The allure of the trophy property, the signature gem in a real estate owner’s portfolio, is as strong as ever.

Demand for prime South Florida real estate is being fueled by investors who want to secure acquisitions while interest rates are still at historical lows and before inflation kicks in. Certain users, such as Publix, AutoZone and Family Dollar, are increasingly turning to property ownership as an alternative to leasing space. The competition for the most available sites in the region is deep.

Miami-Dade, Broward and Palm Beach sector snapshots (pdf)

“There is so much capital ready to invest in Class A real estate,” said Warren Weiser, co-founder and chairman of Coral Gables-based Continental Real Estate Cos.

“From the buyer’s side, if you have capital now, you want to spend it,” Weiser said.
That demand is not translating into headline-grabbing, market-changing trades, however.

By many measures, 2012 has been a year of recovery in the South Florida real estate market. The operating performance of properties in most sectors is improving, and investors of all kinds are clamoring to pick up sites in the region. The long-term prognosis is promising.

But owners of such properties are not looking to sell.

Sales of South Florida trophy properties are down from the last few years, with a few notable exceptions like the $100 million sale of the former Gansevoort Hotel in Miami Beach (which also included a $200 million loan assumption), the $220 million sale of the Bal Harbour Beach Club, and the $262.5 million sale of the Miami Center office building in downtown Miami.

“You’ve got some sellers who are thinking ‘You know what? I’ve held on for this long, things are going up and I don’t want to sell too soon,” said Miami real estate attorney Jon Chassen, a partner at Bilzin Sumberg Baena Price & Axelrod.

Chassen was part of a Bilzin team that represented the partnership of Starwood Capital Group, the LeFrak Organization and Invesco in the February purchase of the former Gansevoort, which has been renamed the Perry Hotel South Beach.

“Unless someone comes and offers stupid money,” Chassen said, “they are going to hold on.”

Big Shift

The paucity of signature real estate trades is a dramatic shift from 2011, when the sales of top properties like the Miami Tower and SunTrust International Center in downtown Miami and the Bank of America Plaza at Las Olas City Centre in Fort Lauderdale harkened back to the real estate boom days.

South Florida’s real estate industry is moving away from being dominated by distressed transactions. The market no longer has the “quick hits” that some investors enjoyed by acquiring and reselling distressed properties between 2009 and 2011, said real estate attorney Steven Carlyle Cronig, a Coral Gables-based partner at Hinshaw & Culbertson.

“Back in the late [2000s], you could buy something for $25 million and sell for $50 million a year later,” Cronig said. “I don’t see that coming back for a while.”

The slowdown in expensive sales is a function of where South Florida currently is in the real estate cycle, according to Ezra Katz, chairman of Aztec Group, a real estate and mortgage brokerage firm based in Miami’s Coconut Grove neighborhood.

Some institutional property owners are in the midst of established hold periods, often five or 10 years, in which they can’t sell off portfolios, Katz said. Others would face substantial prepayment penalties if they sold properties before the debt securing the properties matures.

“The number of mega-transactions has diminished,” he said. “I attribute it more to the fact that what we saw that last two years was transactions that involved multiple buildings or where there was a restructuring of debt or some structured transaction, in addition to the classic one-off sales for good or defensive reasons. I see the market as frothy as it has ever been.”

Other owners, particularly those with office properties in the region, are waiting for broader signs of recovery in their sectors. The multifamily and industrial sectors are back to pre-recession levels, but the office market is lagging behind until employment rebounds. More than 21 percent of South Florida’s urban Class A office space remained unfilled through the third quarter of 2012, according to CoStar Group.

“For office building owners, it’s prudent to lease up these assets to the highest level, given that the appetite for these assets will be around for an extended period,” Weiser said. “Gains are coming.”

Second-Tier Deals
While owners of prime properties resist overtures from myriad investors, those with secondary and tertiary real estate assets are taking advantage.

Activity has significantly increased for properties priced between $1 million and $20 million, market observers say. The hospitality, multifamily and retail sectors have had the bulk of such transactions.

“Smaller sales are extremely active,” Weiser said. “I don’t see it changing in the foreseeable future.”

Foreign investors have particularly found a “sweet spot” in the market for stable properties, like shopping centers, priced between $1 million and $5 million, according to retail broker Barry Wolfe, vice president of investments at Marcus & Millichap. These buyers, who have historically concentrated on Miami-Dade County, are expanding their searches to Broward and Palm Beach counties.

“The last three centers we sold were all to South American buyers,” Wolfe said. “The one before that went to a Canadian buyer. These were $3 million to $5 million deals.”
Institutional funds that are unable to deploy already-raised capital on trophy properties are turning to groupings of less expensive sites, according to Cronig.

“We might see someone packaging five $20 million properties together as a group and raising the money once” to acquire them, he said. “That allows [large investors] to use one set of lawyers and brokers.”

Recent real estate lending by one of South Florida’s largest community banks, City National Bank of Florida, shows that overall transaction activity is on the rise.

Through the end of September, the bank has funded $200.5 million in real estate loans, compared to $175 million for all of 2011, according to City National executive vice president, real estate banking executive Gary Fitzgerald. City National expects to fund about $260 million in real estate loans by the end of the year for a nearly 50 percent increase from 2011.

Most of City National’s lending activity this year has been for tri-county area properties, Fitzgerald said. The average loan amount this year for the bank’s real estate banking division, which has a legal limit of more than $70 million for individual real estate loans, is about $5 million. That supports the anecdotal observations of investors concentrating on lower-priced acquisitions.

City National has had greater interest from multifamily investors than other sectors, Fitzgerald said. The languishing commercial mortgage-backed securities market has opened the door for smaller lenders to step in on deals involving stabilized multifamily properties.

“We have been active in the multifamily sector,” he said. “We have really played in all the spaces, but if you look at our book this year, there has been an emphasis toward the term business. About 80 percent of commitments have been for term loans, versus 20 percent having some construction component. There’s a window of opportunity here.”

Financing for top-tier assets should be attainable for buyers whenever that market segment picks up again, according to Weiser.

“The opportunity to finance trophy assets is out there today,” he said. But “it’s certainly more conservative than it was back in the go-go days, but it’s available. It’s attractive [for buyers] from an interest rate standpoint.”

Election Uncertainty

The decline in pricey South Florida commercial real estate sales could ultimately prove to be a short-lived trend. Many market observers see a flurry of such transactions coming after the presidential election, regardless of who wins.

“Being so close to a decision date creates uncertainty,” Fitzgerald said. “One thing investors dislike the most is an uncertain environment with which to do business.
Other factors being watched, in terms of overall indicators, [include] employment metrics.”

The risk of an increased capital gains tax following the expiration of the Bush-era tax cuts could spur a “huge volume” of year-end real estate sales, according to Chassen, the Bilzin Sumberg partner.

“If you have managed to hold on and got a nice paper gain in your real estate, on Nov. 7 you might call your lawyer and say ‘Let’s get this thing sold as quickly as we can,’ ” he said. “There is a definite possibility of a lot of deal flow between now and the end of the year.”

Broader economic concerns about the “looming fiscal cliff,” a slew of federal budget cuts and tax increases scheduled to take effect in January, could also force certain property owners to cash out before the end of 2012, Chassen said.

The potential cliff “will have some people take a look at the current market — how prices in certain areas have gone up 10 to 15 percent year over year,” he said. “You might find people who remember the last bubble and get out while the getting is good.”