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
Market Review: South Florida Real Estate Braces For Challenges
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%.
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.
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.
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.
High interest rates, high capitalization rates and sellers not willing to compromise on price have contributed to the office deal slowdown.
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.
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 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.
And his clients are willing to pay record prices for a luxury residence, especially if it comes with an ocean view.
Bandell asked the panelists if the state of the national economy could slow down luxury buying in South Florida.
With 800 people a day moving to Florida, the state will continue to prosper, Berkowitz Pollack Brant’s Lieberman said.
In 2020 and 2021, more money migrated to Florida — about $24 billion — than any other state in the U.S., Edens’ Shiman said.
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.
Those new companies want Class A office space, and they are willing to shell out top dollar for it.
The influx of people and business has enhanced the demand for industrial, too, Elion Partners’ Stellino said.
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.
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
Even local residents who bought early have a predicament.
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.
The attraction of a skilled workforce is what South Florida needs to attract large tech companies such as Google, Reese said.
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.
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.
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.”
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.
Source: SFBJ
Here Are South Florida’s Biggest Industrial Leases Of 2022
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
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.
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.
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.
Opponents include former Palm Beach County Commissioner Karen Marcus, who was in office when the land was bought and set aside.
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
Butters Breaks Ground On Tamarac Warehouse With $26M Loan
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
Industrial Cap Rates Expected To Rise But Outlook For Seasoned Investors Remains Strong
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.
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.”
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.”
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.”
Ultimately, a recession seems likely and Burns says the changing economic landscape will have “varying impacts” on investors and individual markets alike.
Source: GlobeSt.
CRE Outlook Still Mixed Despite Apparent Inflation Slowdown
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.
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.
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.
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.
Source: GlobeSt.
Inflation, Interest Rates And The Industrial Market
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
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 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.
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.
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.
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.
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.
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.
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.
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.
Source: Bisnow
Impact Of Rising Interest Rates Mixed On Commercial Real Estate
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
Why CRE Is Proving More Stable Than Stocks, According To One Expert
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.
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?
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.”
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%.
Source: GlobeSt.
Why Some Industries Are Moving First On Reshoring Back To U.S.
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.
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.
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.
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
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.
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