Commentary:

As we discussed in our September 6, 2005, comments, the Federal Reserve raised its target for the Fed Funds Rate to 3.75%. The Fed gave some lip service to Katrina, but kept the rest of the language from their recent announcements intact. With the 2 year T-note yielding, at this moment, 4%, and the 10 year T-bond yielding 4.29%, the yield curve is flat enough that: A. We are heading into a recession; or, B. The longer end of the curve is going to rise in yield and fall in price. We are squarely in the “B” camp.

Real Estate:

For you Real Estate speculators out there: We would prefer to jump out of a 3rd floor condo unit’s window rather than buy the unit (it would be a coin toss if faced with the 4th floor). Single-family investment properties in South Florida are dead money for the foreseeable future, just as they were from 1990 – 1999.

Commercial properties? The prime rate - now 6.75%, and we expect 7.25% no later than Q1, 2006 – is the benchmark for corporate borrowers and commercial mortgages. The average yield spread for a commercial mortgage in South Florida is 1.5 – 2.0 % over prime, giving us 8.25 – 8.75 % commercial mortgage rates, and asking cap rates of 7.5%. No wonder these properties are not moving! The Fed has clearly stated their intentions, in our opinion. They intend to move the long end of the yield curve higher – by any means necessary. There is no relief in sight for either commercial or residential property investors in South Florida - interest rates are going the wrong way, insurance costs are spiking, as are energy costs (read your FPL bill lately?), the supply issues are horrendous (of course, a nice category 5 landfall would adjust those nasty supply issues quite nicely), and that is before green Real Estate investors come to the conclusion that (unlike financial instruments) left unattended their investments will rust in the rain, and rent yields are barley above the cost of taxes and insurance in many cases. The rent yield issue is going to get worse, in my opinion. As I have stated before, South Florida has become Real Estate centric. As this market corrects, a lot of space now rented to people working in the industry is going to be on the market, further worsening bleak rental yields.