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State of the Market - Summer 2017

The stock market is setting record highs and the unemployment rate is reaching new lows.

The stock market is setting record highs and the unemployment rate is reaching new lows. From multiple perspectives it appears Southwest Florida’s economy has recovered from the Great Recession. Given this momentum, is it possible for the real estate market to experience a significant slowing or even decline? Absolutely – real estate is governed by supply and demand. A strong economy may ease the macro impact of a real estate market slowdown, but product oversupply almost certainly will usher in a downturn that can be devastating for those involved. Additionally, while oversupply in one real estate market segment may not be repercussive throughout the entire market, the dynamic of oversupply will significantly impact the oversupplied market segment. Over the past four years, downtown Sarasota has experienced an unprecedented residential build up, much of it driven by true market demand. But as often occurs, perceived demand can also be magnified by developer enthusiasm to deliver what they consider “unique” residential product to the market. Consider the Rosemary District, where approximately 1,300 new residential units and 200 hotel rooms are about to be delivered. South of Fruitville Road, and along the waterfront, another roughly 1,000 residential units expect to be added by January 2018. While sales and leases are transacting, the pace has been somewhat less frenetic than some developers anticipated. As is often the case in growing markets, the first developments delivered are absorbing the demand and achieving sales and leasing benchmarks as their pro forma projections indicated, but the slowing demand does not bode well for those projects under construction or projects soon to be competing for buyers and tenants. Meanwhile, as the residential market in Sarasota has become frothy, the other market segment being impacted by oversupply is the office market. Buyers are still purchasing office buildings as investments or to use, but tenants are few and far between; a critical market dynamic that will cause rental rates to soften over the long term unless fundamentals drastically change. Unlike the residential market, however, the office market’s oversupply is a result not of overbuilding but of shifts in how business is conducted – the result of technology and greater mobility – and less overall demand for brick-and-mortar space.