It's About Growth

The forces that have insulated the region's economy and boosted the real estate industry will leave Southwest Florida slightly bruised as the national economy recovers, says economist Gregory Miller.

The Atlanta-based chief economist for SunTrust Bank will present his outlook this month at the Urban Land Institute-Southwest Florida District Council's Winter Institute.

When the national economy took a dive in 2001, Fort Myers and Naples kept moving along at a relatively healthy clip. Real estate, in particular, continued to grow. For example, the National Association of Homebuilders reports that median home prices in Fort Myers in 2002 rose an estimated 19 percent-largely due to what Miller terms a "composition shift" from lower- to higher-end housing.

Meanwhile, the region's economy leans on retail and construction. Miller reports that the Fort Myers area has about twice as many jobs in construction (about 10 percent) and retail (around 25 percent) as the national average, and Naples has similar percentages. An increase in back-office operations-communications and customer-service centers-has boosted incomes for many who traditionally held low-wage retail jobs.

Other advantages include a strong snowbird population as well as foreign and domestic in-migration. Some workers being laid off or taking early retirement move to the sunny South, so "migration patterns actually accelerate toward the South when the economy turns bad," Miller explains.

Overall, Miller says, the region is "a little bit recession-proof" because the population has been growing at even greater rates, there's job growth, and investors have been far more interested in real estate than in the stock market.

Gulfshore Business: Is there a real estate bubble in Southwest Florida?

Gregory Miller: Do I expect that house prices are going to grow on the order of 19 percent in 2003 or 2004? No. Are we going to pop this bubble and see valuations deteriorate? No.

There are a variety of reasons. The "composition shift" has been a response to a weakened stock market. People have shifted their wealth holdings back toward house-related assets. I suspect that over 2003, we're going to get less and less of that. Stocks will start moving back up and will begin to compete for the asset distribution that was going into housing.

Fort Myers and Naples have been out of sync with the macro economy for almost the whole decade. Because they don't slow down when the rest of the world is slowing down, they generate some of the excesses through the recession. For the next year or so, I expect to see a ramp-down in some of those areas that generate excesses.

The strong population growth won't continue; people who were forced out of other parts of the country because of recession aren't being forced out anymore. If single-family permits or construction dropped 10 percent in 2003 and another five percent in 2004, I would not be surprised.

There's another element. The Canadian dollar has been sliding against the U.S. dollar, making it more expensive for Canadian snowbirds to relocate to the United States.

Those elements are going to slow down the migration patterns that fed the region's economy when the rest of the world was weak, and single-family looks like it's probably hit the top. That's the bad news.

Here's the better news: Nationally, the numbers of first homebuyers are improving for the first time in a decade. For the next few years, home prices should continue to increase better than they have in the past 10 years, until we got into the late '90s.

GB: What particular types of housing will prosper or decline?

GM: For the next couple of years, relative strength is shifting to multifamily, in particular high-end condos. Mid- to low-end condos are not as strong. Rental apartments are not strong at all. Amenity-related communities (such as golf course or marina communities) and communities where people can move to different parts with increasing levels of health care available are starting to accelerate.

GB: What challenges do we face by having an economy tied to real estate?

GM: It adds potential volatility to the local business cycle. We would have expected a market like Fort Myers to stall out when the rest of the country came out of the '90-'91 recession. It didn't; it held its own during the early stages of recovery, then accelerated away from the rest of the country.

If the market gets too overbuilt and recovery of the national economy is moderate, which is what we have now, the risk to a market like Fort Myers is greater. [Stock market woes and a shift to back-office operations have helped the region.] Recently, companies have been shifting these back-office operations offshore. That has the potential to add volatility to markets dominated by construction and relatively low-income retail trade employment. When those elements weaken, the local area slows relatively more.

GB: What else should we expect for the local market?

GM: We've been out of recession for a year now, but the market is treating this as if the economy is still in it and perhaps even going deeper into recession. Throughout 2002 we had a greater than three percent economy running. That's not bad, but the stock and bond markets are treating this economy as if it were still negative.

For the next year, I suspect the economy will do slightly better. In markets that tend to lag the cycle like Fort Myers the potential for slowdown is substantial, particularly in the housing industry. One threat is the self-fulfilling prophecy of a slowdown, so if local businesses recognize that times are improving, they can offset some of the potential volatility.

ULI Events in Southwest Florida

Developing Golf Courses and Communities Conference

Where: The Ritz-Carlton Golf Resort, Naples

When: March 24-25

Cost: $995 for ULI member, $1,145 for non-member, if registering before March 14. After that date, add $100.

Contact: ULI at (800) 321-5011 or

www.conferences.uli.org.

Southwest Florida District Council Sixth Annual Winter Institute

Theme: Trends and Directions in Real Estate Development-Strategies for a Softer Market

When: 8 a.m.-2 p.m., March 26

Where: The Ritz-Carlton Golf Resort, Naples

Cost: $135 members, $175 non-members. There is a $25 discount for those who attend golf course conference.

Contact: (800) 321-5011 to register. For more information, call Cindy Meskauskas at (239) 390-1152 or coordinator@swflorida.uli.or