As I  was reading the WSJ article of yesterday (1/11/2012) , “Trouble is Brewing for Office Market”. The article is authored by Craig Karmin and Eliot Brown and digs into the current state of the office marketplace.

In all reality, I  thought that because only a small amount of office space was added during the “Bubble” that the office sector  would escape unscathed.

But, not so fast..two things are at the root of the problem,

1. Contraction of firms occupying office space
2. Many mid-market and large buildings took advantage of low rates and easy money (just like many homeowners).

The result is easy to see..with tenants able to demand concessions and renegotiation, which then leaves the properties “upside down”.

This  additional debt and a limited prospect of near term change is the result!

In regard to the Tampa and St. Petersburg, Florida office market- CoStar reports 4th quarter 2011 vacancy of 13.6% over all classes of building, indicating that for the moment the office market is not oversupplied.

Thanks for the quick read, I hope that it offered a bit of insight for you as to where the Commercial Office Real Estate Sector is, and how it’s demise has let to our current status.

Recently Robert Trigaux of the St. Pete Times wrote a piece in his column about our two Bay Area,  largely failing retail concepts. The article points out some of the issues and problems that beset both the downtown St. Petersburg and downtown Tampa projects. In my role as a commercial real estate market analyst and consultant,  I know that it is of paramount importance to identify exactly what the product (project) is. How does it function? Who does it compete against? What makes a good urban retail concept? These two urban retail developments represent a specialty niche in the retail world in terms of identifying the answers to the questions above. In my work I am typically employed as a consultant to answer these questions by providing insightful market analysis using a fundamental market analysis approach, employing six sequential  steps.

The first step as noted above is to properly identify the type of product or project that is being studied. The reason for this is that each of the successive steps depends upon a proper detailed analysis to understand how the project can compete effectively with the various types of competition in the marketplace. For instance, a neighborhood shopping center is usually identified as a grocery store anchored shopping center with less than 100,000 ft., and with a likely competitive market area of 5 to 10 minutes driving time. Neighborhood shopping center sizes have increased over time and in some cases decreased depending upon the customer profile and location. This retail use has relatively specific criteria including a residential base with good linkages to working and shopping points. The likely  customer profile  cuts across demographic statistics as the service provided is convenience shopping. The consumer expects the store to be modern, attractive and in the case of a Publix grocery store a recognizable brand. Obviously parking, access, distance and signage are all important in this highly competitive segment of the retail market.

In attempting to define the category of retail that describes both Baywalk and Channelside requires first an understanding of what it is not. The term of art often employed for this type of retail property is Festival Marketplace. Good examples would be the Inner Harbor area of Baltimore and the widely known Faneuil Hall in Boston. Faneuil Hall can generally be considered an example of a successful retail concept but many others have attempted to duplicate the magic formula that makes this concept work effectively. Obviously the products and services provided by a festival marketplace are different from the neighborhood shopping center. As noted the neighborhood shopping center is built around the idea of convenience shopping. The festival marketplace just like malls is more clearly  a destination shopping experience but differs in the customer profile, expanded market area and often has unique stores, goods and services. Interestingly enough suburban mall properties have demonstrated ever-growing vacancy as old shopping habits make way for new ideas. We have seen the development of so-called power centers and big-box retailers which are a permutation of other retail types but nevertheless still destination shopping. The collective attraction of these power centers acts like a magnet in providing a number of popular  store brands. There was a time when the mall, and every small to medium town seem to have a mall, had an effective market area of 15 to 25 miles appealing to a consumer population within 20 to 45 minutes driving time from the location. The proliferation of malls occurred at the same time the new power center, big-box and fashion retailers emerged. Too many malls, too much competition and a difficult re-positioning  problem. The festival marketplace does not and cannot compete with the more conventional retail types. To be sure there is a crossover of goods and services between all of the retail concepts although  Baywalk and Channelside, to be successful, must have both the proper tenant mix providing unique consumer goods, and of course finding that proper tenant mix is the key question and problem. A retail truth is that shopping centers don’t create new demand (depending on the type), they drain it from other competitive shopping centers.

There are models for study that can help to develop the unique characteristics of the festival marketplace to fit a particular  niche  in the retail world. Once these characteristics have been identified the problem  evolves to the task of identifying the competitive market area as well as location and nature of the competition. So often, especially in  “boomtime” real estate markets the details of proper market research, planning and construction design become less important than the availability of financing. Considering the present state in which these two projects find themselves it is way past the proper study stage. Now the problem becomes how and can the property be repositioned and find perhaps for the first time, it’s target market. Self-help guru Tony Robbins often says in picturing and designing your personal success, study someone who has been successful. It may not be possible or necessary to exactly emulate that ideal concept even if certain design and marketing considerations cannot be fully achieved. On the other end of the spectrum there are a number of similar stories to the Baywalk saga where the local community provided the impetus and in some cases guaranteed the financing even when there was clearly not a properly defined target market, or properly designed concept. At that point as in the case of Baywalk in particular the years following the groundbreaking have become an exercise in figuring out why it didn’t work. I’m not saying I know the exact correct answer, off the top of my head, but I know how to find it by using the proper market analysis steps we have described in this article. No one has an easy answer without help. The broker who lists and  markets the whole property or provides leasing services does does not know, nor does anyone else. Not the banker, not the broker, not city, and to some extent not the developer without good market intelligence. There is no question that the difficulty of finding their footing was (and is) exacerbated by the difficulties virtually all retail venues have experienced.

Mr. Trigaux laid out the proper identification  of reasons why both projects lost their way. Market analysis might well reveal that the location and design are not compatible with the available target market. Instead of continuing to pound Square pegs into round holes by simply selling the property were continuing with the same policing efforts which yielded no lasting effects, except for the reputation for failure. Yes, there can be a stigma associated with properties but in most cases this can be overcome by thoughtful consideration of an adaptive reuse, in other words a newer and better highest and best use. By now there are countless examples of the iconic line from Field of dreams, “if you build it they will come”.

As noted by Mr. Trigaux, Channelside in Tampa has some location advantages including a waterside site, accessibility from cruise ships docking nearby as well as frequent sellout crowds at the St. Pete Times forum. A successful Festival marketplace seems to depend on walk-up customers or at least adequate nearby parking that is safe and easily accessible. An excellent example, or one reasonably close, is the Bayside project in downtown Miami adjacent to the cruise ship docks. Clearly the Miami area exhibits a largely different demographic than Baywalk or Channelside, including both foreign visitors from Europe and Latin America as well as thousands of cruise ship passengers departing and arriving at the nearby docks. The merchants at Bayside are largely providing consumable goods and services given the nature of the transient demographic. To a lesser extent Channelside has some of the same influences but they are less fully developed than Miami.  Baywalk lacks a waterfront location, the influence of cruise ships for the daily and nightly influx of visitors or local patrons drawn to the area by the nature of the project. It has been pointed out in the St. Pete Times article that the restaurant world is well represented by excellent venues located along Beach Dr. while the retail is scattered along Beach drive in a less cohesive fashion then Bay Walk  could provide. Here’s what we know, retail operations are like a magnet, they draw to them the customers who are attracted to the services and goods provided. All of the items briefly discussed here represent study goals with an understanding that there are no immediate answers without hard work and research.

Concurrently with the near total deterioration of the Florida real estate market encompassing most segments and categories, comes the push back against county property appraisers about their valuations and the resultant tax liability. Amidst loud and steady cries for reform the Florida legislature has recently considered several key issues that relate directly to property valuation.
There has been much made of the County Appraisers employing “highest and best use” as the basis for valuation for tax purposes. This resulted in cases such as “working waterfront” properties that argue that not every parcel is a site for a waterfront condominium and that the present less “valuable” use should apply. Many have rallied behind the idea including another group severely affected by the run-up in prices, the small motel and hotel properties which are often family owned and marginally profitable before any potential tax burden.
It is tempting and emotionally appealing to consider this change in the law but in principle, it is the wrong thing. We must drill deeper to unearth the root problem and consider how there may be other potential remedies. There are four classic tests of highest and best use that must be considered and while each is important they require total consideration to arrive at an informed decision.
• The proposed use must be legally permissible
• The proposed use must be physically possible
• The proposed use must be financially feasible
• The proposed use must be maximally productive.
The classic (and only partially true) statement often heard is “that use which results in the highest net return to the land”. It is a highest and best use as if vacant concept which is then considered in terms of the highest and best use as currently improved. The contemporary statement which most applies to the definition is “that use which results in the highest net return to the land in consideration of USE, USERS and TIMING (risk).” It is more than a subtle difference and one which is widely ignored by fee appraisers and county appraisers who fail to consider properly all of the four tests which in turn are supported by market analysis which is the “plasma” that sustains the organism.
Here are some examples based on recent cases with location and some details purposely omitted. In a local incorporated island community all land parcels west of the single service arterial are zoned for commercial use which among its permitted uses allows condominiums under certain physical guidelines. In this community are a number of locally owned or seasonal beach cottages much like the scenes I remember growing up in Sarasota. The lots are small and in many cases substandard in size allowing only conditional rebuilding if the structures are destroyed or severely damaged by an act of God. The property appraiser holds the view that since the land is zoned for commercial use now, even if the site is not large enough to support a multi-family structure, it may be combined with either contiguous parcels or worse, non-contiguous parcels to create a condo site.
This is an extraordinary set of assumptions under any conditions but in light of recent, current and likely continuing conditions the act strains credulity! First “assemblage” of land and/or improved parcels with attendant price influences is not a properly supported highest and best use. The only reason to assemble is when there is a market for the product that will ultimately be placed on the assembled site. This is such a key issue and it cannot be underscored enough, it’s about the TIMING requirement we discussed earlier.
The property appraiser used some sales of small residential properties that were “flips” and others where the implicit assumption on the appraiser’s part was that they were potential condo sites. More to the point at the time of the valuation there were (and more now) hundreds of unsold condominiums and even available vacant sites. Why would there be a market for the land when there is clearly no present market for the condos? This is the point where the issues become timing and risk as there needs to be a forecast of when there will be a market for the potential development and as always timing and risk are intertwined. The longer the holding period required to build the more risk that the outcome may not be as planned. Simply, the present worth of assumed future benefits.
The second example is similar in that as before, it’s a highest and best use problem (but then all of them are!). There is a slice of time in a rapidly escalating residential market, especially at the beginning stages, where there is unsatisfied demand because supply to match demand takes time, there is a lag. In that interim period there are “low hanging fruit” in the form of rental apartment projects that may for a time have a highest and best use as converted condos where they can be sold quickly. In my experience this has happened every time there has been a market surge and every time there have been unintended consequences. When the supply side catches up to current demand there exists a significant product differentiation. If you are a “user” or intended resident there may be better products with more features that are newer. If you are an investor there may be nobody to flip the speculative purchase to. If all sales are not consummated and closed there is the danger of becoming “fractured”, partly sold, partly not and among those two, partly rented.
In this case the appraiser has a “loophole”, once an apartment project is “declared” as a condominium the assessor in the next cycle can assess each unit separately as a “condo” unit. Let’s consider the aforementioned four tests; the use may certainly be legally permissible and physically possible (as improved) since it is basically the same as a rental project. There is just an aggregate change of ownership. The real problem is when the market never materializes or just disappears mid-stream! It is very likely in the case of a project never marketed that it is operated just as before, as a rental. Logically under highest and best use tests that is the highest and best use. In the case of the fractured or partially sold project it is a bigger mess to clean up. It should be valued both as a rental and as an unsold condo with market analysis of the product, timing and supply and demand required. This will be the present worth of future benefits as well.
Highest and best use cannot be determined without appropriate market analysis and value cannot be estimated without an appropriately supported highest and best use.

The most compelling contemporary question I hear is “are we at the bottom of the market”? There is a variety of opinion about this; some driven by a “positive attitude” because we need some good news, some which are darker and perhaps more pragmatic responses. I am an admirer of Lou Dobbs of CNN, he is by in large a practical thinker strong on basic rights and a keen observer not afraid to give his opinion. He has been predicting the economy (including housing) will begin a comeback before the end of the year. He criticizes both Obama and Bush for negative messages and offering little good news. The interwoven problems and solutions to the total economic health picture are beyond most of us but clearly there are key indicators in my bailiwick that give me a cautious view of when and how there will be a substantial recovery.

First, any recovery however that is measured, will not be uniform and across the board at the same time. Second, prices (not values) will not “return to their peak” anytime soon given that the peak was investor driven and not user driven. In addition to the hopefully soon to be flowing credit availability there is a single troubling wild card that cuts across every region and every property type. It’s fundamental that jobs are the key to all of the other systems. The alarming rise in unemployment will not change overnight and in spite of assurances to the contrary may not respond positively to stimulus attempts in the near term. Think about it, jobs create income which evolves into disposable income. Without adequate ability to repay from income there can be no housing mortgages, retail space becomes vacant (save for necessities) and office space exhibits shrinking occupancy.

I tend to agree with St. Pete Times columnist James Thorner in his May 1st column, “Rah-rah housing talk is wishful”. He provides an estimate that there are 35,000 unsold homes which for some period of time will be fed by further foreclosures. We in the Tampa Bay area and most of coastal Florida have been dependent upon in-migration of retirees and relocation of families coming primarily from the Midwest and Northeast. If that migration pattern is to continue (and there are signs that is dramatically changing) those folks need to sell their homes “up north” first. Almost every day the optimists (and some with rose colored glasses) point to the increase in home sales which has closely followed the slow to change price declines. It appears that there are certainly bargains, especially if you intend to live in what you purchase, but once again there are pockets of equity rich investors counting on the market being at or near the bottom in prices and are preparing for a renewal of flipping. However, once again the fundamental lack of credit and mortgages for many precludes fueling the cycle and at the end of the day it’s still about jobs, especially if you don’t have one!

This past week was as usual packed with tidbits of information and continued hand wringing about TARP, foreclosure and other serious subjects. What I found more interesting was closer to home. In the St. Petersburg Times on Sunday there were two references to proposed real estate projects. One is the massive Babcock Ranch development proposed for southern Charlotte County to the east and south of Punta Gorda. Former NFL player Syd Kitson and partners purchased the 90,000 acre ranch in 2006 at what now seems the peak of the overheated market in SW Florida. After closing the group then spun off 73,000 acres to the State of Florida leaving the remaining 17,000 acres for future development of both residential and commercial development. The article acknowedges that Kitson and his associates are clear that this is the riskiest venture they have undertaken to date. Mr. Kitson’s group has formed an alliance with Florida Power & Light for a sustainable solar community. The group feels that this is “the game changer” the group is counting on it to make the project a success.

As an appraiser and market analyst the project of course intrigues me on several levels. I have recently worked on assignments in Lee County to the south of the acreage and it is widely thought there are tens of thousands of unsold lots and homes with ground zero being the long enduring Lehigh Acres east of Ft. Myers. The first thing that must happen is that an overwhelming excess supply of both lots and homes must be absorbed in order to provide any opportunity for a new project. I do not, nor does anyone else know exactly how much time that will take or if the worst is over and the bottom reached.

I agree the energy efficiency aspect is an intruiging one as Floridians watch their cost of living soar at a time when joblessness is rising and many cannot sell their homes. The recognition that addressing the critical issues of energy cost and water is long overdue and may well eventually even provide a marketing advantage over other opportunities. What bothers me is the optimisim that the developers apparently feel that things will go back to where they were before the downturn, that just as many people will retire and migrate to Florida as ever. There is already documented study that suggests that while in-migration is positive a substantial number of households are leaving. There are many reasons that this was happening even before the resounding economic upheavals of the last 9-12 months, primary among these is the reality that the quality of Florida living “ain’t what it used to be”.

At the end of the day as they say, it is a gamble to acquire and hold the land and likely incredibly expensive to create infrastructure even without the consideration of a fully solar community. It is possible that the ability to hold on to “Boardwalk” and “Park Place” can provide a tremendous upside but substantial market analysis and due diligence is required to support that confidence.

In the case of downtown St. Pete, I was wondering what the pilings being pounded along 1st Avenue South were for? This represents the foundation building step of a project located at 1560 Central Avenue which will when complete function as a market rate rental aprtment project of 300+ units. The location places the project due north of Tropicana field and as a neighbor of the nearby sports bar. I would assume that the project demand forecast was based upon a very thorough market study and if so I would love to see it. As a market analyst and appraiser for 35 years I have heard most of the stories, plans and dreams that precede the development of a project, I am a natural skeptic of hype and a practical believer in sound market data and indicators.

The compelling question is why now and why rental apartments at market rate? There are a few related threads of reason that warrant further discussion. During the early stages of the recent burst-bubble there were a number of conventional rental projects converted to condos throughout the Tampa Bay area and Florida. It is the “low hanging fruit” available for a short window of opportunity while the supply side struggles to catch up with demand. Like fruit, the opportunity is highly perishable with a short shelf life. The aftermath of the conversions produced a predictable result, the successful conversions went up and out quickly but as of this writing there are thousands of units in hundreds of projects all over the state that are now “fractured” (part condos sold-part rental units). Many units were purchased as “investments” to be rented and some amount by the former apartment tenants. The ownership structure changed but the market metrics indicate that the fractured projects are still rental competition. Add to that the the “shadow market” of built but not fully sold or occupied condominiums dotting the landscape from I-175 to 1-375 and from 34th Street to Tampa Bay.

So first “supply” must be absorbed through sales or full rental occupancy which has been and will continue to be slow for a year or two and possibly more. Secondly, the recent condominium developments were not based on any definable demand but on the “Field of dreams” theory, “if you build it they will come”; they didn’t, at least in sufficient numbers. In any community there is a dynamic ratio between the propensity of household occupants to rent or buy; the typical range is from 30-60% rental and of course has results rooted in jobs and household income, both of which are currently in trouble. This project should come to market in 2010 and we will just have to wait and see if the location and the product ignites a lateral move as high density Pinellas is nearly at capacity without demolition and replacement. I just wonder, “Is now the right time” and is this the right place?

In a time of increasing frustration and turmoil the Tampa Bay area real estate market offers few clues to incite an outbreak of hope (with confidence). In fact, in addition to the ongoing residential slide other analysts believe that the commercial real estate market has yet to suffer a similar fate. There is some good news, I feel that the commercial market is not overbuilt in every property type as there were not that many new starts of office buildings and industrial (broad category of industrial) buildings. This is consistent with what we call demand generators; for office space and industrial space the demand for new space is directly related to job growth in the relevant categories. However, retail space and residential growth are another matter entirely as the adage says “retail follows rooftops”. However there is serious overbuilding when retail leads rooftops as has been the case from 2003-2007/8. The underlying premise of one use following the other is valid as part of the reason new residential units are built and occupied is the presence or promise of retail services, especially the standard grocery store anchored neighborhood shopping center. Further exacerbating the problem is that so much of new housing stock was a false path not seen until later where flipper-investor driven demand rather than users of housing was driving supply creation. So it is not unreasonable to expect there to be a growing parade of retail failures compounded by the lingering recession and rising joblessness. In all of that bad news, the neighborhood shopping center stands the best chance of surviving because of the nature of the shopping for essential goods and services. It was already clear that there were too many malls and then too many mall killers in the ubiquitous “lifestyle centers”.

So, where is the light? Any decision made regarding commercial real estate or for that matter the residential development sector must be made on more than hope and desperation. Smart marketing always plays a role but this is more about relying on realistic timing forecasts built as solidly as possible on good market analysis study and the use of the six-steps of market analysis detailed on my websites. So much depends (and it always has) on properly defining the product at the outset and coldly assessing the competitive attributes. The product or project that most closely possesses and maximizes efficienctly market standards will emerge sooner from these troubled times and market turmoil. It is a fact that during this crazy run-up in price superior products sold or rented first, and as always the second and third tiers followed. As the market demonstrated an appetite for more and more, the secondary location and product became a pseudo-primary property and each level in turn moved up. As the tide goes out, and gathers to return, the pecking order is reordered and “the last shall be last”. It is also important to know the competitive market area and a realistic assessment of the estimated market share. From within that market area (and it’s different for most different properties and variations) demand can be forcast and competitive supply can be counted.

It’s not complicated in concept, absorption of supply will eventually and gradually result in a renewal of reasonable demand, the burning question is when!

I have been following with great interest the discussion regarding the so called “Heartland Expressway” a proposed new corridor running from I-4 NE of Lakeland through Osceola, Polk. Highlands, Hardee, Desoto and Lee Counties. This is one of those ideas which is so good that it may not happen!

As a market analyst engaged in market studies, highest and best use studies and feasibility analysis this project has all of the ingredients to make an interesting and compelling study. In my field the lexicon identifies “Linkages” which are primarily thought of as being roadways linking people and jobs and services. Linkages can also include public transportation, utilities and communication corridors as well.

The last article in May provided an overview of the project and news that the proposal was met with opposition and disinterest on the part of the new governor of Florida. To be sure the St. Petersburg Times stories leading up to the latest article not very subtly attempt to attach a “stink” to the project due the fact that there are large landowners who would benefit from the project. It all sounds very “John D. McDonald-ish” when you paint a picture of the rich land baron creating ill-gotten gains. In spite of the slant of the articles and using my own consulting practice as a resource as well as first-hand knowledge of previous successful projects the whole story has not been told. This area of Florida is where the great ranches, farms and landholdings of the past formed a vital part of our economy for many years. The plan seems to call for a conscious and overt effort to provide both the necessary linkages to control growth as well as accumulate public interest lands for conservation purposes.

Governor Crist calls the roadway “a road to nowhere”; precisely governor and that’s the sensibility of it. As a life-long Florida resident I have seen many of the traditional growth areas attempt to control growth by not providing services and then finally when growth pressure occurs anyway a much steeper price is paid to provide the same services after the fact. Even more importantly is the question “Where else would you put a corridor”? Although Florida’s traditional growth volume and patterns are changing we will continue to grow. We will grow where there is land and “Linkages” from where people live to where they shop and work and go to school. Building the road ahead of time is not a radical concept, look at the Veteran’s Expressway in Tampa and the controlled community planning that followed and closer to the Heartland, the Polk Parkway. In both instances these are toll roads paying for their own cost impact and at the same time providing a much needed linkage in already congested areas (especially in the case of the Veteran’s Expressway). The Polk Parkway provided me with a consulting assignment for the FDOT several years ago when they were attempting to negotiate the acquisition of sufficient land to widen an existing roadway at the Parkway and were met by reluctance on the part of the landowner. My assignment was to provide a marketability study of the larger parcel from which the acquisition would be made and determine the (at the time) highest and best use.

The study revealed that although the road had initially been controversial it accomplished the goals set for the project in opening up new lands in south Lakeland and Polk County for new and much needed family housing and new schools and services. The road provides access to the two main work centers for Polk residents, Tampa and Orlando. Central Lakeland at or near I-4 was (and is) congested and there were few parcels of land left to build on in northerly Polk due to environmental reasons.

Florida historically has too few north-south linkages and arteries but an abundance of east-west corridors crossing the peninsula. The call for additional widening of I-75 as well as I-95 and the congestion on the aging Florida Turnpike point to a need for relief by providing new growth centers and corridors instead of throwing money at a losing battle to stay abreast of traffic needs to already overcrowded areas of urban sprawl.

My recent posting titled “The Real Estate Law of Gravity” provides some of the context for the conclusions here.

A recent Tampa Tribune article detailed the current problems associated with a “late-in-the-market” apartment-to-condo conversion. While not rising to the level of an “I told you so” moment this type of project problem has happened before in our market. Unfortunately there are some very difficult situations that can occur as a result of a stalled or failed conversion and it seems as if this project has, is or will experience most of them. The developer already knows that they likely paid too much, too late for the property and were forced to set a price based on investment cost and not necessarily on market price or value. The advantage of conversions is usually timing in that filing condominium documents, making cosmetic changes and putting a marketing team in place is much less time consuming than finding land, getting approvals and building from scratch. As long as the price fits, the market is not oversupplied and the investor-flipper buyers are still there, it works!

It’s a simple but often overlooked process that can be employed; instead of paying “whatever it takes” to buy land or in this case an apartment building, and then building all costs and profit on top to create a price there is a moe sensible alternative. If the developer calculates the selling price of units first and then deducts, all costs including profit and marketing, it becomes apparent what can be paid for the underlying property (land or apartments).

The issues are that if the conversion stalls anytime before sellout and especially early on with just a portion sold when the market flattens or declines the developer and the unit buyers both have a dilemma which will extend to the lender at some point. Once conversion takes place there are ongoing shared expenses, condo fees, indicidual taxes per unit as well as insurance. Marketing and carrying costs continue and any significant delay can eat up all of the potential anticipated profits. At some point when the flipper-investor can’t get their price and the developer can’t sell anymore there is an ugly stalemate. By that time the lender may be involved and will be concerned but not excited about taking over the problems and letting the developer off the hook. The few unit owners are stuck without assurance of services promised and the effects of having overpaid now that their unit cannot sell for wha tthey paid. This could drag on until “someone” comes along and is able through market conditions convince all parties to sell out and move on. The “price” paid is likely to make enough sense that the project can once again function in its intended role until there is once again an apprent “demand” for conversion.

The announcement of exciting and ambitious plans for development of the now vacant Tropicana Block with an impressive mixed-use development prompts several important thoughts as well as questions. It is clear that the City of St. Petersburg has a vested interest in encouraging tax-base building development and with the impressive developer’s track record is eager to line up in support of the proposed development. It is equally clear that there is much promise in this historically well located and desirable downtown location. Truly quality project concepts and locations can overcome obstacles other possible development proposals cannot get past. There is evidence of this in the aftermath of the apparent investor driven downtown market boom fueled by much speculation, abundant capital and pro-development municipal encouragement. The approval for development of many more projects than are currently being built is near term evidence that fundamental market components are still lacking.

St. Petersburg’s history of development and Winter residency shows demand for residential and commercial development especially during parts of three decades beginning in the Florida golden era of the 1920’s and extending into the two decades following. In large part what we now know as “downtown” was built up and prospering through the 1950’s. There was little land for development and the area was widely known and desirable. Urban decay resulted because of a shifting of residential patterns and like many other older Tampa Bay area towns the result was in some cases benign neglect. This phenomenon while marked with some significant historic building losses also had the positive effect of dampening any significant enthusiasm for demolition and renewal and thus saving a number of treasured buildings.

Southeast Market Analysts recently updated a 2-year old market analysis report of the Downtown St. Petersburg Condominium market with interesting results. Significant and successful development marked the early phase of the recent 4-5 year “boom-let” most especially water-view and east-northeast urban core locations. All markets of this type have sub-markets defined by existing uses, infrastructure and potential and the area described was the best of the submarkets. Numerous projects announced, both large and small were approved but never funded and in many cases, never started. Those that were funded with “pre-sales” did start and the secondary submarket locations will face a test of the will of non-user-resident investors to close and wait for a future opportunity to sell or walk away and wait for another day.

The latest uncertainties of the market conditions affect the consumer buyer who has the least information available as well as the more informed developers. The same fundamental demand factors dictate market potential now as they have for the last 5-years (and frankly always have). Condominium sales success depends upon current and forecasted future growth of qualified buyers, either users or investors. To be sure, for a time there will be fewer investor risk-takers especially at higher price points and until some amount of confidence and semblance of order is restored to the “Market”. This is now the classic “Field of Dreams” dilemma; “if you build it will they come”? Current forecasts of residential population growth do not support the premise that there are sufficient qualified buyers for nearly 600 condominium units, this could change as well, but the recent boom as noted was fueled less by future residents than investor-flippers.

There is something of a “chicken-egg” relationship as well in this proposed project and others; residential demand depending upon the market segment and price responds to the availability of the services available including but not limited to adequate fire, police, sanitation, and the softer infrastructure of parks, landscaping, social amenities and shopping. This proposed development location offers many if not all of these things at the present time. On the other hand commercial development, restaurants and shopping require critical mass of residency. Current retail vacancies suggest that there is insufficient residential base to support what space is already there but that can and will change. The good news is that all of this has happened before in this area in the style of the era and good locations eventually return to success first.

Are we seeing aftershocks or tremors in the Tampa Bay real estate markets and sub-markets? Actually it is probably both with daily stories emerging about the effects of the rapidly deteriorating prospects for planned developments. From an analyst’s standpoint this is part of a logical series of events marking yet another (but nevertheless unique) real estate cycle in Florida. We have seen a nearly unprecedented “up” portion of this latest cycle lasting in some cases nearly five years. The inevitable “Law of Real Estate Gravity” ultimately rules and markets move from being out of equilibrium in terms of excess demand toward level and then declining conditions in terms of prices and volume. It is a simple concept in all markets even beyond real estate; when prices rise and even skyrocket the market participation increases as latecomers join the frenzy and act to increase supply. The next result, a slowing in sales is predictable as is a leveling of prices. Declining prices always seems to catch some by surprise but the results are plainly evident when the now “tooled up” market starts adding massive amounts of supply. At present many are ready to declare the busted bubble healed and are optimistic about near-term recovery prospects. It is not entirely a pessimist’s point of view to declare “not so fast”!

The cycle is not new nor unique to Florida but some of the elements present here are worrisome in terms of near term recovery prospects. The first of these is the nature of “users versus investors” in the purchase of the end product. The seemingly global consciousness that compelled so many who were either ill or misinformed to “invest in real estate, they are not making any more” accounts for the expectation of profit by flipping, always sure that there would be a “greater fool” to purchase their investment. At some point the music stops (see this website feature-”how we got here” for more details) and there are no more players.

Additonal factors at work in Florida, particularly south and central Florida include the hangover form the devastation of the recent multiple hurricane seasons, the property tax increases that require us to “pay the piper” and wildly increasing insurance costs. Add to that the growing reality of development density, crime, clogged highways, drought, pollution and water concerns and we now have a recipe for a change in habits and preferences. It is believed by some that there is a migration whiplash taking place where move-ins from the north have increasingly become move-backs from the south. The Florida dream life may be a bit frayed at the edges.

Finally, the beneath the surface rumblings are the future shock of possible dramatic increases in mortgage failures, foreclosures and bankruptcies. The additional hangover from too much borrowing of cheap money against the “sure thing” of value increases is already catching some short and putting even more pressure on a market where resistance to price decline is both understandable and inevitable. Borrowing to buy “things” and unexpected real estate ownership cost increases leave some with a real dilemma. Where do we go next? All markets eventually heal themselves and Florida has a track record of recovery for over a 100 years; this time may be as different in the recovery process as it was was in the run-up of prices. There are questions to be sorted out and other “shoes” waiting to fall.

An article in the St Pete Times yesterday continues a growing pattern of scaled back, delayed or withdrawn real estate development projects in the Tampa Bay area. This analyst’s recent blogs have continued to examine market conditions dating back to early 2006 and even late 2005 with concerns about the nature and strength of market fundamentals and the growing inevitability of of market disarray.

According to the article developers announced that they are refunding deposits in the condo-hotel project but apparently not giving up the site. There are numerous potential pitfalls in this segment of the market cycle including the cost and availability of funds and the obvious truth that the investor-buyers who largely fueled this “boom” are no longer there. That leaves users, people who intend to live or actually use the real estate for its apparent purpose as the potential buyers and there are as we have suspected less of these than the former (flipper-investors). Ultimately “booms” end with either a whimper or a thud and in this case it may best be described as the whimper phenomenon. The developers who these days must allow lots of time and cost to just obtaining entitlements are betting just as hopefully as the individual investor that prices will keep increasing enough to justify the time, money and risk. The longer the cycle lasts the more costly it is to join the game as everyone wants a piece of the action and the costs of raw material, especially land soar upward. Developing is not a game for the faint of heart with the uncertainty that always exists and the survivors who do profit are those who have in done just that, survived.

My recent posting titled “The Real Estate Law of Gravity” provides some of the context for the conclusions here. Municipalities and local government are largely eager to support development and especially redevelopment to build tax base and the investment in approvals has certainly paid off well for the local governments whose budgets are brimming with new projects paid for the ad valorem taxes collected as a result of the incredible price increases (not necessarily value, but that is another blog subject). As widely quoted as the adage “location, location, location” may be location does not in the near term trump oversupply and uncertainty. It seems that the direct point to be made about this project at this time is the delicate factor exposed in the saying “timing is everything”.

A lower front page article in this mornings St. Pete Times discusses the on-going angst over property tax relief efforts at the State level. The self styled “Property Tax Crisis” described needs clarification as much as it needs relief. First and very importantly, the mission of the County Property Appraiser in each of Florida’s 67 counties is mandated to be valuing all properties at 100% of “market value” and reporting that valuation to the Florida Department of Revenue.

The aforementioned “market value” is based on the very same data that appraisers have been using to provide those indications of “market value” for buyers and sellers. Although I received many phone calls of concern last year when the “TRIM” notices were sent in advance of tax bills my only advice to concerned owners is that in the near term there is little to do. As hard as it is to hear this it’s hard to have it both ways. You cannot expect to enjoy the fruits of escalating values without them being reflected in new property tax valuations. Further, once the property valuations have been made it is difficult to get them lowered now or in the near term.

Curiously the same aberrant market conditions of an investor driven market have and will continue to lower “values” and truthfully neither extreme is truly representative of that definition. Going forward the likelihood of “Property Tax Rollback” is as much a function of the demands of local government and out of the domain of the state. In other words once the valuations are filed and accepted by the state, the property appraiser is through. With these unprecedented price increases in place the stage is set for county and city government and special taxing districts to set their budget based on expected revenues.

The local government entities have shown reluctance so far to backing off of the opportunity to spend for heretofore unbudgeted items, some no doubt necessary and others maybe, well, “not so much”! What is likely a popular compromise is the ability to make a homestead exemption basis portable or at least re-instate at less than the new amount for an existing property owner. Otherwise the effect is felt in a portion of now unqualified buyers especially after adding in the uncertainty of insurance costs. However that is not the only answer to the problem, it is also the market which is in the process of adjusting as any market based upon supply demand (and all are) and will find a new price level necessary to attract buyers before the cycle at some point begins again.

As noted earlier the property appraisers for each county will attempt to make strong arguments for the case that the downturns are the aberration not the overheated market results. There will be some serious battles between owners and property appraisers over the next several years and rightly so. The owner must be well prepared, unemotional and be well represented to appeal to the “special master” employed by each county as a mediator.

Yesterday’s article in the St. Pete Times updates the continuing saga of the as yet undeveloped Trump site in the “Channelside” area of Tampa. The announcement that the project will be scaled back comes as no surprise in the wake of numerous, previous holds and setbacks but especially in the context of a “market on hold”. The real question is not what specific number of units should be developed or even at what price range and in what configuration. The more compelling concern is who will buy the units if they were there and why?

The surprisingly downplayed aspect of the recent market run-up of nearly five years, especially in condominiums, was fueled more by available cheap money and “investor buyers” than potential resident users. In truth there is no way of knowing this until the units are completed and people either move in, walk away or sell. Until that time occurs we are reliant upon the marketing team and no indication from the public records, government or other reliable source to know what the breakdown between buyers and investors actually is.

In my on-line presentation found on my website entitled “how we got here” I discuss the obvious parallel between the “Day Traders” of the 1990’s and the “flippers” of the new millennium. In the case of the “Flippers” the intent is to purchase and resell without ever in some cases closing (understandably in condos) and finding the next “flipper”. This makes actual absorption and demand much more difficult to predict especially when the market was driven not by demand for housing but rather demand for money and big profits by becoming a “certified” real estate investor.

To that end the project by aligning itself with the willingly given endorsement and name of Mr. Trump the original developers apparently hoped that the assumed market perception of “luxury” and quality would make a difference in marketing and price expectations. Trump’s role was brilliant strategy to in essence license the cachet he believes is associated with the name. He is as we know more directly involved in a still under construction project on Wacker Drive in Chicago.

In 30 plus years of observing and analyzing real estate markets in Tampa-St. Pete, the west coast and all of Florida I have found that nothing is worse than a over-hyped project that falters in terms of rebuilding investor and buyer credibility. In addition now that the dust has at least begun to clear it is apparent that “smart” investor money has already moved on to other equity opportunities, evidence the stock market now in a decidedly bullish mood.

Finally there is a consciousness shift as large as the eternal optimism of the late-comers to the “real estate boom”! A few of us began to question the strength of this phenomenal market run-up as far back as 3 years ago. To be frank, it was difficult to be heard in that regard when the air is filled with the yelps of joy of the newly minted real estate tycoons as their flips turn quickly in the air.

There is more of a sober air if not completely candid assessment of the state of the market as we read articles such as today’s St. Pete Times article about the mortgage market and the effects of “creative financing” arrangments. It is my sad and pessimistic view that any projections about foreclosures and bankruptcies are clearly understated. There are thousands of homeowners who are vulnerable to the slightest blip in the rate of their mortgage and now with record increases in both real estate taxes and property insurance costs there is real danger in maintaining stability. Fundamentally everything boils down to jobs, if job creation softens and business slows (and Florida’s business climate is clearly built on in-migration, construction and service industry employment) there is real desperation on the horizon.

In the meantime I am sure that there are some who hold the view that unpleasant little market blip is just temporary and that there is real opportunity in buying up foreclosures. The problem with that strategy is that this is not a little blip but maybe a bigger “blimp” obscuring the view of the end. Anything foreclosed on that was bought and or financed in the last several years was probably at or near the top of the market and has little nearterm upside. The name of this strategy is patience, there will be many opportunities won on the heap of properties likely piling up over time.

Another current investment strategy involves just renting if you cannot sell. The problem with this is that you cannot very likely cover the carrying costs and find anyone to rent; further there are now and will be more choices for the renter. If we understand this is a buyer’s market and will continue that way, we must also accept that this is a renter’s market too. The only investor poised to benefit is in a conventional situation with controllable costs and realistic expectations.

The problem in Florida is best illustrated by the fact that the referenced article points out the nearly quadrupling of homes on the market in Pinellas and Hillsborough Counties over the last 12 months. To that inventory will be added a substantial portion of units contracted for before construction that will not close when there is no “greater fool” to sell to at the time of occupancy permit issuance. There are already many stories on the street told by ordinary people who are walking away from deposits to avoid bigger losses.