then, land prices have doubled or tripled from 2011 to mid-2014, putting pressure on homebuilders and developers. The vulture deals are gone. The second generation land sellers are seeking retail pricing, and in many cases they're getting it. However, that trend is not sustainable long-term for builders to serve the Middle-America homebuyer which comprises the bulk of the Southwest Florida market. The second generation land sellers are not distressed and, absent of the urgency to sell, this is curbing sales activity.

During the first generation period from 2009 to 2012, homebuilders and developers were acquiring land and the lot price they paid was typically less than the true cost of the infrastructure (roads, sewer, etc.) leaving zero value for the land. They essentially got the land for free and passed this on to the homebuyer to accelerate new home sales. It worked and created four years of growth. Today, however, we are seeing challenges to the lower end of the market where there is limited inventory for entry-level and move-up housing under $250,000 in central areas. The primary reason is rising costs: what builders pay for materials, labor, and land.

Now builders and developers are paying the true lot price, often in excess of $50,000, that will be passed on to the homebuyer. Therefore expect significant price increases for new homes from here on, which may steer price-sensitive buyers toward secondary, outlying markets such as Cape Coral, Lehigh Acres, North Fort Myers, Golden Gate in Collier County, and Charlotte County overall. Buyers may also seek existing resale homes if the price for a comparable new home becomes out of reach, but still encounter limited inventory of entry-level pricing in primary submarkets.

Reiterating our update from last quarter, the new housing market has been on fire and has reached a plateau, but leveling off is not a bad thing if that tapering leads to stabilization. Until this happens, we have not returned to a sustainable new housing market in Southwest Florida, even as permit volume continues to increase. With builder costs increasing across the board, we expect residential land transactions to level off for the remainder of 2014 and into 2015.

Watch for trends concerning costs, including significant impact fee increases, which present a challenge to keep prices affordable. Let's hope for another nasty winter up north to bring us another flood of new homebuyers. We'll closely examine how the fourth quarter plays out, and what this means for the following year, at the next Market Watch event in February.

— Market Watch presenter Randy Thibaut is president, owner and founder of Land Solutions Inc.

Statistics source: Stan Stouder and Denny Grimes