Riding the Wave

Where Are We Heading?

We focus on the real scoop on real estate, including the current status of the market, where analysts and experts think it’s headed and when the Emerald Coast can expect one of its most important economic generators to stabilize.

Riding the WaveThe real estate market may have cooled, but over time it will correct itself.

By Jason Dehart

To someone like Ed McMullen, executive vice president of sales for Legendary Realty Inc., the ongoing real estate cool down in Okaloosa and Walton counties is like a spent wave receding from the shore. Wait a little while, and the retreating water will be absorbed by a new wave, thundering toward the beach.

“You know, just before the wave comes to the beach, the water actually recedes from previous waves and it goes back, and then collects itself into the next wave and comes to the beach? Right now, we are in one of those receding waves,” he said. “And the next wave is coming – it’s 70 million baby boomers who won’t reach their peak until 2012.”

McMullen works for one of the premier upscale real estate developing companies in Destin, alongside Emerald Coast business legend and Legendary Inc.’s founder Peter Bos.

McMullen said that new vacation home communities such as the company’s Emerald Grande at HarborWalk Village and Regatta Bay Golf & Country Club developments prove that quality can trump any cool down. He has faith that the demand for a quality, upscale home will never slacken – especially if today’s “generational” customers remain “loyal” to the coastal-living lifestyle.

“Their grandfather had brought them here, their mother and father had a place here, now they’re getting a place that they can celebrate with their kids,” McMullen said. “And they are generally (by generation) more loyal to this area. They are coming to the beach here, whether it’s raining, whether it’s a hurricane, whether there’s a war going on or if there is a national tragedy. But all of the speculators, the investors, and the un-emotionally related people to the area have evaporated.”

However, it’s hard for many – especially those in the building industry – to find glee in the current situation.

 Skip Miller is President of Key Lime Homes in Niceville. He is also a Builder Member serving on the board of directors of the Building Industry Association of Okaloosa-Walton Counties, and past president of the BIAOW. This is the local chapter of the Florida Home Builders Association, of which Miller is Area One builder vice president. The Tallahassee-based FHBA is a trade association that represents 21,000 corporate members.

“The current housing and real estate market is, I would say, flat to slow,” Miller said. “We are probably, I would think, off on our sales and closings probably by 50 to 60 percent over recent years. That’s very bad. Those are newly built homes completed and for sale. There are not a lot of people buying newly built homes. For all purposes we have stopped building speculative homes in the price range of $250,000 and up in Okaloosa, which is my primary focus.”

“Virtually all of Florida and many other locations in the nation are also suffering from a real estate slump,” said John Cook of Coldwell Banker JME Realty. Cook’s firm covers all of Northwest Florida, and portions of Southern Alabama and Mississippi.

Nevertheless, the slowdown was predicted ahead of time, said Edie Ousley, spokeswoman for the Florida Home Builders Association.

“From a statewide standpoint, our industry knew well in advance, in 2006, that the market was going to be slowing down significantly and builders were urged to begin using caution and most of them have,” Ousley said. “They have slowed down on production. In other words, there are less speculative homes being built, and instead they are building totally on signed contracts. They are (finishing construction on) what they already had in the pipeline from last year, but really slowing down so the market doesn’t become flooded with inventory. So they have been using caution.”

Meanwhile, it’s not just residential construction feeling the squeeze. The asking price for commercial land has jointly increased with residential, making it a challenge for companies like GVA Advantis to find land for retailers desiring to locate in the Emerald Coast market.

“The challenge is that sellers are asking too much for the land. I blame that on the residential upturn that happened in ’04 and ’05,” said Jason Carnes, associate director for GVA Advantis. “Property values were sky-rocketing, and commercial property value rose – that is, the asking price of both increased.”

Carnes makes a living representing commercial developers looking for sites in Okaloosa, Walton and Bay counties. Finding those sites has proven problematic in the current environment. The dilemma is that the high cost of land translates into high rent.

“The developer reaches a point where we can only pay so much in rent,” Carnes said. “Publix, for example, will not pay over a certain amount regardless of where it is. That’s the challenge that has happened because the residential market has exploded … it’s difficult for commercial players to buy the dirt for what the seller is asking for.”
 

The Situation

Nationwide, the number of building permit applications has dropped dramatically. According to the U.S. Census Bureau and the Department of Housing and Urban Development, the number of building permits in April was down 8.9 percent from March and down 28 percent from last year. April’s housing starts – the number of homes in the construction phase – were at a seasonally adjusted rate of 1,528,000, a 2.5 percent increase above the 1,491,000 estimated for March. However, this figure is 16 percent below the April 2006 rate of 1,821,000. Single-family housing starts for April were 1,225,000, a 1.6 percent increase over the 1,206,000 estimated for the previous month. Housing completions in April were 5.8 percent below the March estimate of 1,616,000 and is 26 percent below the April 2006 rate of 2,058,000.

According to the Florida Association of Realtors, sales of existing single-family homes statewide fell 28 percent, from 18,751 sold in March, 2006 to 13,469 sold in March, 2007. FAR also reported that sales of existing condominiums also were down in March this year. A total of 4,236 condos sold statewide compared to 6,193 in March 2006 – a 32 percent decline. The statewide median sales price for condos in March, 2007, was $208,800. That’s a 2 percent increase over March 2006’s condo median price of $203,900. The National Association of Realtors reported the national median existing condo price was $225,400 in February 2007.

Locally, single-family home sales appeared to continue going downward. Florida Trend Magazine reported that Okaloosa and Walton counties saw a 22 percent drop and a 27 percent sales drop, respectively, between August 2005 and August 2006. However, more recent statistics from the Emerald Coast Association of Realtors indicated that from 2006 to 2007, the total number of detached single-family homes sold in the Emerald Coast market dropped from 3,422 to 1,247 – a 64 percent decrease. The dollar amount fell from a staggering $1.2 billion in sales in 2006 to $459,093,872 so far in 2007.

Sales of Emerald Coast condos, meanwhile, bucked the trend. The dollar volume of sold listings for condominiums rose 2.42 percent during that same time period (May 2006-2007), and 48.93 percent during April 2006-2007. In 2006, 513 condos were sold between January 1 and June 5 for a total volume of $223,841,361 in sales. The average listing price was $463,069 and the average sales price was $436,338. Things are looking better in 2007 for the condo market, with 530 units sold for a total volume of $293,337,858 and an average sales price of $553,468.

“Our business starting in January this year through the first quarter was up 68 percent over the same time last year,” said Bruce Fults, sales manager, Sandestin Real Estate/Playground Destination Properties. “We have people looking at the market and buying. They see that there is a supply available, and that gives them more choices.

They’re able to take advantage of what is more of a buyer’s market today compared to what was a seller’s market two years ago. We’re able to offer anything from a $250,000 studio in the Village of Baytowne Wharf up to a $5 million home on the bay in Burnt Pine.”

Experts, meanwhile, aren’t rushing to slap a black mark on the current situation, which undoubtedly is affecting the single-family home market more than the luxury home market.

“We would never go so far as to say it’s a recession,” said Ousley of the FHBA. “Even housing economists say it is not a recession but a significant downturn.”

“I think it’s a pretty average correction for Florida,” said Marisa Di Natale, a senior economist for Moody’s Ecomony.com, an international economic research and forecasting provider. “It’s a little bit of a riskier situation than for the nation as a whole in terms of the overall economy in, say, Fort Walton Beach for example. Fort Walton Beach has a higher share of housing-related jobs; everything from construction to material suppliers, landscapers, mortgage brokers and home inspectors. It has a higher share of these housing jobs relative to the rest of the nation … and that creates a little bit more risk for the overall economy because if those jobs are lost, that’s bad.”

Back at Key Lime Homes, Skip Miller said he’s already seeing the trickle down effects Di Natale talks of.

“From a builder’s standpoint, I know of many builders that have had to cut back on their staff,” he said. “I know of many who, as a result of their slowdowns and lack of building, that has resulted in a lot of subcontractor firms having to lay off people because the demand is just not there any longer.”
 

Contributing Factors

There are many reasons for this downturn. In Florida, a bad stretch of back-to-back hurricanes in 2004-2005 has today caused a property insurance crisis of epic proportions.

Throw high property taxes and fuel rates in the mix and the “little guy” is getting squeezed out of the market.

“The causes of the market softness are well documented,” Cook said. “They include insurance, property taxes, hurricane worries and speculation from investors with little or no staying power. Real estate is not a short-term investment, and those who attempt to make it a short-term play are in for a surprise.”

“Fuel prices are skyrocketing; housing prices have in many places increased faster than a family income increase, so that poses some consternation about families and their ability to qualify,” said Ousley. “And I think, too, property insurance and property taxes, both of which have skyrocketed. Certainly the legislature has made efforts to address the property insurance question. The legislature passed legislation in January and held a special session on property insurance to find avenues of reducing property insurance premiums. And on property taxes, which have skyrocketed, there will be special session on June 12 to resolve that (problem).

“Our state knows for a fact that skyrocketing taxes have impacted, from an economic standpoint, the buying and selling of new and existing homes,” Ousley said. “People are absolutely holding off buying homes because they are absolutely afraid of their taxes doubling or even more. So it is, for that reason alone we have been supportive of the governor and legislature making reforms to property taxes.”

Residents in Fort Walton Beach are getting hammered by high costs of insurance there, according to the city’s finance director.

“Fort Walton Beach has really been hit by the property insurance rate increases,” said Finance Director Lisa Absher. “The rest of the state has been hit over the past few years, since 2001, but the panhandle really got hit only recently. For the average guy inland, say one or two miles from the ocean, he is still getting assessed a very high risk rate, even though they are one or two miles inland. I live almost three miles away from an actual body of water and I’m still paying almost $3,000 a year on my house, which is valued at $200,000.

“They aggregate everybody’s risk in the whole area, which is annoying. But again, it’s a recent phenomenon in the panhandle,” Absher said. “The folks on the beach are seriously taxed, between $12,000 and $14,000 a year for property insurance. They used to pay high taxes before but now pay 10 times more. This has been the effect for the last one to two years. The rates have really increased.”

Over in Destin, Legendary’s Ed McMullen said prices are higher but it’s not a problem unique to Florida.

“Certainly the cost of insurance, property taxes, all those things certainly have an impact on the economics of the decision to purchase a second home,” McMullen said. “But that’s not unique to us – it’s every place where there are second homes. Now have hurricanes impacted that? Absolutely. Flood insurance required by lenders and all those kinds of things, certainly have an impact. And it is expensive. I own a home – I just finished building it myself (in Regatta Bay), closed on it in December and occupied it just before Christmas, and my insurance is more than my property taxes. My windstorm, property and flood, all my hazard insurance. It’s expensive. It’s nearly $20,000 a year. My property taxes are more than $10,000 a year.”

High insurance rates are also having an impact on commercial development, according to GVA Advantis’ Jason Carnes.

“I think insurance is another challenge for owners of shopping centers. That cost gets passed on to the tenant, which in turn passes it down to the consumer,” Carnes said. “That has to be resolved or that will hurt the market.  In the past, property insurance didn’t hinder (development). But factor that in with land costs, and there is no margin for error. It’s risky right now.”

 
The Good News

For all the issues, there is a bright side to the housing slump. The Florida Association of Realtors reported that mortgage interest rates are down to nearly 6 percent, and Florida’s median sales price for existing single-family homes decreased 4 percent between March 2006 and March 2007. Nationwide, the decrease wasn’t as noticeable. The National Association of Realtors reported that the national median sales price for existing single-family homes in February, 2007, was down 1.5 percent from the previous year.
“This is an excellent time to buy, as sellers are very motivated, prices and selections are good, and interest rates remain very low,” said John Cook.

 
Other Trickle-down Effects
“There are more people out there available to work now whereas we had a labor shortage over the last thee or four years,” said builder Skip Miller. “We had experienced a shortage of skilled labor because everybody was working at maximum capacity. Now that there is not so much work out there the qualified people are available.”

However, that’s not necessarily a good thing for families, he said.

“We are seeing a lot of layoffs in the subcontract trades, and I’m sure it’s trickled down to material vendors and suppliers, and we have seen price decreases for materials as well,” Miller said.

But the lack of construction starts means more supplies are available, he said.

“Over the last three to four years we experienced material shortages in certain areas, drywall and concrete. There are now surpluses of those goods. And as a result of that surplus, prices have dropped,” Miller said. “I think that is a positive, one of the positive things you could get from this – but if homes aren’t being built they’re not selling those materials. But labor and material prices are stabilizing, and that’s a silver lining to this whole situation.”

The other silver lining is that influx of Baby Boomers Ed McMullen talked about earlier. High prices aren’t going to keep them from snatching up high-quality second homes along the Emerald Coast. McMullen’s optimism is based on the fact that he’s been selling real estate for 25 years or more, and he’s seen what the market can do and what usually happens to correct it.

“(Quality) is the reason why people buy more upscale SUVs than they do low-scale SUVs. The price of gas is high, but you know, I want a Cadillac. I want a Lincoln. Not a Chevrolet. And they’re willing to pay for it,” he said. “They’ll pay nearly twice the price for it. Because of the ride, the sound system, the way it makes them feel when they’re behind the wheel. And that’s the same thing with this vacation product. Because it’s a luxury – it’s not a necessity. No-one needs a $2 million condominium. But they want it. And that want is an emotional desire that’s fueled by their relationship to this market, the relationship to coming here and how it makes them feel. That’s the customer we’re seeing more and more of. And I think here at Legendary we’re able to do some things frankly that some of the other developers may not be able to.”
 

Predictions and Forecasts: What to Watch For

It’s hard to predict when the Emerald Coast will see the light at the end of the tunnel. Some experts are saying sometime this year, others aren’t quite so certain.

“It depends,” said Fort Walton Beach Finance Director Lisa Absher. “It could change tomorrow, at least that’s the history. There’s no benchmark for how long a typical recession lasts. The federal government can make quick adjustments to interest rates that can really drive the economy.”

“Currently, the market in Okaloosa and Walton counties is beginning to recover from a period of softness resulting from an overheated market in 2004 and 2005 which was further complicated by a rash of storm-related issues,” said John Cook of Coldwell Banker JME Realty. “We are beginning to see a return to a more normal real estate market and once some of the existing inventory is off the market, buyers will not have the upper hand as much as they do at present.”

“We had originally heard (from national economists) that we would start seeing the light end of the tunnel toward the end of this year but it appears now that even the national economists are toning down on their predictions,” said Edie Ousley of the FHBA. “So I think there is still a lot of uncertainty and it’s making the housing economic forecast very difficult to predict. But on the positive side, our builders are still very confident and they are continuing to do what they do best, and they have put the pressure on the brakes.”

“I think a certain amount (of the problem is caused by) a lot of unsold inventory in the market right now, both existing and new homes,” said Skip Miller. “That inventory will need to be absorbed, and that takes time, and I think what needs to take place is meaningful property tax and insurance reform at the state level, which in my opinion will eliminate some of the buyers’ reluctance and uncertainty. Because a lot of people simply feel that they can’t live in the state of Florida.”

“I think it depends on where you are; generally, for the nation we will probably see price declines through the end of this year and maybe early next year, and our forecast for the Florida market (indicates) price declines through the second quarter of 2008 and the same for Fort Walton Beach metro area,” said Marisa Di Natale of Moody’s Economy. “The same pattern holds for that as well. We’ll start seeing positive appreciation in the middle of next year. The prices will stop falling and will start increasing again.”

“My business is recovering nicely,” Cook said. “With a big turnaround noticeable in early 2007 when I had a good number of high-end sales including a good many cash sales in the multi-million dollar range. What we are seeing is that if sellers are realistic in their pricing, their properties will sell. Why not take a good, normal profit and move along? Unfortunately, there are still a lot of sellers who feel that they can double and triple their investment in the short term. Those days are over, and the sooner folks realize this, the sooner they will sell their property.”

“The retail market in Okaloosa and Walton remains strong,” said GVA’s Jason Carnes. “The challenges we have are that the big players, the commercial developers and tenants, if they are not there, they want to be there. They know the market will turn around at some point, and want to be there. I would say we need to see some continued reduction in land prices. In some areas that is happening, and where it is happening we are able to put deals together.

“The good news is the big retailers are looking at this market and want to be here. And that bodes well for the big picture of the overall health of the market. They feel like this area is going to continue to grow,” Carnes said.

“What we’re seeing now is a stabilization of a (resort) market where you have people buying and holding for five years or more,” said Bruce Fults of Sandestin Real Estate. “I do think that real estate markets are local, and that a resort real estate area is going to be different than a metro area or an urban area that may not have the natural location of beach and bay and all the amenities and services that go along with that setting. I would say Sandestin has been used as a benchmark for where the market is, in a resort setting, because so many people are coming here for vacation, or conferences, or just to experience the area.”

“My crystal ball is a bit rusty, but (recovery) will happen sooner rather than later because the Emerald Coast is still one of the best places to live in America, and with the demographics kicking in soon and working in our favor, many, many Baby Boomers will realize that our best years are directly ahead of us,” said John Cook.

Gauging Changes in the Emerald Coast Business Climate

By Lori Hutzler Eckert 

Officials with ResortQuest, a nationwide vacation-rental, hospitality and resort real estate company, announced in mid June that the company has been purchased by Leucadia International Corporation and BEI-RZT. The company, which will continue to operate under the ResortQuest name, has relocated its corporate office from Nashville to Fort Walton Beach.

Dale E Peterson and Anchors Realty’s vacation rental division announced a merger beginning in May. The joining of the two firms, which are two of the area’s oldest real estate management companies, will operate under the Dale E Peterson name in Destin.

Legendary Inc. recently announced that it will include a Jester Mardi Gras Daiquiris to its HarborWak Village development food and beverage lineup. The announcement follows last year’s news that the mixed-use project located in the Destin Harbor will feature another New Orleans icon, Pat O’Brien’s.

Townsend Recovery Centers, a network of treatment facilities providing recovery services throughout the South, opened a center in Fort Walton Beach’s Paradise Village Professional Park in mid-May. Townsend Recovery LLC, which is based in Lafayette, La., specializes in the treatment for a variety of addictions, traumas and disorders.

The St. Joe Company, headquartered in Jacksonville, Fla., and one of the state’s largest real estate development companies, announced in late spring that its Santa Rosa Beach WaterColor Inn & Resort and its affiliated golf courses, Camp Creek Golf Club and The Origins Course, were named by Golf for Women Magazine’s inaugural list of the “Top 25 Best Family Resorts.”

Howard Group’s evolving Grand Boulevard at Sandestin town center, located in Miramar Beach at the entrance to Sandestin Golf and Beach Resort, has opened the doors to several new businesses in June and July, including Learning Express Toys, Victoria’s Secret, Kilwin’s Chocolate Fudge & Ice Cream, Fleming’s Prime Steakhouse & Wine Bar, Cantina Laredo, Mitchell’s Fish Market, Tommy Bahama’s Tropical Café & Emporium, Fusion Art Glass Gallery and Billabong. 

Silver Sands Factory Stores, also developed by Howard Group, recently announced plans to add three new restaurants, Carrabba’s Italian Grill, Cheeseburger in Paradise and Panera Bread, to the shopping center, located in Miramar Beach. The restaurants are under construction and are expected to open this summer.

In other news, Cornerstone Marketing & Advertising recently was presented with three ADDY awards by the Fourth District Advertising Federation’s gala in Miami … The Walton County Tourist Development Council – Beaches of South Walton was awarded accreditation from the Destination Marketing Accreditation Program, an international program developed by the Destination Marketing Association … WilsonMiller Inc., which has an office in Destin, was selected from among 48 nominees and three finalists to receive the 2007 Uncommon Friends Foundation Business Ethics Award, which recognizes a business that demonstrates high standards of ethical behavior in all levels of the organization … Zampieri’s Harbor Grille, located in Destin Harbor, recently received a 2007 Wine Spectator’s Restaurant Award from Wine Spectator magazine, recognizing the restaurant’s extensive wine list.

To submit company news to Emerald Coast Business Journal, please e-mail news releases to lori@eckert.com.