Boom: The Southwest Florida Economy

Florida is experiencing an economic boom that began around 1995 and has continued unabated since. This has resulted in a very active commercial real estate market in southwest Florida and has investors asking, “Will this continue?” and if so, “For how long?”

In order to answer these questions, it is necessary to examine macro-economic data; establish the economic context; view statistics on southwest Florida; describe the economic forces that are currently at work; and examine elements that could alter the projected results of the statistical analyses.

Will the Economic Boom Continue?

Most analysts agree that the United States is not in a recession, even though changes between the rates of growth of the Gross Domestic Product for the US might make it seem otherwise.

The average rate of growth from the first quarter of 1997 was 4.18 percent. With the economy roaring in late 1999, exacerbated by a flood of liquidity provided by the Federal Reserve to hedge against Y2K fears, the change in the rate of growth from 6 percent to 8 percent down to 1 percent felt like a drop off a cliff. This is precisely the slowdown that the Fed engineered when beginning its rate increases in 2000.

Also evident is the change in personal consumption, which contributed to the GDP change in the following chart:

Two critical interest rates, the 10-year Treasury Bond and the 30-year Treasury Bond, make up an important third piece of macro-economic data, especially as it relates to Southwest Florida. The former is used to set interest rates on commercial mortgages, and the latter on residential mortgages.

The current national boom in Commercial Real Estate is fueled partly by the relatively modest cost of mortgage financing. Commercial mortgages are typically priced at a number of basis points over the 10-Year Bond. Since many unmortgaged income streams produce internal rates of return in excess of 10 percent in today’s marketplace, the availability of such financing makes commercial real estate ventures quite profitable.

From this data, it seems that the national matrix of continued Gross Domestic Product growth, the resilience of consumer spending, and relatively low interest rates for commercial (and residential) mortgages all portend the continuation of reasonably good economic times.

For How Long?

Several economic indicators that can help answer that question include: an analysis of Gross Sales as reported to the State of Florida, the number of single family and multi-family building permits issued for Lee and Collier Counties over the past year, and job creation, an important element that drives the issuance of building permits.

Note that sales are reported the month following the actual sale period. January 2001 shows a large peak, but that is actually the result of the sales made in December. Notice that the fall-off in consumer spending that we saw in the Personal Consumption chart did not occur in Southwest Florida. There are two reasons for increasing sales: 1) The population continues to increase; 2) Permanent residents of Southwest Florida have a majority of their annual income derived from non-wage and non-salary sources. The Florida Statistical Abstract, published by the Bureau of Economic and Business Research at the University of Florida indicates that 56 percent of Collier County residents and 50 percent of Lee residents derive their total income from dividends, interest, rents, and transfer payments. That’s 11 percent more than the rest of the state and 21 percent more than the nation. Hence, there is a disproportionately large, stable source of income for many Southwest Florida residents that is driving the economy.

Job-creation activities in Lee and Collier Counties fuel this increasing number of permits issued. In the past five years, Lee County has created a total of 14,412 jobs, and Collier County has created a total of 21,116 jobs. The coming year is expected to provide an additional 4,000 + jobs in Collier and about 3,000 jobs in Lee. These figures indicate that the population is creating new jobs which helps the overall economy to continue expanding.

Maintaining the High Standard

When looking for continued growth, it is important to remain focused on important issues such as providing adequate infrastructure to support continued growth. Roads, water, sewer, and schools must continue to improve in order to maintain the perceived high quality of life, which will continue to fuel this growth.

Four industries constitute 83 percent of the total workforce in Collier County. A large percentage of the new jobs are being created at the lower end of the wage scale. There is a need for employment opportunities in higher-paying careers.

Increasingly favorable economic conditions around the country will help our area avoid a severe economic problem in the immediate future, and the pattern of growth that has been well established for the past 20 to 30 years is likely to continue. As long as we recognize potential problems and act proactively, Southwest Florida should experience further growth and a vibrant economy.

John T. Conroy, Jr., CCIM is a commercial advisor with Grubb & Ellis|IPC, a full-service commercial real estate company serving Southwest Florida