OfceResearch

M A R K E T
Palm Beach County

O V E R V I E W
Third Quarter 2012

Cash Buyers Banking on Improving Operations

Projected additions to payrolls will trigger a further decline in the vacancy rate in Palm Beach County this year and enable more office property operators to pass along slightly higher rents. Several positive trends are maintaining the market on a recovery path. Limited office construction magnifies the effects of even minor demand growth on the vacancy rate, and the pace of mass layoffs has slowed considerably since the low point of the recession. Also, despite a sluggish first half, more than 6,000 jobs have been added since the recessions end three years ago, including 5,000 posts in education and health services, an employment sector with a sizable office-using component. Existing home sales, a key driver of economic activity in Palm Beach County, also picked up recently. Still, the accumulation of these positive trends has yet to translate to a meaningful and robust recovery and vacancy will stay above 20 percent this year. More substantial space demand awaits in about one year, after newly hired workers have backfilled underutilized desks and cubicles, and tenants begin to expand again. Lower prices continue to fuel a surge in investment activity, especially among private investors seeking assets pricing at less than $10 million. Many purchases are made with cash, but bank financing remains available for many investors at LTVs of up to 65 percent. Cap rates on stabilized properties start at around 8 percent, though little stabilized product has sold recently. Replacement cost remains a primary pricing metric instead, and purchases of assets at significantly less than $100 per square foot enables investors to reset rents and ride up the assets value as operations improve. Investments in medical office properties also surged over the past year, and the countys generally older population will sustain high demand for medical services and produce new practices. Development opportunities near new subdivisions may also be uncovered. Over the past year, housing starts in the county jumped about 43 percent to 2,000 units. While homebuilding remains well below the levels recorded prior to the recession, new demand for medical services is nonetheless being generated by the spread of rooftops.

2012 Annual Ofce Forecast

0.9% increase in total employment

Employment: This year, employers will create 4,700 jobs, expanding total employment 0.9 percent. The total includes 500 office-using posts. In 2011, total employment grew by 5,300 workers.

0 square feet will be completed

Construction: Following the delivery of 136,000 square feet in 2011, developers will not complete any new traditional office space this year. However, 142,000 square feet of medical office space will come online, including a 50,600-square foot property delivered in the second quarter.

130 basis point decrease in vacancy

Vacancy: The vacancy rate will decrease 130 basis points to 20.2 percent in 2012 behind net absorption of 300,000 square feet. Last year, vacancy increased 40 basis points.

0.3% increase in asking rents

Rents: Asking rents will rise 0.3 percent to $28.25 per square foot and effective rents will increase 0.5 percent to $22.42 per square foot, the first annual increases in both measures in four years. Last year, asking and effective rents slipped 0.5 percent and 0.4 percent, respectively.

Economy

Employment Trends
8%
Year-over-Year Change Nonfarm Ofce-Using

Local employers created a scant 200 jobs in the first two quarters this year. The results mark a slowing from the second half of 2011, when 2,700 posts were added. Many employment sectors expanded head counts during the six months ending at midyear. Additional sales and checkout staff were needed at local malls and shopping centers, generating 1,000 positions in the trade, transportation and utilities sector, while restaurants and hotels created 100 jobs. Expanding medical practices also added 800 workers in the first half. Job losses in the first half were primarily concentrated in employment sectors with sizable contingents of office workers. Professional and business services, for example, shed 2,200 positions during the period, and employment in financial activities fell by 500 workers. Outlook: In 2012, local employers will create 4,700 jobs, including 500 officeusing positions. With the projected increase, office-using employment will finish the year at 90 percent of its prerecession peak.

4% 0% -4%

-8%

08

09

10

11

12*

Construction

Ofce Construction Trends

2
Millions of Square Feet Completions Absorption

With high vacancy and limited access to construction financing, developers remain idle. Over the past year, only 73,000 square feet of space was delivered in the county. No new properties came online in the first half of 2012. Approximately 1.3 million square feet of space is planned in the county, an amount equal to 6 percent of existing competitive stock. By comparison, planned projects in neighboring Broward County comprise a potential 28 percent expansion of inventory there, while the potential impact in Miami-Dade is 14 percent. None of the planned projects in the three counties are scheduled to move forward, however. Opera Place in the West Palm Beach Downtown submarket is the countys largest planned project, measuring 386,000 square feet. The property would rise from a site of an abandoned condominium project. Outlook: Developers will not deliver any new competitive space in 2012. Inventory expanded 0.6 percent, or by 136,000 square feet, last year.

1 0 -1 -2

08

09

10

11

12*

Vacancy

Vacancy Rate Trends

22% 20%
Vacancy Rate

Metro Area United States

More than 160,000 square feet was absorbed in the first six months of 2012, pushing down the vacancy rate 70 basis points to 20.8 percent. In the second half of last year, tenant downsizings added 219,000 square feet of vacant space, pushing up the vacancy rate 70 basis points. Class A vacancy held steady in the first two quarters at 18.3 percent following an increase of 60 basis points in the second half of 2011. In the Class B/C segment, the vacancy rate fell 100 basis points in the first six months of 2012 to 22.1 percent, which is twice the level recorded at the start of the recession. Vacancy has been above 20 percent for 10 consecutive quarters, despite the decline recorded this year. Countywide, an additional 980,000 square feet were occupied at the start of the recession, when there were 12,000 more workers employed in the professional and business services, and financial activities sectors. Outlook: The vacancy rate will decline 130 basis points in 2012 to 20.2 percent on net absorption of more than 370,000 square feet.
Marcus & Millichap

18% 16% 14%

08

09

10

11

12*

* Forecast page 2

Office Research Report

Rents

Thus far in 2012, average asking rents ticked down 0.1 percent to $28.15 per square foot. Measured year over year, ssking rents have decreased 0.4 percent, following a 1.1 percent plunge in the preceding 12 months. Effective rents declined slightly in the first two quarters this year to $22.29 per square foot, holding concessions constant. Effective rents are well below their recent peak level, however. In Delray Beach, effective rents would have to rise 17 percent to reach their previous high, while an 11 percent deficit to the prior peak exists in Boca Raton. In the Class B/C sector, asking rents gained 0.1 percent year to date to $24.45 per square foot at the end of the second quarter. Class A asking rents, meanwhile, slipped 0.2 percent in the first half to $35.24 per square foot. Outlook: Average asking rents will increase 0.3 percent in 2012 to $28.25 per square foot. Effective rents are on course to rise 0.5 percent to $22.42 per square foot during 2012.
Year-over-Year Change

Rent Trends
8% 4% 0% -4% -8%
Asking Rent Effective Rent

08

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12*

Sales Trends**

Median Price per Square Foot

Transaction velocity surged 30 percent over the past 12 months. The recovery in the middle of the market was especially vigorous, with sales of buildings pricing from $1 million to $10 million jumping 50 percent. In deals executed over the past year, the median price was $137 per square foot. A different mix of properties changed hands in the preceding 12 months, resulting in a median price of $152 per square foot. Cap rates on properties listed for sale at midyear varied from approximately 8.5 percent to the low-9 percent range. Outlook: Low interest rates, marginally broader access to acquisition financing and reduced prices from the recent peak continue to provide investors with unique opportunities to purchase at a low cost basis.

Sales Trends
$180 $165 $150 $135 $120

08

09

10

11

12**

Medical Ofce

The 50,600-square foot JFK Medical Arts in Atlantis was completed early in the third quarter, the only new medical office space to come online this year. Also, the second phase of the 38,000-square foot Village Square in Palm Beach Gardens is slated to come online during the third quarter.
17%

Medical Ofce Vacancy

Metro Area United States

The delivery of the completely vacant JFK Medical Arts building will elevate vacancy in the third quarter. In the first half, though, the vacancy rate jumped 70 basis points to 13.9 percent as an additional 6,000 square feet was vacated. The vacancy rate in the county has remained greater than 10 percent since the start of the recession more than four years ago and is 120 basis points highet than at the end of the downturn in mid 2009. Countywide, space available for lease was marketed at an average $26.38 per square foot in the second quarter, roughly the same level as recorded at the end of last year. Sales of medical office properties doubled over the past year. Top properties in areas including Jupiter and West Palm Beach changed hands for more than $200 per square foot.

15%
Vacancy Rate

13% 11% 9%

08

09

10

11

12***

* Forecast ** Trailing 12-Month Period ***As of 2Q 2012 Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics page 3

Marcus & Millichap

Office Research Report

Capital Markets
By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

Alan L. Pontius Senior Vice President, Managing Director National Office and Industrial Properties Group Tel: (415) 963-3000 apontius@marcusmillichap.com

The FOMC announced after its August meeting that it would take no new steps to improve the economy before September. The Fed has pledged to maintain its lending rate near zero through at least late 2014 and has also amassed a portfolio of long-term U.S. Treasurys in an attempt to hold down long-term rates. In fact, the Fed expanded Operation Twist by $267 million during June of this year. In general, lenders continue to be discriminating. Banks remain a source of relatively low-leverage financing for acquisitions of multi-tenant properties, and will also underwrite deals for three- and five-year terms. Life companies are focused on quality assets in primary markets, while conduit lenders are more apt to loan on lesser-quality properties in primary, secondary and, in some instances, tertiary markets. Additionally, smaller, owner-user purchases are often funded using SBA 7A and 504 loans. Ten-year loans are available at rates in the mid-4 percent range, or roughly 250 basis points to 300 basis points above the U.S. Treasury. The rate on the benchmark 10-year U.S. Treasury hovered in the mid- to high-1 percent range throughout the second quarter and into the summer. DSCs start at 1.25x, with repayment schedules of 25 years and LTVs of up to 70 percent available.

Submarket Overview

Approximately 1 million square feet of leases were signed countywide in the first half, mostly in renewals. For example, Child & Family Connections 50,000-square foot recommitment at 4100 Okeechobee Boulevard is the largest lease signed in the county this year. The nonprofit social service agency occupies the entire building, which is located in the West Palm Beach-West of I-95 submarket. Development of medical office properties is picking up. Work is progressing on a 53,000-square foot property on Northlake Boulevard in West Palm Beach. No tenants have been secured for the asset, which is scheduled for completion at the end of this year. Transactions in the first half include the sale of the Courtyard office property in the Boca Raton East submarket. The asset, which measures three stories and nearly 72,000 square feet, changed hands in a 1031 exchange for $87 per square foot.

Prepared and edited by

Art Gering
Senior Analyst Research Services For information on national office trends, contact

John Chang
Vice President, Research Services Tel: (602) 687-6700 john.chang@marcusmillichap.com Fort Lauderdale Office:

Gregory Matus
Vice President, Regional Manager gmatus@marcusmillichap.com 5900 North Andrews Avenue Suite 100 Fort Lauderdale, Florida 33309 Tel: (954) 245-3400 Fax: (954) 245-3410

Submarket Vacancy Ranking

Rank
1 2 3 4 5 6 7 8

Submarket
West Palm Beach West of I- 95 Boca Raton West Boca Raton East North Palm Beach West Palm Beach Downtown Boynton Beach/Lake Worth Jupiter/Juno Delray Beach

Vacancy Rate
15.6% 16.9% 18.1% 18.2% 18.6% 23.8% 26.0% 41.2%

Y-O-Y Basis Point Change

-380 -110 190 130 60 50 80 -80

Effective Rents
$20.82 $23.36 $22.88 $16.29 $29.31 $17.44 $21.74 $13.81

Y-O-Y % Change
0.7% -0.2% -0.3% 0.8% -0.9% -0.3% 0.1% -1.3%

Price: $150

Marcus & Millichap 2012 www.MarcusMillichap.com

Notes: Employment growth is calculated using seasonally adjusted quarterly averages. Construction, rent and vacancy figures exclude build-to-suit, flex space and medical office properties unless otherwise noted. The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, Real Capital Analytics, Reis, Torto Wheaton Research Services.