Tag Archive for: commercial investors

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Brokers are giddy over the Fed’s announcement, while some caution fundamental challenges remain.

Commercial broker Jaret Turkell is ready to rock and roll. Turkell posted a GIF of Minions dancing with the tagline: “It’s time to PARTYYYYYY!” shortly after Federal Reserve Chairman Jerome Powell announced that the Fed was keeping interest rates unchanged, and signaled it would make three 0.25 percentage point rate cuts next year.

“We are back baby.  LFG!!!!!!” reads another tweet from Turkell, who focuses on multifamily and investment land sales at Berkadia in South Florida. (LFG stands for “let’s f**king go.”) The sentiment changed almost overnight,” Turkell said, tempering his initial enthusiasm a bit. “I’m not saying we’re back to 2021. Valuations will start to get a bit more attainable. Massive distress is going to be somewhat off the table, at least I hope so.”

The Fed’s decision is expected to boost confidence across commercial and residential real estate, especially in South Florida. The region has been somewhat insulated from headwinds in other U.S. markets since the Fed began hiking rates in the spring of 2022, but investment sales  volume is way down.

More than anything, the expected cuts are a sign of improving — not worsening — conditions. That could result in a boost of sales and financing in the second half of next year, brokers and attorneys say.

“Real estate is not a liquid asset, and it takes time for things to change. It takes time for that sentiment to build into transactions,” said Charles Foschini, senior managing director at Berkadia.

Still, the planned rate cuts won’t solve all problems, experts say. The high cost of insurance and construction will continue to hamper deals, brokers say.

“While South Florida maintains advantages over other major metros in the U.S., its biggest downside is insurance,” Foschini said.

Eternal Optimism Meets Reality 

Some pointed to the stock market rallying and the drop in inflation as breadcrumbs indicating that more good news is on the way.

“The signal that rates have stopped going higher and will go lower, psychologically is very impactful,” said industrial developer and broker Ed Easton. “But it’s not earth-shattering,”

In fact, most expected Powell would leave rates unchanged.

“No one was anticipating anything more than a standstill at this time of year,” said commercial broker and developer Stephen Bittel, chairman of Terranova Corp. The expected cuts are “not an enormously meaningful adjustment, but it does telegraph future expectations.”

Jaime Sturgis, CEO of Fort Lauderdale-based Native Realty, said he is already seeing that confidence translate into better terms.

“That will continue next year,” Sturgis said.

Still, asset classes like office and multifamily could suffer disproportionately, especially as suburban office tenants continue to downsize and multifamily landlords struggle to turn a profit.

“There will be pain and distress in that market, no question about it,” Sturgis said. “Some multifamily landlords and developers were already operating on razor thin margins to begin with. The smallest variations in that model can break it.”

Multifamily developer Asi Cymbal, who has projects in Miami Gardens, Fort Lauderdale and Dania Beach, agreed that rate cuts won’t solve major problems, such as if a developer overpaid for land.

But, Cymbal said, “the worst is over.”

Cymbal and others expect more groundbreakings in 2024, with some self-funding initial construction, expecting that they can secure a loan. He plans to self-fund the groundbreaking of Nautico, a $1.5 billion mixed-use development fronting Fort Lauderdale’s New River, in the next 90 days.

“The Fed news could help top tier developers get lower rates on construction. But not most,” Cymbal said. “Lenders will continue to be conservative.”

“Some prospective buyers who were ready to purchase may postpone their decision until rate cuts happen,” said Bilzin Sumberg partner Joe Hernandez.

 

Source: The Real Deal

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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