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Market Review: South Florida Real Estate Braces For Challenges

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There was a whirlwind of real estate deals in 2021 and most of 2022 as billions of dollars flowed toward the purchase or development of South Florida properties.

That steady pace of dealmaking was fueled by an influx of wealthy people, well-paid professionals, and businesses who relocated from other parts of the U.S. to Florida due to its decent weather, low taxes and business-friendly environment.

Today, that migration is still ongoing. However, higher interest rates and growing concerns of a nationwide recession have noticeably cooled South Florida’s red-hot economy. Still, the state’s population continues to grow, which has, in turn, kept the economy humming.

Meanwhile, the tri-county region remains a favored destination for the rich to invest and live in.

To discover about how these trends are affecting South Florida’s residential, office, retail and industrial real estate markets, now and into the future, the South Florida Business Journal gathered a panel of experts for its ninth annual Market Review panel event at the ArtsPark Gallery in Hollywood.

Moderated by Business Journal Real Estate Editor Brian Bandell, the panelists discussed how high interest rates and inflation have affected some property sectors and not others, whether the state’s continued population growth will make it less susceptible to a national recession, and other key topics. The two-hour discussion was sponsored by Berkowitz Pollack Brant Advisors and CPAs, Stiles and the city of Hollywood.

High Interest Rates

The panel launched with experts discussing one of the main drags on the region’s real estate market: higher interest rates.

Noah Breakstone, CEO of Fort Lauderdale-based developer BTI Partners, said interest rates started at 3.25% in January and have climbed to about 7%.

“It’s had a serious impact on purchasing power for single-family home buyers, for condo buyers throughout the market, and we are going to continue to see that effect,” Breakstone said.

Art Lieberman, director of tax services for Miami-based Berkowitz Pollack Brant Advisors + CPAs, agreed, adding that he’d seen a consistent slowdown in property transactions in recent months.

“And there is a good reason for that,” Lieberman said. “Financial leverage is turning either even or upside down.”

The rise in interest rates has created a “bid/ask spread,” in which sellers and buyers are reluctant to compromise on the price of real estate assets. That’s caused transactions to slow down, if not stop altogether.

“A lot of my clients are projecting no property sales for at least three months,” Lieberman said.

As for office deals, they have “come to a screeching halt,” said Brett Reese, managing director of Boca Raton-based CP Group, one of the largest office landlords in Florida.

“Deals we are still trying to make happen involve the seller offering financing … or they have an existing mortgage that we can assume,” Reese said. “Absent that, it is virtually impossible to make the deals work today.”

High interest rates, high capitalization rates and sellers not willing to compromise on price have contributed to the office deal slowdown.

“The other issue we come across is public markets,” Reese said. “The REITs (real estate investment trusts) have traded down or sold off so badly that their valuations are bleeding into the public market a lot faster than private markets.”

High interest rates and cap rates have slowed retail transactions, as well, said Nicole Shiman, senior VP of Edens, a Washington, D.C.-based retail owner and operator. On top of that, consumers nationwide are being squeezed by inflation. Nevertheless, retail has already faced adversity.

“Retail has been experiencing broad-based headwinds for a number of years, with e-commerce and Covid being the most significant stress tests imagined on retail,” Shiman said. “So, retail has fared a lot better than a lot of its piers from an interest rate perspective.”

Michael J. Stellino, senior managing director of development for Elion Partners, a North Miami Beach-based investment management firm that focuses on industrial real estate, said high interest rates have affected its business. But the industrial sector is doing fine.

“The ray of sunshine is that we have seen a lot of interest in the capital markets,” Stellino said. “Pension funds really have shown a positive commitment to industrial. It still feels like this is an asset class that has a long way to go.”

The Trillion-Dollar State

Harvey Daniels, VP of sales for Miami-based Fortune International Group, a broker and developer of high-end condominium projects, said high interest rates have hardly impacted the luxury residential sector. His customers pay cash directly to the developer over a period of four or five years.

“When you are dealing with the ultra-high-end luxury market, it is like, ‘What is a mortgage?’ You just don’t hear about it,” Daniels said.

And his clients are willing to pay record prices for a luxury residence, especially if it comes with an ocean view.

“I have been doing development sales for 30 years in South Florida, and I can tell you there are some of the most expensive projects coming online that South Florida has never seen before,” Daniels said. “Prices per square foot are exceeding $5,000. Somebody just sold something at preconstruction at $7,500 a foot. The reality is, they are coming here and they are buying here. And when that money comes here, the other things come.”

Bandell asked the panelists if the state of the national economy could slow down luxury buying in South Florida.

“Look, I have been hearing this for a long time, but we are in a bubble,” Daniels said. “We go up high and we go low fast. It is what it is.”

With 800 people a day moving to Florida, the state will continue to prosper, Berkowitz Pollack Brant’s Lieberman said.

“They have to live somewhere and work somewhere and play somewhere,” Lieberman said. “So … there is going to have to be increased building.”

In 2020 and 2021, more money migrated to Florida — about $24 billion — than any other state in the U.S., Edens’ Shiman said.

“Texas is next on the list, and they had $6 billion,” Shiman added. “We are talking about three or four times more than anywhere else in the country. And retail is in a great position to capture much of that cash flow. If you have significant wealth migration, you have more consumers with disposable income who can spend and that really drives retail sales, And once you drive retail sales, that is the opportunity to drive retail rents.”

The office sector has certainly benefited from the wealth influx, especially among companies entering the market for the first time, CP Group’s Reese said.

“For the last few years, the momentum on the leasing front has been unlike anything the state has experienced before,” Reese said. “Historically, maybe there was 250,000 square feet or so of new-to-market tenants coming in. Since Covid, it has been 2 million square feet and, if you were to look at who that is, it is every household hedge fund, private equity, bank, technology firm. They all established a presence in South Florida.”

Those new companies want Class A office space, and they are willing to shell out top dollar for it.

“There is no cap on what the top hedge funds or banks are willing to pay. The comps we are getting in West Palm for the best-quality space are three or four times higher than the highest rent ever achieved in South Florida,” Reese said. “What people are paying in rent per square foot is what we are buying buildings for per square foot.”

The influx of people and business has enhanced the demand for industrial, too, Elion Partners’ Stellino said.

“Those people are still shopping. They are still buying things,” Stellino said. “And where does all that product get stored before it goes to the retailer? Before it goes to the condominium? It all flows through the warehouse.”

Increasingly Unaffordable

The luxury market is performing well because South Florida is a historically proven safe harbor, both domestically and internationally, BTI Partners’ Breakstone said.

“Look at what is happening in Brazil, Colombia, Peru, Russia,” Breakstone said. “People want to keep their money here.”

But while the influx in cash has helped the commercial real estate sector, it hasn’t made it easier for the average income earner to afford to live here. Not only are most homes out of reach thanks to high interest rates, but rents are increasingly unaffordable, Breakstone said

“People who are medium income, they’re using over 50% of their earnings to live here and it’s getting even more costly,” Breakstone said.

Even local residents who bought early have a predicament.

“If you live in a place that you own, it’s great what you can sell it for,” Breakstone said. “But what are you going to buy?”

Higher interest rates and labor costs have made it much more expensive to build, too. And with less supply, there will be higher housing costs, taking the housing affordability issue from bad to worse, Breakstone said.

“I think Miami is on the track to be another New York, just with a better tax environment, superior weather, easier access and a lot of other dynamics,” Breakstone said. “But affordability is going to be a substantial challenge. I don’t think that is going to go away and there is going to have to be more creative solutions.”

The attraction of a skilled workforce is what South Florida needs to attract large tech companies such as Google, Reese said.

“South Florida in general is a place a lot of students want to move to, but it’s extraordinarily expensive,” Reese added, “So offering more affordable housing options is going to be critically important to attract that talent, and having that talent will spur more growth with employers.”

Future Trends

South Florida has likely already seen its biggest lease deals in the present real estate cycle, Reese said, so a “cooling off period” seems imminent. Transactions for office buildings, on the other hand, will probably heat up as the substantial mortgages that landlords took out over the years come due.

“We are at this standstill where somebody has to blink and … the first guy to blink is going to be the seller,” Reese said.

Retail landlords will generally do well in South Florida, thanks to the influx of cash and a shortage of available retail space, Edens’ Shiman said.

Industrial is also set to prosper, especially since developers and retailers are still hoarding items and materials after dealing with supply chain issues last year.

“They realize they are losing customers if they don’t have items on the store shelves,” Elion Partners’ Stellino said. “So, they keep that inventory here, where they can control it. That means builders and distributors now keep the raw materials they need in warehouses here instead of offshore and abroad, in case there’s another hiccup in the supply chain.”

Yet, there’s only so much space where new industrial can be built, leading logistics developers to consider new approaches.

Stellino said local industrial developers could replace Class B and Class C office buildings with newer Class A industrial, since they’re often in major markets.

Breakstone said there’s so much uncertainty in the market, he’s stopped trying to predict the future. He just makes sure he’s nimble enough to react to the “crosswinds that are happening.”

“South Florida is a micro-economy that does not follow national trends,” said Berkowitz Pollack Brant’s Lieberman. “We have booms when no one else does, And we have busts when no one else does.”

And Florida is unique in another aspect: Many of the people moving their residences and companies to the Sunshine State are attracted by its center-right politics.

“People are moving here for political reasons,” Lieberman said. “As long as there is a political imbalance between the north and the south, I think you will see the continued increase in population.”

 

Source: SFBJ

Here Are South Florida’s Biggest Industrial Leases Of 2022

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Bigger is better when it comes to South Florida industrial leases.

Across Miami-Dade, Palm Beach and Broward counties, major retailers and shipping services like Target and FedEx leased 2.8 million square feet of industrial space in the largest leases of 2022, far outstripping last year’s total of 2.2 million square feet.

Amazon was notably absent from this year’s roundup of the top 10 leases. The e-commerce giant clinched three of the top 10 spots last year. In May, news broke that Amazon sought to sublease at least 10 million square feet of its existing space — a reversal from its pandemic-era practice of gobbling up as much space as possible.

The average lease size of the top five leases this year came to 362,000 square feet, which is above last year’s 258,530 square feet, but still below 2019’s average of 449,000 square feet.

Here’s a breakdown of the top five industrial leases signed this year in South Florida.

Imperial Bag & Co., Hialeah, 506K sf

Five out of the top 10 largest leases were inked for properties in Hialeah, with New Jersey-based Imperial Bag & Paper Co. (ImperialDade) taking the top spot, both in Hialeah and overall. In the second quarter, company representatives signed a lease for 506,000 square feet at Countyline Corporate Park on Northwest 102nd Avenue in Hialeah. The company distributes janitorial supplies and food service packaging.

FedEx Ground Package System, Medley, 501K sf

FedEx leased 501,000 square feet in Medley in the first quarter. It’s the only non-Hialeah lease in the top five. The shipping behemoth took over one of the warehouses at Miami 27 Business Park at 10300 Northwest 121st Way, according to published reports. FedEx has long been interested in South Florida industrial properties. Last year, Industrial Outdoor Ventures outbid FedEx for the 38.5-acre site at 3055 Burris Road in Miami. The winning bid was $64M.

FreezPak Logistics, Hialeah, 312K sf

FreezPak Logistics took this year’s third largest lease at the same Countyline Corporate Park in Hialeah as Imperial Bag & Co. It signed a lease for 312,000 square feet in March. This is the first South Florida location for the New Jersey-based cold and dry-storage provider.

World Electric/Sonepar, Hialeah, 267K sf

In the fourth spot, World Electric leased 266,760 square feet at Beacon Logistics Park at 4220 West 91st Place in Hialeah during the first quarter. A subsidiary of South Carolina-based Sonepar, North Miami Beach-based World Electric in September announced it inked a deal to acquire Advance Electrical to increase the company’s presence in Atlanta. The company specializes in business-to-business electrical services and equipment.

All Florida Paper, Hialeah, 227K sf

Medley-based All Florida Paper signed the fifth largest lease of the year, during the third quarter. It took 227,700 square feet at Beacon Logistics Park at 4120 West 91st Place in Hialeah. All Florida Paper is a wholesale distributor founded in 1993, according to the company’s website.

 

Source: The Real Deal

Palm Beach County Commissioners Debate Future Of Agricultural Reserve

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Construction is booming in Palm Beach County with new housing developments, shopping and entertainment districts.

However, what some may see as progress others may call a broken promise.

One area seeing pressure to develop is known as the Agricultural Reserve, 20,000 acres that stretch for miles in areas west of Florida’s Turnpike, including near Delray Beach. That is the dilemma facing commissioners. There is a proposal to build housing in an area where development seems to be swelling up all around it.

Opponents to the change for the land just argued that it was the voters’ decision in 1999 and allowing development might lead to taking more reserved land.

“Over 70% of the county voted to say they wanted agriculture and sensitive lands preserved, and you’re here to make sure that continues to happen,” Gate said at the Palm Beach County Commission meeting.

“I don’t think that we should go that route,” Commissioner Mack Bernard said. “I think we should bar that completely and just leave it alone.”

During the public input portion of the meeting, the owner of the land parcel located just north of the Delray Marketplace at Atlantic and Lyons Road shared his thoughts.

“Right now, there’s a thousand people that work at Delray Marketplace,” the property owner Richard Bowman said. “The average commute is 15 miles, so they don’t live in the Ag Reserve. They need a place to live.”

That land in question is known as the Brookside property. Attorney Marty Perry, representing the landowner, objected to not even being allowed to present the formal proposal for the development.

“This is the wrong way to do it,” Perry said. “We are frankly being deprived of our constitutional right to due process and a fair hearing.”

Opponents include former Palm Beach County Commissioner Karen Marcus, who was in office when the land was bought and set aside.

“The big issue that needs to be resolved is, not just for the Ag Reserve but for the entire county, is conservation easements and what they mean,” Marcus said.

The process has frustrated landowners and developers who said they haven’t even been able to present their proposals. Commissioners for the most part said they are not in favor of allowing the land designation to change but will sit down with both sides in March for a workshop to talk it over, knowing the pressure to develop more in the county won’t let up.

 

Source: WPTV5 News

 

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Butters Breaks Ground On Tamarac Warehouse With $26M Loan

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Butters Construction & Development broke ground on a warehouse in Tamarac after securing a $26 million construction loan.

TD Bank provided the mortgage to Hiatus Industrial Venture LLC, a joint venture between Coconut Creek-based Butters and New York-based BlackRock. It covers the 12.55-acre site at 5601 N. Hiatus Road. The site is just off the Sawgrass Expressway near the Commercial Boulevard exit.

Butters Construction & Development will build a warehouse at 5601 N. Hiatus Road, Tamarac, for Sonny’s Enterprises. (RENDERING CREDIT: RLC ARCHITECTS)

Butters already announced a tenant for the 201,000-square-foot warehouse there. Sonny’s Enterprises, a manufacturer of car wash equipment, will occupy the entire space as its headquarters and distribution facility. The company currently has several locations in Tamarac.

The developer purchased the property for $16.23 million in 2021 and demolished an office building there.

 

Source: SFBJ

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Industrial Cap Rates Expected To Rise But Outlook For Seasoned Investors Remains Strong

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Industrial has been on quite a tear over the past few years, as changes in consumer behavior have driven demand for more logistics and fulfillment facilities in key markets.

And according to one industry expert, the sector should stay a favored asset class for experienced investors, despite rising capital costs.

“Post-pandemic consumer behavior has changed and the rate of growth in ecommerce has slowed which has already led to pullbacks by some companies,” says Greg Burns, Managing Director at Stonebriar Commercial Finance, noting Amazon’s recent announcements regarding its industrial portfolio. “Demand for industrial though was driven by other factors as well including a move toward onshoring and the disruption of just in time supply chains.”

With that said, however, Burns said “depending on the what and the where, I would not be surprised to see cap rates widen another 50 to 100 basis points.”

“The cost of debt and equity capital have increased and cap rate hurdles have increased for institutional buyers,” Burns says, adding that he recently saw an increase of 100 basis points in an appraisal for a property in a market where his firm closed a deal six months ago.

Burns will discuss what’s happening in the capital markets in a session at next month’s GlobeSt Industrial conference in Scottsdale, Ariz. He says Stonebriar’s definition of industrial includes not just warehouse and distribution facilities, but manufacturing, life sciences, cold storage and data centers as well, and notes that “each of those sub-categories have their own dynamic and, broadly, all are growing.”

“We prefer properties with multi-modal access, especially those near ports, with most opportunities we’ve seen recently being to the southeast of a line drawn from Baltimore to Phoenix,” Burns says. “We also pay attention to outdoor storage capacity as that has become a greater consideration for tenants. There have been several announcements of new manufacturing sites relating to microchip and electric vehicles which should lead to demand for new logistics properties nearby.”

As the costs of debt capital rise, Burns says Stonebriar’s underwriting will continue to focus on the sponsor, asset and market and “that won’t change.”

“We do few spec development deals and will likely be more granular on understanding the demand/supply side of a respective market,” Burns says.

Ultimately, a recession seems likely and Burns says the changing economic landscape will have “varying impacts” on investors and individual markets alike.

“From our perspective, there will be a premium on a sponsor’s experience and capacity,” Burns says. “I anticipate industrial will remain a favored asset class for investors although those with less experience in the sector could pull back until the economy recovers.”

 

Source: GlobeSt.

 

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CRE Outlook Still Mixed Despite Apparent Inflation Slowdown

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Core CPI inflation and headline CPI both decelerated last month, in a trend experts say could portend more disinflation factors in the near term.

Analysts from Marcus & Millichap note in a new analysis that the prices for some commodities also fell in October, including apparel and used motor vehicles, and the fees certain medical services.

“And these may be early signs that less disrupted supply chains are alleviating some of the structural drivers of inflation,” Marcus & Millichap say.

Headline CPI increased 7.7 percent over the 12 months ending in October, the smallest year-over-year increase since January of this year. While the deceleration is notable, Marcus & Millichap experts say the downshift is unlikely to be enough to fend off another hike in the overnight lending rate in December.

“The Federal Open Market Committee noted in its most recent forward guidance that it is looking for a clear trend of inflation normalizing toward the 2 percent target,” Marcus & Millichap say. “Even so, the FOMC has also acknowledged that there is a delay between when monetary policies are put in place and when the economy responds, and last month’s slower price climb, paired with an uptick in unemployment, support a more moderate rate hike. The current expectation is for a 50-basis-point December rise in the fed funds measure, capping the fastest year of increases since the early 1980s.”

But October’s inflation news offers a “mixed outlook” for retail CRE: while rent growth has improved and vacancy has tightened over the last year, prices continue to keep pace at restaurants and grocers. Gas prices also ticked up in October after three months of decreases, and higher energy bills are predicted to constrain consumer spending entering the holiday shopping season.

High housing costs are good news for the multifamily sector, where rents continue to rise at a rate that’s half the typical house payment. Over half of last month’s CPI increase was driven by higher housing costs, Marcus & Millichap says.

“In recognition of these housing needs, multifamily construction activity is set to hit a record magnitude next year,” Marcus & Millichap say. “While the new supply is warranted in the long-run, in the short term it will drag on fundamentals, especially as high inflation and rising interest rates weigh on economic outlooks and prompt more households to stay put in 2023.”

Lenders are also pumping the brakes as the cost of debt continues to increase. CBRE’s Lending Momentum Index fell by 11.1% quarter-over-quarter and 4.7% year-over-year in Q3, while spreads widened on 55%-to-65%-loan-to-value (LTV) fixed-rate permanent loans running from seven to 10 years in length. Marcus & Millichap has noted that pricing is recalibrating across most property types as the expectation gap between buyers and sellers widen and lending criteria have tightened.

“But once interest rates stabilize, however, investors and lenders will be better able to determine valuations and move forward on trades,” the firm says. “In the interim, the dynamic environment fostered by the Fed could lead to unique options for buyers, who may face less competition now than when rates plateau.”

 

Source: GlobeSt.

 

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Inflation, Interest Rates And The Industrial Market

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Pesky, lingering inflation that is higher than we’ve seen in years, along with six interest rate hikes totaling 375 basis points since the beginning of the year have had varying degrees of impact on all sectors in commercial real estate.

The speculation of further hikes later this year and in early 2023 doesn’t help.

Industrial real estate remains one of the darling sectors, though it is being tested by current economic conditions.

Four industrial real estate professionals, including owners, investors and brokers, three of them based in Chicago and one based in Houston, participated in a roundtable discussion, giving their perspectives on inflation, interest rates and industrial real estate. The participants: Alfredo Gutierrez, Founder, SparrowHawk; Rick Nevarez, Director of Acquisitions, Clear Height Properties; Kelly Disser, Executive Vice President, NAI Hiffman; and Hugh Williams, Principal and Managing Broker, MK Asset Brokerage.

What are the implications of the five 2022 rate hikes on transaction/acquisition activity?

Alfredo Gutierrez: It’s a challenging time as there are more investors stepping to the sideline. This means that if you are selling an asset today you might get three or four offers versus a dozen one year ago. On the  buy side, if investors have cash or lines of credit tied to a low rate, they are utilizing their resources. The fundamentals on the income side of the equation, because of rent growth, are still strong—that’s factual. Some are putting down their pencils because they are concerned about the potential for a recession and whether we’ll see the same levels of rent growth.

In reality, cap rates are a function of how much capital there is to invest into something. The question is how much dry powder remains on the sideline. We’re seeing an erosion of capital on the retail side and people starting to get squeezed. However, banks, life companies and institutions still have capital to place, and I believe it will flow into industrial.

Rick Nevarez: Activity has slowed, but it hasn’t come to a grinding halt. Overall, we continue to see deal activity and are expecting a big fourth quarter. It’s like airplane turbulence:  some respond with white-knuckle gripping of the arm rest while others acknowledge it’s taking place and go about their business. It’s really a matter of understanding the fundamentals of the real estate and how the current economic environment impacts those fundamentals.

Kelly Disser: It’s an interesting time with different groups being impacted in different ways. Owner occupants, private investors, institutional investors—all have acted or reacted differently. The demand for industrial space and leasing absorption today is still very strong. Inventory/vacancy is at an all-time low. As a result we’re seeing rent growth like we haven’t seen before. In certain underwriting acquisitions, we are seeing the impact of interest rates on values somewhat mitigated by rent growth and rents trending even higher than what we see today. The equation is evolving.  The development and investment sales markets have reacted and adjusted. Those with large funds have the ability to remain active and aggressive—and they are distinguishing themselves. Investors/developers who are sourcing capital on a deal by deal basis may be having issues in the current environment.

Hugh Williams: There was a point this summer when large institutional investors essentially said, “pencils down on all deals,” unless it was a perfectly placed asset/tenant combination in the middle of the fairway. Investors and developers are proceeding with haunting caution because at some point the math does not work.  You cannot acquire an asset when you underwrite debt costs that are greater than your projected return. That is problematic.

But we need to remember we’ve been in a low-rate environment for a long time, an environment that couldn’t last forever; and there are geopolitical events taking place that are also important considerations.  I have heard people say they are pulling back but some of them aren’t sure why. Overall, leasing activity is quite strong, and things are still moving forward particularly in select markets and micro-markets.

How are the rate hikes changing the flow of acquisitions and dispositions, if at all? And are they impacting different size buildings differently?

Nevarez: Interest rate hikes have pushed some buyers and sellers to the sidelines. But we are still buyers, looking at a variety of opportunities including value-add acquisitions. Sometimes you have to tweak underwriting to have a deal pencil out and make sense. Now more than ever, you need to understand ALL elements of the transaction, and what is motivating buyers and sellers.

Gutierrez: The effect based on size is really a case by case situation. But in general, if you had two assets where essential building characteristics except for size were essentially the same, the smaller asset would feel the pinch more. While smaller buildings are more likely to have shorter term leases, it will depend on the tenant roster and the lease terms. At the same time, because the rent roll may turnover more quickly, smaller buildings may be able to adjust pricing more quickly, too.

Disser: Interest rate hikes are impacting the flow of acquisitions and dispositions. The  pace has slowed in the second half of 2022 from what we saw the prior 18 months. But it is all relative, the first 18 months coming out of covid we saw activity levels, values and rents not seen before—in Chicago and across the country. An adjustment was needed.  There was simply too much money chasing too few assets:  the definition of inflation. Impact varies from case-to-case, according to location, submarket, or quality of asset.

Williams: My hypothesis is that if you go to a smaller, non-institutional building, it’s generally a different type of buyer, with a different mentality. For example, an operator like Blackstone is taking the long view. They are likely focused on main and main locations. When they go to build, they are focused on operating their platform as a business, not necessarily the conditions of the moment or focused on a near to short term exit. Smaller owners may be at greater risk—real and emotional—based on being prisoners of the moment (as we all are).  The short stroke is big boats are better ballasted against storms. Small boats get tossed about.

In other asset classes—like office and multifamily—some say that activity has slowed as the market looks for a re-set. To what degree is that occurring in the industrial sector, and are there other considerations (i.e., size, etc.)?

Nevarez: It’s really hard to say that any asset class is recession-proof, but industrial certainly is close. If the market was overbuilt, the impact might be different. There may be a scaling back and slight reset of pricing, but it’s not the same as other sectors because demand has been so strong. Our portfolio, for example, is 96% leased due to lack of product in the markets we own and operate in.

Gutierrez: A lot of people have put pens down, so to speak. Unless you need to place capital, you won’t. With some of the overall questions that exist, and fewer offers to consider, there isn’t necessarily a lot of pricing clarity. As 2022 wraps up our volumes will be down, particularly for the second half of the year.

Disser: It is always dangerous to generalize. The idea of a price reset isn’t absolute in industrial, as it may be in other sectors. In the industrial sector I think value equations are evolving, given rent growth. We see absorption, leasing and rental rates continuing to increase. The user/occupier clients of mine generally are operating businesses that are still strong and eyeing expansion.  In addition to scrutinizing interest rates, many are watching how lenders behave—as many have slowed loan origination activity. For some groups, the ability to secure the capital for a project in some cases is as much of a question as the cost of the capital.  If you lose your equity partner or can’t get a loan—you’re out.

Williams: There is a group that has been waiting 5-6, 10 years for a reset! The sky is continually falling.  Say it long enough and eventually you will be right. Pricing may fluctuate from its peak, but I don’t anticipate an incredible swing. The reality is that developers are much more rational today and have been that way for the last decade. What is going on in the interest rate environment forces additional austerity measures onto industrial developers.

All of the various elements at play lead me to believe that the sky will not fall, maybe a little rain, but rainwater is one of the keys to life—ask California.

How are higher interest rates impacting user sales/acquisitions? Are the higher rates making them any more or less likely to look at renting versus owning?

Nevarez: Higher Interest rates make it harder for users to come up with the capital to purchase an asset. Most users would rather place their capital in their actual business operations (machinery, employees, etc.).  Current owners may also look at their overall business plan to determine where they may need additional capital and find creative ways on how to get that capital. They look at their actual real estate as an opportunity to raise capital—through a sale leaseback—and to Clear Height (landlords) as a way to get that capital, creating a win-win situation for both parties.

Gutierrez: One of the factors that pushes users to consider an acquisition is the upward trajectory of rental rates. They figure they might as well buy. But in the current interest rate environment, the cost of ownership—if there was an inventory of buildings for users to buy—is up as well.

While there are concerns across the industry about interest rates, inflation and their overall impact, Alfredo Gutierrez suggests that the potential for stagflation would be worse. “If the Fed is going to push us into a recession, put us there and make it short-lived.”

Disser: Everything is getting more expensive across the board; that is why inflation is so crucial at this point in time. I don’t believe the increases in interest rates have impacted user sales whatsoever.  The most limiting factor is just availability of space or available options that could be purchased.  There is virtually no inventory. I have clients who want to sell their buildings—they need more space—but have no where to go; because there is nothing larger for them to buy.   Clearly the higher cost of funds results in larger interest payments, but the demand and growth seems to be greatly outweighing borrowing costs.

Williams: Not everyone needs to own a home, not everyone needs to own industrial real estate. Unless there is a specialized need, most operators should probably focus on their business and not try to get into the real estate game. The other consideration is that because of the overall tightness of the market, it’s hard to make a move—hard to buy a building. For many owner-users real estate is as emotional as it is practical.  Those that really want to buy will find a way but my supposition is that things slow on the user front because higher interest rates also affects the entire supply chain of activities within a warehouse as much as the cost of acquiring that warehouse.

 

Source: REjournals

Cold Storage And E-Commerce, But Not Amazon, Sustaining South Florida’s Industrial Boom

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For most of the last few years, Amazon has been the dominant force in South Florida’s industrial market, but the e-commerce giant’s recent pullback hasn’t had a negative impact on the region’s warehouse market, industry insiders said at Bisnow‘s South Florida Industrial Outlook event last week.

“The last few years it has all been Amazon, right? They were making 90% of that e-commerce growth. They were really bailing us out of all that space we could not lease,” Bridge Industrial Vice President Aaron Hirschl said at the event. “Now it’s everybody else playing catch-up. It is 85% of all the e-commerce deals are other groups other than Amazon. It’s really good to see that positive growth there.”

The vacancy rate for South Florida industrial properties dropped to 1.8% in the third quarter, according to JLL research. Rents have grown 60% year-over-year, to an all-time record of $14.35 per SF. Construction is speeding up as a result: So far in 2022, approximately 2.3M SF of new product has been delivered. Over the next 18 months, JLL projects deliveries to hit 7.8M SF.

“Much of that is still fueled by e-commerce, even in the absence of the industry’s leader,” Prologis Vice President Jason Tenenbaum said at the event, held at the GalleryOne Fort Lauderdale by Hilton. “I’d say e-commerce continues to be the predominant player, I am guessing in the majority of our portfolios, and that’s notable particularly because of Amazon’s specific slowdown this year,” he said. “I would say the vast majority of our work is centered around that space.”

Tenenbaum said that he expects more leasing in the e-commerce space to come from third-party logistics companies as retailers themselves look to outsource their distribution. Those companies, called 3PLs, have accounted for more than 35% of all warehouse leasing in South Florida so far this year, according to a just published CBRE report.

“I think as pricing and rents continue to rise and supply is constrained, you will see a lot more of all of our clients electing to 3PL their supply chain,” Tenenbaum said.

After e-commerce, the biggest driver of demand in the industrial market is in the food and beverage industry and their need for cold storage, developers at the event said. The global cold storage market was over $9.6B last year and is projected to reach $11.3B this year and hit $25.4B by 2027, according to an October market report by Reportlinker.

“If you look at where the demand is the most nationally, clearly cold storage will be it,” BBX Logistics Properties Mark Levy said. “In South Florida, if you look at the footprint of the market as a percentage of the total base, it’s a very, very small amount of cold storage space product that has been delivered.”

Tenenbaum said that the tourism industry in particular has been active in looking for cold storage properties, a piece of the market that had been largely absent for the previous two to three years.

“There was a time in the last 24 to 36 months where the tourism activity was way down. Now it’s back at a high pre-pandemic levels,” Tenenbaum said. “As tourism has come back and the cruise ships are set to sail again, that’s a really active space.”

Levy said that while the cold storage market is “still tremendously undersupplied,” building the space on a speculative basis is still a rarity. But Bridge Industrial launched a spec cold storage warehouse in Hialeah last year, and signed FreezePak to a 312K SF lease in March.

“I remember when Bridge was working on that development and we thought ‘Those guys are crazy! There is no way that they are going to get those rents,’” Hirschl said. “And sure enough, they leased it out and knocked it out of the park. They proved a thesis and it was really cool to see it happen.”

Kroger, the largest grocery chain in the country, doesn’t have a supermarket in South Florida, but it opened a 60K SF warehouse in Opa-Locka this year to start delivering groceries directly to customers’ homes. Kroger said in its September earnings report that its delivery sales grew by 34% from the previous year.

“Kroger does not have any grocery stores here but they are renting near people’s homes,” Hirschl said. “That trend is really interesting to see if they can really penetrate the market here.”

Butters Construction & Development Director of Acquisitions Adam Vaisman said on a panel that, in addition to e-commerce and food and beverage companies, manufacturing is an increasing presence in the market. He said his firm signed a 200K SF lease with a manufacturing firm in Broward County and was getting ready to break ground.

“You will definitely see more of the manufacturing jobs, especially given our labor pool here in South Florida,” Vaisman said. “We are definitely starting to see that and I think that trend is starting to pick up if you continue to have global instability the way we do.”

But while manufacturers and cold storage providers largely need specialized space, e-commerce users are taking any space they can get in a market with soaring rents and sub-2% vacancy.

“Location is the most important always, so for e-commerce users, if they can’t find a new building and it’s a market they need to be in, they will make it work with a Class-B space or a Class-C space,” said Seagis Property Group Vice President of Florida Acquisitions and Leasing Bradlee Lord. “Public transportation will only get increasingly worse as the population grows. With Covid in 2020, the roads were still relatively busy. Location matters as congestion gets worse.”

 

Source: Bisnow

 

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Impact Of Rising Interest Rates Mixed On Commercial Real Estate

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The past two years were like nothing ever before seen in South Florida.

A period of record growth was fueled by inbound migration, strong consumer spending and record low interest rates — all of which drove billions of dollars invested in the development of millions of square feet of commercial real estate.

Much of this was brought on by the pandemic. Now, the pandemic has subsided and the South Florida CRE market has come to a moment of reckoning. Or has it?

The Federal Reserve has raised interest rates five times this year, including the increase of 75 basis points on Sept. 21, all in an effort to stem inflation. The Fed’s effort to keep the economy moving at the start of the pandemic led to the slashing of its target rate to 0%-to-0.25%. It remained there for the next two years, until March, when it set its first increase of 25 basis points.

The era of relatively cheap money for commercial and residential borrowers has come to an end. While the current rate of around 3% to 3.25% still is historically low, borrowing costs are at their highest level since 2019. In June, Federal Reserve Chairman Jerome Powell noted that the rate could reach 3.8% by late 2023. Simply put: These are the most aggressive rate hikes in generations.

This leaves developers and owners of office, industrial and retail projects to perform a delicate balancing and forecasting act incorporating borrowing costs versus long-term demand.

With borrowing costs rising, and fears of inflation and a possible recession looming, how will CRE across South Florida respond? It’s impossible to judge from how other markets are responding. Some have seen commercial projects tabled and vacancies rising, even if rents remain stable.

South Florida Is The Outlier In The CRE Marketplace

Development remains robust. Warehouse, logistics and industrial projects continue unabated from Homestead in the South and Palm Beach County’s Western expanse to the North, with numerous infill projects in between. Luxury rental apartments in hot markets, such as Brickell, Coral Gables, Fort Lauderdale’s Flagler Village and downtown West Palm Beach, are rising to meet the demand of the more than 800 new arrivals still coming to Florida daily.

Conflicts exist between remote workers and their employers calling for a “return to the office;” and with the hybrid workplace model continuing to evolve, future office needs remain unknown. Yet, the region has numerous dedicated and mixed-use Class A projects in development.

While the concept of “headwinds” comes up in any conversation about the unknown impacts of rising interest rates, inflation and the possibility of recession, South Florida and the state are outliers for other reasons. Whether through REITs (real estate investment trusts), private equity, hedge funds and other institutional capital seeking a solid vehicle for their funds; family offices and investors looking for a hedge against inflation; Latin American families seeking a less turbulent harbor for their money; those looking to real estate as a hedge against inflation; or developers bullish on local market prospects, Florida is rich with liquidity.

 

Source: SFBJ

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Why CRE Is Proving More Stable Than Stocks, According To One Expert

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The stock market has been on a tumultuous ride as of late, making commercial real estate even more attractive to investors looking for stability amid the chaos.

“I think it gives everyone a little heartburn to see the S&P 500 fall by more than 6% in a little over a week,” says Marcus & Millichap’s John Chang. “But the stock market has been on this trend for awhile.”

Specifically, the stock market is down by 10% over the last month and by 24% from the peak at the beginning of this year. And while it gained 27% in 2021, the losses this year have basically wiped out last year’s gains. The CRE market also had big pricing gains last year, according to Marcus & Millichap data, led by industrial at 17.9%, self-storage at 13.6% and apartment at 8.1% The difference?

“While the stock market peaked at the end of 2021, “commercial real estate kept going,” Chang says.

In the first half of 2022, the average industrial prices went up by 13%, self-storage went up by 10.5%, and hotels increased by 13.7%. Meanwhile, in the first half of 2022 the stock market fell by 20%.  The caveat, however, is that pricing is typically locked in 90 days before a deal closes, meaning second quarter pricing numbers were probably locked in before the Fed began aggressively raising rates.

Chang says the Fed’s press conference after its latest hike on September 21 “will probably impact” CRE pricing, “but the impact will be far less severe than what we’re seeing on Wall Street.”

“In general, CRE values tend to move more slowly than the stock market. They also tend to be less dramatic,” Chang says, adding that quarter-over-quarter pricing swings over the last 20 years have been “enormous” while commercial real estate pricing has largely remained steady.

Total annual returns also drive this point home, with CRE delivering a compound annual growth rate of 7.8% since 2000, beating the S&P at 5.3%.

“It still has its ups and downs, but its amplitude tends to be very modest compared to the stock market,” Chang says.

 

Source: GlobeSt.

Why Some Industries Are Moving First On Reshoring Back To U.S.

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Among the harsh lessons the pandemic taught industries is that relying on thinly sourced supply chains, particularly for manufactured goods, can be a mistake.

Something coming from that experience is a degree of reshoring manufacturing—bringing it back to the U.S., as Avison Young notes.

The push has been growing for “several years … with 1.3 million manufacturing jobs brought back to the U.S. since 2010.” Manufacturing grew by 21.6%, according to the Census Bureau, and new manufacturing facilities construction was up 116%. The reason is to diversify supply chains.

“Many companies are investing in domestic facilities based on lessons learned during the pandemic, as product shortages disrupted their business flow,” the firm wrote. “Recent intense pandemic lockdowns in China took many businesses by surprise and threw another jolt into the already disruptive supply chain. By locating facilities in the U.S., they can mitigate risk and gain more control over the production, quality and distribution of their products.”

Technology companies have been leaders in the push to reshore manufacturing. Examples are multi-billion-dollar chip plants, thanks to the $52 billion CHIPS and Science Act that was part of the Inflation Reduction Act.

The shift isn’t only the province of giant companies like Intel, Samsung, and TSMC.

“Many small- to mid-sized companies are also reshoring or expanding domestic manufacturing,” said the report. “Aside from the supply chain benefits, companies are also trying to work around skyrocketing shipping costs and other transportation costs. And, geopolitical issues related to China are prompting some companies to reduce their reliance on those foreign labor ties.”

With the increase of manufacturing facilities comes a boost to warehousing, because factories need storage and distribution space, as do tiers of suppliers to these manufacturers and potentially distributors.

“Despite the higher labor costs of operating in the U.S., it can be more cost-effective to manufacture products closer to the customer base, when reduced shipping and distribution costs are factored in,” the analysis noted.

An additional benefit that experts in supply chain and manufacturing logistics have noted for at least 20 years is shortening that by shortening the distance to a customer base, a company can react more quickly to changes in the market. Having factories in Asia and then shipping goods by sea leaves 30 to 60 days of inventory in transit, setting an effective time barrier on how quickly updates, design modifications, or error corrections can be incorporated.

 

Source: GlobeSt.

 

Parkland Agrees To Purchase Golf Course, Could Permit Development

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The City Commission of Parkland agreed to purchase part of the shuttered Heron Bay Golf Club, which could lead to the city working with a developer to build on much of it.

The city of Parkland will buy part of the Heron Bay Golf Club (MAP CREDIT: CITY OF PARKLAND RECORDS)

The commissioners voted 4-1 on Wednesday, Sept. 21st, to purchase 65 acres on the west side of Nob Hill Road, north of Heron Bay Boulevard, for $25.41 million from the North Springs Improvement District (NSID). The city will have a 90-day due diligence period before closing. Part of the land is in Parkland and part is in Coral Springs.

“Our commission is committed to developing the land in a way that ensures our unique Parkland charm and characteristics are honored and embraced,” Parkland Mayor Rich Walker said. “It is our intention to ultimately seek a developer who will partner with us to produce the desired outcome for all of our residents.”

The entire Heron Bay Golf Club property totals 220 acres. The NSID purchased the full site from Canada-based ClubLink for $32 million in 2021. The NSID, a quasi-government entity that provides water and drainage services for parts of Parkland and Coral Springs, issued a request for proposals to sell the 65 acres along Nob Hill Road to a developer.

Parkland officials decided to make an offer for the site so that their city, not the NSID, would determine how the site is used in the future.

 

Source: SFBJ