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Berkadia’s Charles Foschini On The Florida’s CRE Market

florida

Berkadia’s active presence in Florida’s CRE debt scene owes no small part to Charles Foschini, who co-heads its originations in the state from the company’s office in downtown Miami.

The University of Miami graduate, who spent nearly two decades at CBRE, has led some of Berkadia’s biggest Florida deals since he joined the company in 2016. Among them is a $121.5 million acquisition loan that helped Parkway Properties and Partners Group buy a set of six Tampa office buildings late last month. The firm has also been a key player in multifamily capital markets, putting it on the cutting edge of Florida’s changing demographics.

Foschini spoke with Commercial Observer by phone last week to discuss everything from the Sunshine State’s sunny skies to its business climate, transportation struggles and even its school system.

Commercial Observer: In a nutshell, what are your responsibilities at Berkadia?

Charles Foschini: I co-lead Florida operations in both a management and production role. I focus on a group of clients [for whom] I do a fair amount of their business … and that runs the gamut of any of their capital-market needs, from permanent loans to construction loans to bridge loans.

Commercial Observer: Florida’s shown a lot of momentum lately — throughout the state, but particularly around Miami. What do you see as some of the driving factors?

Charles Foschini: When I studied at the University of Miami, it wasn’t lost on me that the temperature was 78 degrees all the time. It’s a very enviable place to live, work and play. But you have to layer over that that our last two governors [Ron DeSantis and Rick Scott] have been very pro-business. We’ve had a lot of growth in the medical sector and a lot of employment growth. It’s not just a tourism economy anymore.

Commercial Observer: Berkadia has been a force behind some significant multifamily debt deals in the state this year. How is the state’s apartment market evolving?

Charles Foschini: We’re seeing unrelenting population growth and immigration to the state, and we’re seeing a continued evolution of employment. Some of the bigger submarkets have a lot of transportation challenges. Those factors have formed a confluence to create a need for multifamily near where people are going to work. That’s created a lot of new developments in suburban and urban markets. What’s more, the individual credit consumer has been harder to come by: Not as many people have been buying houses in this cycle. That has created a renewed demand for lifestyle residential, where people can get all the amenities that you couldn’t frankly afford or justify in your own home.

Commercial Observer: Reforms to Fannie Mae and Freddie Mac have been a never-ending discussion in Washington. Do you have any concerns?

Charles Foschini: Fannie and Freddie have been market leaders in multifamily finance, and they have very healthy allocations for 2020. I expect that to continue. But having said that, the economy and capital market side is extremely vibrant. You have CMBS lenders, banks, life companies and debt funds, all of which are available to a borrower in any given transactions. They’ll continue to have a significant market share in multifamily, too.

Commercial Observer: You mentioned some transportation challenges. Do you think the state’s urban areas need to become more commutable?

Charles Foschini: The demand for a live-work-play lifestyle is fueled both by millennials as well as those folks that are selling homes and moving back to the cities. They want to have everything in one place. The new Brightline train [which now connects Miami and West Palm Beach, Fla.] is so much more convenient than it was 20 years ago when you had to get in your car and commute. As South Florida and particularly Miami evolve as 24-hour cities, that means you have 24-hour traffic. Mass transit is a solution to that.

Commercial Observer: You mentioned that the state’s politicians have fostered a business-friendly reputation. How specifically has that helped drive new investment in the state?

Charles Foschini: One of Berkadia’s technology tools looks at IRS tax payments from one year to another. You can pick somewhere in the Northeast — anywhere in the Northeast — and look at the tax migration. For example, if you paid your taxes in 2018 in Connecticut and then in 2019, you paid your taxes in Florida, that net migration has been measured, potentially, in billions of dollars, and that’s continuing. In many cases, the Northeast is losing out to where it’s easier to live, easier to do business and where overall taxation on the same work dollar is lower. Florida is a huge beneficiary of that. Then there’s the fact that submarkets like Orlando and Tampa have very, very nice campus-style offices that rent for a lot less per square foot.

Commercial Observer: People often speak of talent pools as one of the deepest strengths of gateway cities like New York and L.A. How is Florida doing on that front?

Charles Foschini: I would say it’s evolving, and not fast enough. Our private school systems are exceptional. The Florida state schools are getting better. Five years ago, most of them didn’t have real estate programs, but now they all do. But the public school systems here for primary grades are not evolving fast enough. As our population grows, they’re not evolving at a pace to support that population. So that’s a challenge that municipalities continue to address.

 

Source: Commercial Observer

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Predictions For South Florida CRE In 2020

the road to 2020

So 2019 is drawing to a close, having given the world of commercial real estate things we expected — like a booming industrial market — and things we didn’t (WeWork and opportunity zones were among the greatest flops of the decade).

Bisnow asked some South Florida real estate pros what 2020 may bring. Here are their thoughts:

Jeff Gordon, Vice President, JLL

“We have a number of interesting new office developments delivering or in the pipeline across Miami’s office market over the next few years. This will create variety and optionality not previously seen in Miami as it pertains to emerging submarkets, deepening options in changing submarkets and the way in which the office use is amenitized with other product types across the market as a whole. This variability will provide opportunities for tenants that approach their future leasing with a proactive strategy. In line with this, it will also be interesting to see the impact that the continued expansion of the Virgin Trains stations will have on the connectivity of Aventura and Boca with our Central Business Districts and the continued goal of connecting Florida’s growing talent and workforce.”

Tere Blanca, Founder and CEO, Blanca Commercial Real Estate

“Miami’s vibrant and diverse economy, its business-friendly environment (and tax advantages) and its convenient lifestyle and connectivity to the world via Miami International Airport will continue to spur the relocation to Miami of talented professionals and companies across various industries both domestically and internationally. Key factors driving this movement include this increase in people relocating here due to tax incentives including the lack of a state income tax. The strong population growth in the past five years, with continued projected growth, will continue to motivate companies to establish a presence in Miami. Also, the uncertain political climate in key Latin American countries may attract investment into Miami from these markets that include Mexico and other nations. With limited new office supply delivering in 2020 and robust demand from companies touring the market, we expect the market to remain stable and steady with positive absorption and modest increase in rents. Also, new office deliveries in 2020 will be well-received given Miami’s persistent flight-to-quality trend and this in turn will drive owners of older, existing buildings to undertake strategic renovations to remain competitive. With flight-to-quality prominent among tenants today, we expect new supply to attract tenants across various submarkets, while also attracting new-to-market entrants.”

Cory Yeffet, Director of Acquisitions, Integra Investments

“We expect multifamily development and sales to remain active in 2020. Although rent growth has slowed due in part to significant new supply, demand remaining strong and multifamily cap rates remaining at record lows will continue to support a healthy development and sales environment. This is why Integra continues to be active in the sector, with four multifamily projects under development in South Florida, including the 315-unit Bella Vista project in Lauderdale Lakes, which we intend to deliver and stabilize in 2020. The biggest commercial real estate concern we see for 2020 is the uncertain impacts of the election year, and how global economic and sociopolitical dynamics may slow down private sector expansions.”

Doug Jones, Co-founder and Managing Partner, JAG Insurance Group

“For about the last 10 years, rates have consistently gone down. But with the influx of natural disasters, reinsurance went up in 2019 and that will continue in 2020. That trickles down to the consumer. Also, while risk of sea level rise continues to be a concern, thanks to the recent expansion of the private flood market, consumers will actually have more options in 2020 than ever before to make sure their assets have the proper coverage.”

David Druey, Florida Regional President, Centennial Bank

“I predict minimal, if any, slowing down in deal flow of construction financing in any of the major sectors. Smart developers are seizing the opportunities of low interest rates through use of bank financing for construction financing and securing forward commitments with institution investors for stabilized projects. The ongoing major risk is if the developer can actually complete the project on time and budget. Most of the more substantial projects, outside of apartments, typically have the stabilization piece solved prior to construction commencement.”

Ronald Fieldstone, Partner, Saul Ewing Arnstein & Lehr

“The new EB-5 regulations went into effect at the end of 2019 and we are still seeing increasing interest from investors, especially from Latin America, in the EB-5 program despite the higher threshold. Over the past 10 years, developers have grown dependent on raising EB-5 capital to finance their projects due to the low cost of EB-5 borrowing. We expect it to continue to remain a viable source of financing for development projects in downtown Miami west of Biscayne Boulevard, Little River, areas around Miami International Airport and certain sections of Coconut Grove.”

Stephen Rutchik, Executive Managing Director, Colliers International

“Although one of the original iterations of coworking, WeWork has collapsed on a corporate level, I expect that the concept and most of the existing locations will continue to perform well over the next year. On a larger scale, office landlords in South Florida are increasingly incorporating the coworking concept into existing office buildings. This is attracting new tenants who previously would have either been priced out of traditional office space or who require flexibility that a traditional lease cannot provide. The coworking concept is much larger than WeWork. It has quickly become a part of the American office culture and I expect this trend to grow in the coming years.”

Adam Lustig, Partner and Incoming Real Estate Practice Group Leader, Bilzin Sumberg

“With continued low interest rates, increased employment and significant population growth, I expect the South Florida real estate market to remain strong in 2020. In particular, I see health-related real estate and senior housing as areas of opportunity with the aging of the population and the need for urgent care centers, hospitals, medical office space and senior housing facilities. As shopping center owners try to adapt to dramatic changes in the retail market, medical, health and wellness uses will continue to expand. The major threats to continued growth in South Florida remain traffic, lack of public transportation and affordable housing. One other threat that is not being talked about enough, but that we are very focused on, is the phase-out of Libor at the end of 2021 which affects trillions of dollars of commercial real estate loans.”

Chris Chakford, Managing Director of Origination, Kawa

“Kawa sees ground leases as an ongoing trend in 2020 as banks pull back on commercial fee simple financing in non-core markets, most notably in hospitality and office sectors. With sponsors needing creative solutions to fill out capital stacks and lessen their equity requirement, Kawa has created a ground lease program that offers a complete financing solution to meet these needs. This type of financing vehicle offers a highly adaptable bifurcation structure that accommodates owners’ needs while typically enhancing returns, providing tax benefits, being nonrecourse, and mitigating interest rate risk by offering perpetual financing. In the last three years, Kawa has executed 12 ground lease transactions with a total value in excess of $652M and anticipates ground leases to be a prominent alternative for providing creative financing solutions with flexible capital that can be deployed quickly as we look ahead into 2020.”

Peter Mekras, President of Aztec Group

“2020 is likely to be a year filled with volatility. Interest rates and the political environment both locally and nationally will be the main drivers of market volatility in 2020. Irrespective of the trend of volatility in 2020, we expect capital markets to remain liquid. Equity capital will continue to flow into Florida real estate in 2020. Florida will maintain its label as one of the few states positioned for strong long-term fundamentals and a uniquely favorable business environment for real estate investors. Florida is projected to experience better than national trend employment growth and will continue to benefit from strong population growth. Rental apartments, senior housing and well-located office and shopping centers will be the beneficiaries.”

Lissette Calderon, President and CEO of Neology Life Development Group

“Allapattah is seeing significant residential and commercial real estate investment underway that will enhance the neighborhood’s appeal and quality-of-life offerings. With Miami’s growing population seeking lifestyle living alternatives within the urban core at attainable price points, our mission is to provide a solution to this need by developing attainable luxury rental units that are modern, functional and offer upscale amenities.”

Michael C. Brown, Executive Vice President and General Manager, Skanska USA Florida

“Come the new year, I anticipate the two sectors poised to fuel Miami’s economic growth will be healthcare and higher education, which continue to be the largest sectors for us across the state and in South Florida. I believe we will also continue to see a more pronounced shift into environmentally friendly building, specifically with companies looking to minimize their carbon footprints.”

Martin Melo, Principal, The Melo Group

“2020 will prove to be a year full of challenges, mostly driven by the political landscape throughout Latin America, the upcoming elections and the increasingly low interest rates and low income tax in Florida. We can expect to see an influx of new residents who come to South Florida searching for a more attractive and stable socioeconomic climate as opposed to the current situation in their own countries. The demand for multifamily and market-rate apartments will continue to rise and interest rates will remain low, which will ultimately spark a bigger interest from developers and investors in the area.”

Shawn Gracey, Executive Vice President of Hospitality, Key International

“As the hospitality industry becomes increasingly diverse, there will be even more emphasis on presenting a unique value proposition to today’s travelers. We’ve found that our customer profile is seeking experience-based and design-driven accommodations in key coastline cities, which led us to develop the AC Hotel by Marriott in Fort Lauderdale Beach, which will be one of the newest, upscale select-service properties in the area when it’s delivered next year.”

Rishi Kapoor, CEO, Location Ventures

“Pointing to various indicators, the fortress submarkets of Miami’s luxury condo inventory are the prominent choice in 2020, compared to areas of oversupply. Foreign buyers will remain a challenge, despite promising pockets from target countries in Latin America; the true stability is in the end user, who traditionally purchases a primary residence rather than investment product, and is more likely to focus on lifestyle moves in the market. This is why more protected submarkets, such as Coral Gables, will be a strategic play, as we’re seeing a wave of retirees or empty nesters, coupled with growing families, seeking to place roots in a neighborhood with a thriving business environment, limited top-tier condo product and a historic record for stability.”

Miguel Díaz de la Portilla, Attorney, Saul Ewing Arnstein & Lehr

“2020 will be an exciting year of American Dream Miami. We have our land use and zoning approvals in place and will be finalizing the design of the project, applying for administrative site plan approval, and moving forward with continuing to work on infrastructure. This will all be happening at a time when people from all over the world are beginning to experience the magnificence of American Dream Meadowlands in New Jersey. Triple Five just opened the entertainment center that serves as a sneak peek to how American Dream Miami will look and the tremendous benefit that it will have on our local economy.”

 

Source: Bisnow

West Palm Beach Is Overflowing With Class A Office Space As New Towers Emerge

West Palm Beach

Real estate agents are increasingly concerned that first-class office buildings offer too much space to sublet shadows.

Even though another project needs to be considered, downtown West Palm Beach’s office market is full of empty space, and real estate professionals say there is little demand for renters outside the area to rent large offices.

Surveys of real estate developers and estate agents indicate that the city’s Class A office buildings, which usually attract the top tenants, have sufficient space directly in the buildings or by office tenants who are trying to rent their space. These sublet offices are a shadow market, indicating that the actual supply of office space is much larger than expected. In fact, the prime A buildings are about 80 to 85 percent full, which means that at least 10 to 15 percent office space is available in each building.

“There are big holes in all buildings,” said a real estate agent who asked not to be named. “Where’s the demand?”

The space flood is revealed when two new office buildings are constructed in downtown West Palm Beach and a third tower is due to be approved by a city committee. The Downtown Action Committee will vote on whether the One Flagler office tower will be allowed to raise 25 floors on land if it has five floors near South Flagler Drive and Okeechobee Boulevard.

The tower would offer 261,000 square meters of office space for rent. These buildings complement the existing range of first-class spaces in the city center. This area includes Class A buildings such as Phillips Point, Esperante and CityPlace Tower.

“Back in June, I had 17 percent vacancy in front of the new buildings,” said Neil Merin, chairman of NAI / Merin Hunter Codman in West Palm Beach. “Adding Rosemary 360 and One West Palm, both under construction and scheduled to open in 2021, will bring the vacancy rate to 35 percent. With 360 Rosemary, One West Palm and possibly One Flagler, you’re talking about 750,000 square feet. But even in the prime, we can only take up 100,000 square feet a year. The space will not only last for years, but will also lower rents in other office buildings.”

A developer from Flagler, Related Cos., argued for the tall tower, saying there is a lack of Class A rooms with the amenities and water views provided by private equity firms and hedge funds Northeast would be sought to make room in the city center. However, according to brokers and developers of commercial real estate in the city center, numerous high-quality office spaces are currently available.

“This is due to the fact that the market has seen flat to negative net absorption in the past two years when some companies left and others signed new contracts for smaller spaces,” experts said.

Real estate sources say the flood of space and new office buildings coming onto the market frighten some building owners who want it. In fact, it can be assumed that the Phillips Point office complex will be launched next year, as well as other buildings.

“The market is getting nervous,” said a source.

Phillips Point is a Class A office tower on 777 S. Flagler Drive. The two-tower complex offers water views, luxurious finishes, and a top tenant list. Among them: AMG, a global wealth management company.

AMG endeavors to sublet the entire 11th floor of the east tower, which is 16,000 square meters in size and offers a breathtaking view of the water. Also available is a first-class room with a view of the water on the 10th floor of the East Tower, which was once occupied by the Arnold & Porter law firm, which still rents out the room. The 8,000 square meters of space are available for subletting.

“In fact, 84 percent of the 460,000 square feet at Phillips Point are occupied,” brokers said.

Over there in Esperante, at 222 Lakeview Avenue, the 25,000 square meter tower, according to the real estate agent, has 48,000 square meters of rental space available, which corresponds to an occupancy rate of around 82 percent.

Even if sought-after hedge funds and private equity companies rent space, they don’t take much with them. Instead, they typically look for small offices that are sometimes between 800 and 1,200 square feet, according to an expert in commercial leasing. According to brokers, more than 95 percent of the Class A office buildings in the city center were fully let for a short time, but have adjusted to their historic occupancy rate of 80 to 85 percent.

“There weren’t many significant new businesses in downtown West Palm Beach,” said Peter Reed, managing partner of Commercial Florida Realty Services. “It’s still a mess” of existing downtown tenants.

For example, a new tower under construction, 360 Rosemary in Rosemary Square, has replaced Comvest from the nearby CityPlace Tower. It also attracted Lewis, Longman & Walker Law from Northbridge Center, where the firm rented 16,000 square meters. Now both the Cityplace Tower and Northbridge have to fill the soon empty space in their buildings.

At CityPlace Tower on 525 Okeechobee Boulevard, the last new tower in the city center since 2008, the occupancy of the building is only 72 percent according to the leasing information on the website and the broker data. The brokers market a 21,160-story sublease on the 9th floor. The rental price is $ 39 net per square foot, less than the market price of more than $ 50 per square foot for the area in the building.

In addition, according to the building’s website, the 300,000 square meter building has a further 64,127 square meters of rental space. This includes the top two floors where Intech used to be and which have moved to the One Clearlake Center on Australian Avenue.

 

Source: The Media Times

New Apartments Coming To West Palm Beach’s Warehouse District

District Flats Rendering

In West Palm Beach’s Warehouse District, the transformation from barbed wire and body shops to hipster haven is accelerating.

Palm Beach Gardens-based Eastwind Development officially broke ground Thursday, December 5, on The District Flats, a 178-unit apartment complex a block south of the Grandview Market food hall.

The four-story building on Blanche Street will include a 250-space parking garage, a dog park and a large mural. Construction is expected to finish in 2021.

Eastwind has yet to say how much units will cost. Twenty percent of the apartments, or 36 units, will offer discounted rent to tenants who make less than 140 percent of the annual median income for Palm Beach County.

District Flats is direction south of the 85,000-square-foot Warehouse District, where tenants include Steam Horse Brewery, the Steel Tie Spirits distillery, Palm Beach Squash Club and Gypsy Life Surf Shop. The main attraction is the Grandview Public Market, where eateries sell ramen, poke, tacos and cold-brew coffee.

The six warehouses in the deal were built between 1925 and 1974 — ancient for industrial space in the Amazon age, but ideal for a collection of independent retailers and eateries.

Johnstone Capital Partners, headed by Hunter Beebe of Palm Beach, paid $5.46 million for the six buildings over the past few years, according to property records. Johnstone flipped the properties in late 2018 to Asana Partners of Charlotte, which paid $18.5 million.

 

Source: Palm Beach Post

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Seven CRE Investment Strategies For 2020

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With the Thanksgiving holiday weekend behind, it is not too soon to look at what will be the top investment strategies for next year.

Seven top CRE investment strategies for 2020 include:

1. Sell Overpriced Industrial Assets

The industrial market has been booming for the last few years and is the favored asset class among institutional investors. The market is “hot” because of the strong economy, increased demand for warehouse and distribution space due to rising Internet sales and last-mile same- day delivery of online goods. Cap rates for industrial properties have compressed 1.5% to 2.0% during the last 18 months and we would be net sellers of industrial assets in this market.

2. Acquire Beaten Up Retail Assets

Many shopping center and mall real estate assets are selling at 7.0% to 10.0%+ cap rates and some of these assets should be bought. Retail assets have been out of favor for the last few years and although there are tenant risks, with bankruptcies and store closures, they can still provide a higher risk-adjusted return than other CRE assets. A number of the public retail malls are also selling at deep 50%+ discounts to net asset value and are also ripe for a buyout or being taken private. These distressed retail deals are opportunistic investments and need significant renovation and releasing.

3. Invest In Data Analytics Companies

One of the key growth areas of CRE is in data analytics. Data analytics encompasses all aspects of big data for CRE including; demographics, ownership data, property data, historical value information, sales/lease data and financial analysis. The data analytics space is very fragmented with a few large companies like CoStar, RealPage, REIS (a unit of Moody’s) and many local and start-up companies. These larger firms have been acquiring smaller competitors to expand their service offerings and customer base. Recently, CoStar acquired Smith Travel Research, the leading hotel/lodging consulting firm, for $450 million and RealPage acquired Buildium, a property management software firm, for $580 million. As the industry grows, there will be more consolidation and an opportunity to acquire these smaller private firms and even establish a platform to consolidate these entities.

4. Sell Overpriced Core Assets and Reinvest In Opportunistic Assets

The risk and return for various CRE investment strategies range from the lowest risk, core investments, which are typically fully leased, institutional quality, Class A properties with little or no leverage, to value-added strategies which are higher risk strategies that involve some property redevelopment, tenant adjustment or leasing or with operational problems to opportunistic strategies, which are the highest risk category that involve a high degree of redevelopment, leasing, tenant relocation or change or may be in financial distress. Many core properties are still trading at 3.0% to 4.5% cap rates and should be sold. The proceeds should be reinvested in higher return opportunistic strategies, as discussed in #2 above, buying beaten up retail assets.

5. Provide Participating Mezzanine Loans

Even though there is a lot of capital sloshing around chasing deals, there is a dearth of debt/equity capital for the portion of the capital stack above the first mortgage at about 65%-70% and below the minimum owners’ equity investment of 10.0%. This slice of 20% of the capital stack is ideal for a participating mezzanine loan. The participating mezzanine loan may have terms as follow; interest rate at LIBOR plus 4.0%+, loan fees of 1.0%-3.0%+ and 20.0% to 30.0%+ ownership of the deal. The mezzanine lender will typically not be secured by a second lien on the property but by an ownership guarantee and assignment of the owner’s interest in the property. The lender is entitled to the equity kicker because it is taking some of the equity risk of the project. Internal rates of return of 12.0%-15.0%+ can be delivered with this strategy, which is very attractive for a fixed income investment.

6. Perform A Systematic Review and Analysis Of The 15 CRE Risks

As we have discussed before, there are 15 risks inherent in CRE investment as follows:

  • Cash Flow Risk-volatility in the property’s net operating income or cash flow.
  • Property Value Risk-a reduction in a property’s value.
  • Tenant Risk-loss or bankruptcy of a major tenant.
  • Market Risk-negative changes in the local real estate market or metropolitan statistical area.
  • Economic Risk-negative changes in the macroeconomy.
  • Interest Rate Risk-an increase in interest rates.
  • Inflation Risk-an increase in inflation.
  • Leasing Risk-inability to lease vacant space or a drop in lease rates.
  • Management Risk-poor management policy and operations.
  • Ownership Risk-loss of critical personnel of owner or sponsor.
  • Legal, Title, Tax and Political Risk-averse legal, tax and political issues and claims on title.
  • Construction Risk-development delays, cessation of construction, financial distress of general contractor or sub-contractors and payment defaults.
  • Entitlement Risk-inability or delay in obtaining project entitlements.
  • Liquidity Risk-inability to sell the property or convert equity value into cash.
  • Refinancing Risk-inability to refinance the property.

All investors that own CRE should perform a detailed and systematic review of the above risks and their potential effect on an asset or portfolio.

7. Acquire Small Capitalization Public And Private REITs

There are more than 30 public REITs with market capitalizations less than $1 billion that are trading at or less than their net asset value. These REITs are ripe to be acquired or taken private by other REITs, real estate private equity firms or other institutional investors. It also may be possible to get control of the board of directors of some of these REITs via a proxy contest.

Any acquisition or merger opportunity will have to comply with the REIT tax rules including, the 5 or 50 rule which states that 5 or fewer individuals cannot own more than 50% of the value of a REIT during the last half of the year. Also, more than two-thirds of REITs are incorporated in the state of Maryland which has broader liability protection, more flexible voting provisions for stockholders, easier Bylaw amendment provisions, better protection against hostile takeovers and easier stock issuance procedures. Notwithstanding a Maryland incorporation, there are still opportunities via a friendly acquisition or proxy contest.

 

Source: GlobeSt.