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!