Survey of Emerging Market Conditions

Q2 2008 Findings

Executive Summary & Conclusions

If our survey respondents were physicians, they would be telling us that Florida's condominium markets and some single family development markets have pneumonia, and Florida's rental real estate markets have the flu. That is to say, the condominium markets and some single family development markets are very sick, and there may be casualties. Meanwhile rental markets - apartments, industrial, office and retail - will suffer varying degrees of pain and discomfort in the months ahead, but are basically healthy and destined to recover. Probably because Florida's long-term growth outlook remains fundamentally stronger than most regions, our respondents are reporting that the basic real estate values and investment outlook remain solid despite a gloomy near-term prognosis.

Prominent Features
The general investment outlook remains remarkably stable in the face of the gloomy media picture of real estate and a now evident decline in near-term rental real estate performance. In virtually all forms of rental real estate - apartments, office, industrial and retail - respondents now report declining rental performance in the months ahead; that is, declining occupancy and little or no growth in rental rates. Despite a drift downward in rental performance, the overall outlook for office and retail can still be described as mixed. The outlook for absorption of new single family development is now steady; that is, no further decline, but improvement. The expectation for condominium development still is for declines in absorption. Prices are still expected to decline. The availability of capital is still reported to be ample, but restricted by severely increased underwriting requirements. Respondents' own business outlook continues an eleven quarter decline, though the decline from last quarter was among the smallest. The stability of cap rates, a fundamental measure of real estate value, is a strong indicator that Florida real estate is perceived to remain a solid investment asset class.

The Survey
Our quarterly survey, conducted by the Bergstrom Center for Real Estate Studies, Warrington College of Business Administration, University of Florida is in its eleventh fielding. The total number of participants, at 282, is the most extensive survey of Florida professional real estate analysts and investors conducted on an ongoing basis. It includes respondents representing thirteen urban regions of the state and up to fifteen property types.

General Investment Outlook
Our general index of real estate investment outlook, weighted 40 percent for single family and condo development, 40 percent for apartments and commercial rental property and 20 percent for developable land, shows remarkable continuing stability and resilience in contrast to the gloomy media picture of Florida real estate, and cautious near-term expectations for rental performance. Investment expectations continue to be neutral or mixed, with a very small drift upward.

Single Family & Condominium Development
The outlook for absorption of new single family homes, is the best it has been in over two years, with an expectation of no change. This is up from nine straight quarters of expected decline. While the outlook for absorption of new condominiums remains more pessimistic, it holds steady for the second quarter at its least pessimistic assessment in two years. The expectation for prices is more pessimistic. Both for new single family and for condominiums, expectations have continued a five quarter decline, and a majority of respondents continue to expect price declines ahead. Despite the sober outlook for prices, the outlook for investment in single family and condo development remained steady, suggesting that an increasing number of respondents are seeing relief ahead for residential development. Our respondents continue to see both single family development and condominiums, in Florida as a whole, as a mixed investment opportunity.

Apartments
Respondents indicate a sharp negative reversal in the expectation for apartment occupancy. For both market rate apartments and apartments for condo conversion, the outlook for occupancy plunged into decline for the first time in over two years of our survey. Similarly, the expectation for rental rate increases continued to fall well below the rate of inflation, and even towards expectation of decline. Despite this growing pessimism for immediate performance, the outlook for investment in market rent apartments remains positive and steady, while the outlook for investment in apartments for condo conversion improved noticeably. Still, the investment outlook for both types of apartments remains in the mixed zone.

Industrial
The outlook for occupancy in industrial property has declined for a fifth consecutive quarter, to the point where most respondents expect actual declines in occupancy. The outlook for rental rate growth in Warehouse and Distribution plunged further below the rate of inflation, while the almost equally negative expectation for rental rate growth in Flex Space, etc. stabilized somewhat. Despite these continued weakening expectations, the outlook for investment in industrial property remains mixed to positive. The investment outlook for Warehouse and Distribution drifted upward slightly, while the investment outlook for Flex Space, etc. drifted downward slightly.

Office
After six straight quarters of falling expectations for occupancy, the outlook for both Class A and Class B Office occupancy improved slightly, rising toward an expectation of no change. The outlook for rental rate growth, after turning sharply downward into low growth or decline, remained stable from last quarter, though still pessimistic. Though still mixed, the investment outlook has diverged slightly from last quarter, with improved outlook for Class A and weakened outlook for Class B.

Retail
The outlook for retail occupancy was mixed. While respondents still lean slightly toward declines in occupancy, there was notable improvement in the outlook for Large Centers. On the other hand, there was notable decline in expectations for Neighborhood Centers, with roughly half of respondents now expecting declines. The outlook for rental rate growth has now declined for all types of retail, with expectations uniformly for rental rate growth well below the rate of inflation. Despite declining expectations for near-term operations - occupancy and rental rate growth - respondents continue to view investment in retail as mixed. In all cases the investment outlook has remained steady from first quarter.

Land Investment
The outlook for investment for all categories of land has continued a five quarter downward drift. The outlook is now mixed to slightly negative for all categories of land, with unentitled land and land with residential entitlement suffering the poorest outlook and land with office and warehouse entitlements having the best outlook.

Capital Availability
Once again, in contrast to capital for single family mortgages, our respondents see no decline in availability of capital for acquisition of existing investment property. With capital for development there remains more pessimism, and some respondents continue for the fourth quarter running to believe the availability of capital for development has declined. In all cases, however, our respondents report that increased restrictions in underwriting are narrowing the door to debt financing.

Cap Rates & Yields
With the exception of apartment cap rates, our respondents report cap rates that are little changed since first quarter of 2006. For market rent apartments, cap rates are reported to have increased roughly 100 basis points (one full percentage point) since first quarter of 2006. With apartments for conversion, increases over the two years exceed 200 basis points. In the past, the steadiness of reported cap rates has defied our respondents, who have always expected increases. In this quarter, their expectations settled in the direction of no change. Required yields have increased notably for apartments targeted for conversion. Otherwise expected yields have remained very steady for all property types.

Own Business Outlook
The own business outlook of our respondents, which has declined in all but one quarter since early 2006, continued a steady path downward, though the decline was notably smaller from last quarter. The contrast between this outlook and all the other results of the survey may be, in part, because many of our respondents derive a significant portion of their income from housing transactions, but it also may reflect the now declining expectation for near-term rental performance.

Q2 2008 Survey Report

Results by Florida Market

Jacksonville
Northwest
North-Central
East-Central Coast
Orlando
Lakeland-Winter Haven
Tampa-St. Petersburg
Sarasota-Bradenton
Treasure Coast
Palm Beach County
Broward County
Dade County
Southwest Coast

Past Quarterly Reports

Q1 2006 (December)
Q2 2006 (March)

Q3 2006 (July)
Q4 2006 (October)
Q1 2007 (January)
Q2 2007 (April)
Q3 2007 (August)
Q4 2007 (December)
Q1 2008 (January)