Tag Archive for: post-covid pandemic trends

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South Florida Churches Find A Higher Calling As Property Values Ascend

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Church property in South Florida often attracts developers who want to build something new on sacred ground, due to strong demand for precious land in the coastal corridor from Miami to West Palm Beach.

Nevertheless, church sales and redevelopments are rare in the tri-county area due to land-use and rezoning issues as well as resistance from church members and leaders. But that might be changing. Ascending property values in South Florida and the lingering impact of the COVID-19 pandemic may lead more church owners to put “For Sale” signs on their real estate.

Brokers try to nudge churches onto the market by “cold calling and saying: ‘Hey, do you know your property is worth $50 million today?’ ” said attorney Luis Flores, Miami-based partner of law firm Saul Ewing. “I think a lot of church leaders are going to dip a toe in the water and find out: What is the value of my property? Is it the value that’s advertised when people knock on my door?”

One of the latest listings is a 67-year-old church at 6501 North Avenue in Miami, an 18,800-square-foot brick building with a $4.9 million asking price – or $261 per square foot.

“We have multiple offers on it,” broker Matt Messier said in early March. “South Florida is extremely active.”

Messier is a principal of the brokerage with the listing, Foundry Commercial, an Orlando-based national specialist in sales of churches, schools, camps and other properties owned by religious denominations. He said Foundry brokers about 100 church sales a year nationwide.

“Lately, because the market’s so hot, a lot of churches are sitting on some really good real estate,” Messier said, “So you’re seeing churches being bought to be converted to another use. You’re seeing a lot more of that.”

One of South Florida’s biggest pending sales of a church property would lead to construction of a high-rise condominium in the bayfront backyard of First Miami Presbyterian Church, at 609 Brickell Avenue in Miami. Key International and 13th Floor Investments have offered $240 million for the church’s land on Biscayne Bay for a condo tower project that would preserve the 65-year-old church building that faces Brickell Avenue.

Attorney Cary Tolley, a member of the church, filed a complaint with the Presbyterian authorities to stop the sale of the church property. But the Kentucky-based Presbyterian Office of General Assembly rejected his complaint last September.

“If they build a high-rise condo on the property, that will be the end of it,” Tolley said. “The church will close, and the condo will be all that’s left.”

COVID-19 closed First Miami Presbyterian Church for about two years, reducing Sunday worship to an online-only experience. Tolley said the pandemic cut opposition to a sale of the church’s bayfront property, which had support from the church’s pastor, the Rev. Chris Benek, and by his supervisors at the Presbytery of Tropical Florida in Fort Lauderdale. Neither Benek nor officials at the regional presbytery responded to requests for comment.

“There’s no question that the pandemic played into their hands,” Tolley said. “Benek just wanted to sell the real estate. He’s not a big believer in the importance of in-person worship. He’s one of these guys who believes you can have worship online and have everything done over the internet.”

The pandemic had a simple effect at The Center for Spiritual Living, an aging church in Boca Raton that found a buyer after the pandemic killed cash flow from organizations that rented meeting space at the church.

“When COVID came and all the renters disbanded because no one was meeting anymore, it was a challenge for us because we still had the same expenses,” said the Rev. Jill Guerra, whose mother, Barbara Lunde, is also a minister and controls the company that owns the 3.7-acre church property just south of Palmetto Park Road on Southwest 12th Avenue. “We just realized it was too big of a property for us to maintain.”

In the fall of 2020, Boca Raton-based developer Jay Welchel approached the mother-daughter ministerial team and negotiated a contract to buy the Center for Spiritual Living, then got their consent to extend the closing date of the sale as social distancing and other COVID-era protocols persisted.

“The $4.2 million sale was scheduled to close March 28,” Welchel said in a March 7 interview.

Welchel plans to develop a 128-bed assisted living facility for the elderly on the church site. But he is locked in a court battle with the city government that stems from city staff’s insistence that Welchel’s planned development would require a land-use change for the site.

“If unable to develop an assisted living facility there, I guess my backup would be to put a learning center type of day care at that location,” Welchel said.

“Church sales are different from other real estate deals because the seller often wants to stay on the property,” said attorney Flores. “The uniqueness of church sales is, the church usually wants to stay on the property somehow. It’s not like the typical sale. Those opportunities require the developer to rebuild the church, renovate the church or build around the church, and most developers are savvy enough to do that.”

For example, a church group in Pembroke Pines plans to share its 5-acre property on busy Pines Boulevard with a Wawa gas station and convenience store. The Wawa would replace the existing Trinity Lutheran Church building and its parking lot at 7150 Pines Boulevard. The church, which has operated in its current location since the mid-1960s, will move to a new building to be constructed on the south side of its property, behind the Wawa site, which is vacant. The local city commission voted last year to rezone the site of the planned Wawa and to change its land-use designation.

“A lot of the church groups we work with have a large property – too large for their use. A lot of groups are just trying to right-size their property,” Messier said. “Churches are, other than the federal government, the largest property owners in the country.”

Buying a church isn’t easy, though, even if the bid is rich.

“They are way more complicated than buying a piece of dirt,” said Ryan Shear, managing partner of Property Markets Group (PMG). “Churches are nonprofit, and we’re for-profit, so there’s a lot of education and getting-to-know-you.”

In partnership with Greybook, PMG has built Elser Hotel & Residences, a 49-story, 646-unit condo hotel in Downtown Miami where the First United Methodist Church of Miami occupies most of the first 10 floors.

“The developers have sold more than 50 percent of the building since unit sales began in June 2022,” Shear said in a March 8 interview.

PMG paid $55 million for the 1.1-acre development site at 400 Biscayne Boulevard after responding to a request for proposals from the leadership of First United Methodist to rebuild the church’s previous home, a dilapidated old structure that occupied the site.

Developer Jeff Burns made a bid to redevelop a Lutheran church in Fort Lauderdale that went awry after the church’s out-of-town hierarchy objected, even though he had negotiated a deal with the local leaders of the church to buy the property.

“We had a signed contract. And these guys [the church’s higher-ups] came in and hired an attorney to basically come up with a reason why they didn’t have to move forward with the contract,” Burns said. He decided against going to court to enforce the contract. “It meant suing the church,” he said. “But we’re a community developer, so we decided to move on.”

After that fiasco, Burns stumbled across a nearby church in Fort Lauderdale. He liked the address so much that, after redeveloping it, he moved his business there. He was looking at property across the street when he happened to notice the Gospel Arena of Faith on Northwest Third Avenue, a few blocks north of Downtown Fort Lauderdale and just west of the Flagler Village area. Burns walked into the church, met its owner, the Rev. T.G. Thompson, and asked him if he wanted to sell the church.

“It took a long courtship, if you will, for him to be comfortable and trusting of us,” said Burns, CEO of Fort Lauderdale-based Affiliated Development. “We met him on numerous occasions prior to even submitting an offer.”

Thompson died Nov. 24, 2022, after the sale was completed.

Affiliated Development ultimately paid $2.1 million for the 1.1-acre Gospel Arena of Faith property at 613 Northwest Third Avenue, where the company developed Six13, an apartment building with ground-floor commercial space, which is partially occupied by Affiliated. All 142 apartments at Six13 are so-called workforce housing units, available only to people who earn 80 percent to 140 percent of area median income.

Church redevelopment in South Florida probably will persist, because so many houses of worship occupy coveted locations.

“They have fantastic land,” Burns said. “And a lot of churches have property in areas that are prime for redevelopment. Money isn’t the only consideration because church redevelopments are unlikely to succeed if church sellers don’t like the plan. They would much rather try to figure out a deal with somebody who’s going to do something good on their properties and solve a social need, versus somebody who’s just looking for a profit.”

 

Source: Commercial Observer

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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

Festival Flea Market Could Be Demolished. Here’s What Would Replace It

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The owner of the Festival Flea Market in Pompano Beach wants to demolish the building and sell the property to an industrial developer.

The city’s Development Review Committee on March 16 will consider land use amendment and rezoning applications for the 23.8-acre site at 2900 W. Sample Road. It’s owned by Festival Real Estate LLC, an affiliate of North Miami-based IMC Equity Group, but the application says it’s under contract to Atlanta-based industrial giant IDI Logistics.

The property currently has a 382,000-square-foot commercial flea market, which was built in 1986 and is used by multiple small vendors. It’s near a Florida’s Turnpike exit. The flea market would be replaced with about 773,000 square feet of industrial space. The developer has yet to submit a detailed site plan.

IMC Equity Group acquired the property for $56 million in 2018 and initially spoke about revitalizing the flea market. In November 2021, it sold a parking lot south of the flea market to an industrial developer after it was approved for warehouses.

 

Source: SFBJ

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Will Rising Interest Rates Also Propel Upward Movement In Commercial Real Estate Cap Rates?

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Interest-rate hikes from the Federal Reserve are expected this year.

One key question still being debated by the commercial real estate industry: What do rising interest rates mean for capitalization rates?

One of the most commonly used valuation measures in commercial real estate, cap rates are determined by dividing a property’s net operating income by its current market value. Cap rates are often used to compare the rates of return on commercial properties, and also give insight into how much risk a property may carry.

Since the pandemic, cap-rate compression has been observed, especially, in white-hot sectors like industrial and multifamily. There’s not a one-to-one correlation between cap rates and interest rates, although economists say the expected hikes coming this year could have some influence on where cap rates go in 2022.

Brian Bailey, commercial real estate subject-matter expert at the Federal Reserve Bank of Atlanta, said in a discussion this week hosted by commercial real estate software company Altus Group Ltd. that a rise in cap rates is prompted by many variables. But the prospect of rising interest rates does create risk for higher cap rates.

“The risk associated with higher cap rates depends, too, on loan-to-value ratios at origination, Bailey said. Movement in cap rates in an 85% loan-to-value scenario creates a much greater risk of loan default,” Bailey said. “In fact, any commercial loans that have an LTV ratio of 75% or greater may need to be closely monitored.”

Bryan Doyle, managing director of capital markets at CBRE Group Inc., said during the Altus Group panel that the amount of capital waiting on the sidelines to be deployed into real estate should help keep cap rates stabilized, if not further compressing.

In fact, in a five-quarter period ending in the third quarter of 2021, long-term interest rates rose by more than 70 basis points while cap rates for industrial and multifamily compressed by 50 and 75 basis points, respectively, in the same period, CBRE said in a December report. Investors will have to consider whether an increase in cap rates will be offset by higher rents that’ll produce higher net operating-income growth, CBRE noted.

The office sector may be one to watch because of the significant, pandemic-induced changes it’s likely to see, Tim Savage, clinical assistant professor at New York University’s Schack Institute of Real Estate, said at the Altus Group discussion.

“That will impact NOI, and we know that will, therefore, impact cap rates,” Savage continued. “I would say, probably, there will be slight upward pressure on cap rates going forward. They are not divorced from interest rates or, especially, from the Fed’s asset buying.”

Mark Zandi, chief economist at Moody’s Analytics, in a recent talk hosted by the Counselors of Real Estate also cited the changing nature of the office market, adding remote work has been a game changer during the pandemic. That’s going to change the dynamics of the office market, including how those assets are priced.

“I don’t think that the real estate investors have come to terms with what this all means for the market,” Zandi said. “At some point, that will get reflected in those cap rate spreads.”

 

Source: SFBJ

Another Big Year Expected For Industrial Real Estate In 2022 — But Development May Be Stymied By Supply Chain

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The U.S. industrial real estate market will continue to be on fire heading into 2022 but longer lead times to obtain construction materials and across-the-board price increases will also affect the sector.

Cushman & Wakefield PLC took a two-year look into the future, predicting industrial absorption from the start of 2022 to the end of 2023 will be 855 million square feet. Although demand will be high, and issues will make new industrial development challenging, Cushman expects new supply will slightly outpace demand in the next two years, which’ll help moderate the market somewhat.

Cushman is predicting new industrial deliveries will reach 932 million square feet in 2022 and 2023. E-commerce is a big reason — but not the only one — behind the warehouse sector’s massive growth since the pandemic. Online sales rose to 21.6% of total retail sales in the second quarter of 2020, compared to 16.2% in Q1 2020, and remain around 20% as of Q3 2021, according to CBRE Group Inc. (NYSE: CBRE) research.

“2021 was the best year ever for industrial real estate,” said James Breeze, senior director and global head of industrial and logistics research at CBRE, during a recent forecast call with reporters.

Third-party logistics have dominated industrial deal activity this year, a share that could grow in 2022 as costs continue to rise, and space and labor becomes more challenging to find.

“Many retailers or wholesalers will outsource their distribution to 3PLs at a greater clip in 2022,” Breeze said. “This outsourcing is going to be prevalent throughout the country.”

CBRE is forecasting vacancy rates next year for warehouses to remain at or even below 3.6% in 2022. Cushman is predicting industrial vacancy in North America will end 2023 at 4.1%. Expect rents to continue to rise for industrial occupiers, too. Cushman is forecasting average net asking rents for warehouse space in North America will reach a new high of $8.72 per square feet by the end of 2023.

“Even with the rental-rate hikes, tenants need warehouse space so much they’re willing to pay the new rates,” said Erik Foster, principal and head of industrial capital markets at Avison Young USA Inc.

“In fact, transportation costs are a bigger concern for many groups leasing warehouse space,” Breeze said.

Real estate costs are typically only 3% to 6% of total logistics costs, compared to 50% for transportation. The cost to ship goods via ocean freight grew more than 200% in 2021, while domestic-freight costs jumped more than 40%, according to CBRE.

 

“Leasing more space may actually save some occupiers money, if they are able to use additional facilities to cut down on domestic or international transportation,” Breeze added.

Investment activity for industrial real estate is expected to remain hot in 2022. Since the pandemic, some capital sources have pivoted away from uncertain asset classes, like retail and office, and instead poured money into industrial and multifamily, both of which have been on a tear in 2021.

Capitalization-rate compression across several U.S. markets has been observed in 2021 and is expected to continue, but cap-rate spreads between primary and secondary markets will be observed, CBRE predicts.

CBRE is predicting Phoenix and Las Vegas will post cap rates in line with the Inland Empire, about 3.1% in the first half of 2021, in 2022. Prices in the Pennsylvania Interstates 78/81 corridor are expected to be closer to those seen in New Jersey industrial markets, about 2.9% in H1 2021, says CBRE. Northern and central Florida could approach cap rates observed today in south Florida. Miami industrial real estate saw cap rates averaging 3.75% in H1 2021.

“With the amount of investor interest in industrial right now, there are some groups that don’t have much experience owning or operating warehouse real estate,” Foster said. “We’re seeing folks that are sophisticated, with real funds behind them, move in like never before to an asset class that they don’t know that well, which can cause risk.”

 

Source: SFBJ

The South Florida Answer To West Coast Logistic Bottlenecks

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South Florida’s industrial market fundamentals, particularly for bulk warehouse space, blew through the third quarter of 2021 on strong leasing demand and new construction

The region’s healthy consumer market and growing population helped push investor and occupier confidence in the industrial market, which is likely to continue through 2022.

The backlog at West Coast ports is causing weeks of delays for goods that need  to travel to East Coast markets, making warehouse/distribution space in South Florida an attractive and faster alternative from a distribution standpoint. Bottlenecks in the supply chain are realigning how many firms view real estate needs locally with a shift in philosophy for inventory management.

Previously, companies focused on lean supply chains where materials and goods arrive “just in time.” In a market like South Florida, that meant limited amounts of warehouse space were needed.  Now, companies are turning to an inventory strategy that follows a “just in case” model, where more goods are stored closer to customers to minimize fluctuations in demand. South Florida, with three deep-water ports, has the capacity to address the immediate logistics needs for companies with changing inventory strategies.

In the last year, 18,200 new industrial and warehouse-related jobs were created in Miami-Dade, Broward and Palm Beach counties. They were added because of big-box expansion by e-commerce firms, together with a push into last-mile facilities. Hiring also occurred with traditional retailers, plus new-to-market entrants, which increasingly viewed the tri-county as a strategic location to serve the immediate needs of customers.

New inventory and aggressive development captured some of the new employment. In the first nine months of 2021, 5.4 million square feet of new industrial space was delivered in the region. As the industrial inventory and deliveries grew, so did the occupiers’ space requirements for square footage, but new construction could not keep up.

As of the end of the third quarter, 6.6 million square feet of industrial space was under construction, with three projects representing 1.8 million square feet of new inventory. Still, overall industrial vacancy in South Florida fell to 4.4 percent in the third quarter. Both Miami-Dade and Palm Beach County were even tighter at 3.3 percent, with Broward County coming in at 5.9 percent as available space throughout the region decreased year-over-year.

While not a record-setting year yet, new leasing activity year-to-date of 11.6 million square feet was only 18 percent less than the full amount for all deals done in 2019. Net absorption, or the amount of space absorbed by tenants, was 7.8 million square feet in 2021. That represents a 250 percent increase in the amount of space absorbed when compared to 2020.

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In Miami-Dade, leasing reached more than 6.8 million square feet year-to-date, an increase of 15.5 percent compared to the same period one year ago. For that same period, Broward County recorded more than 3.6 million square feet, a 36.1 percent rise from 2020. Palm Beach County had 1.0 million square feet in new leasing activity so far in 2021.

Limited availability on heightened demand allowed landlords to push asking rates to all-time highs. Overall average asking rents for all South Florida were at $9.87 per square feet, triple net, the highest amount recorded. Rents in Miami-Dade were at $9.17 per square foot, a 7.1 percent jump from last year. And Broward County also reached an all-time high of $10.27 per square foot in the third quarter. Palm Beach County topped out at $11.07 per square foot with the asking rate rising steadily over the last three quarters as construction picked up.

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Confidence in South Florida’s economy and potential for growth will only be enhanced by the lifting of U.S. restrictions on foreign travel. The influx of travelers and investors from overseas, starting over the holidays, will contribute to additional optimism in industrial market fundamentals in the region. The longer that challenges remain at West Coast ports to efficiently move goods into the United States means that South Florida becomes the better, more reliable strategic alternative for companies. The region’s positive fundamentals post pandemic,including solid population growth and rising incomes, make South Florida an attractive market for investment.

 

Source: Commercial Observer

 

This Asset Class Posted The Largest Price Growth In 2021

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In a surprising twist, suburban office achieved the greatest price growth at 14.8% of all CRE asset classes over the last year, besting investor favorites multifamily and industrial.

John Chang of Marcus & Millichap notes that the price growth in the sector reflects three factors: “a pricing bounce, a disproportionate share of well-leased properties in the sales data, and some investor speculation.”

Unlike the price gains notched in multifamily and industrial, suburban office appreciation is not well supported by rent growth, which was only up by 0.6% or vacancy rate change.

“Part of the gain is an anomaly,” Chang says. “Suburban office prices dipped last year in the early stages of the pandemic, so part of the gains are the property types simply recovering losses. Second, the sales market has been dominated by well-leased properties—high-quality tenants with long-term leases in place. The sales composition is a bit different and there were fewer weaker assets in the deal mix that would normally drag prices down.”

Chang also says investors are taking note of the widely-held belief that to facilitate employees’ return to the office, companies will have to open locations closer to people’s homes.

“A lot of workers, especially millennials relocated to the suburbs because of the pandemic, and a new trend is forming. Investors are positioning ahead of that curve buying low rise suburban buildings,” Chang says. “Investors are betting on history repeating itself. A significant portion of suburban office stock was built in the 80s when baby boomers migrated there. It looks like millennials are in the process of making that same move.”

The second fastest price growth, according to data from Real Capital Analytics, was in apartment properties, which came in at a 14.7% increase. These values are supported by a 90 basis point vacancy reduction through Q2, Chang says.  And again, investors have millennials to thank.

“Investors are pursuing multifamily properties because of demographics,” Chang says. “The aging millennials are now entering their thirties en masse, which is driving household formation up aggressively. Basically, there are so many millennials trying to move out on their own that there are simply not enough housing units to meet the demand. That trend is expected to run five years of longer, supporting the underlying thesis for multifamily investment.”

Industrial came in third, with price gains of 13.6% over the last year. That reflects average rent growth of 5.9% over the last year and a 30 basis point vacancy drop to 5% nationally, as well as cap rate compression of about 20 bps.

“Industrial properties have drawn increased investor attention over the last couple of years as e-commerce thrived during the pandemic,” Chang says. “The supply chain issues of recent months have also brought forth the importance of industrial property as businesses are stockpiling increased inventories to mitigate shipping and delivery risk. Industrial real estate has one of the strongest investment outlooks like investors penciling in aggressive rent gains into their valuation models.”

 

Source: GlobeSt

Expert Roundup: Brokers Discuss Industrial Real Estate

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Since the pandemic started affecting the U.S. economy last March, industrial real estate has proven to be the bright point in an otherwise challenging real estate market.

As part of CommercialCafe‘s Expert Roundup series, a number of commercial real estate experts from across the country give their takes on why the industrial asset class is so resilient, what challenges it still faces, what the near- to mid-future has in store and even break it down to a regional perspective.

Industrial construction projects in the U.S. are projected to eclipse 342 million square feet in 2021 – the highest in five years. What are the main drivers of this expansion?

Grigoriy Azayev

“The main drivers of the accelerated expansion we see in industrial construction projects in the U.S. and abroad are the following:

Due to stay-at-home orders and lockdowns throughout the U.S.,people had no choice but to shop online for household products, clothing,equipment, and food. The e-commerce and last-mile delivery trend has beenemerging rapidly for the last five years, but the pandemic accelerated growth and demand to numbers and targets that no one in the industry expected to see until 2030 (ratio of online sales vs. in-person retail shopping and dollar amountsspent online in purchases).

But the writing was on the wall for quite sometime pre COVID 19..The retail experience has changed dramatically in the last 10 years, and year-over-year,less Americans go to physical brick and mortar stores for everyday consumer goods. Instead, they’re opting for online platforms which have been improving their ease of use, variety of products, and most importantly: delivery speed. It doesn’t pay to get in the car and drive 30 minutes to the store, walk around the store for an hour putting your goods in the cart, and then driving backhome, if for the same price, I can click a few buttons and have all my goods delivered – sometimes as quickly as 2 hours.” 

Steve Buss

“Right now, three major factors are driving industrial demand — the rise of e-commerce; manufacturing growth due to reshoring; and supply-chain diversification. All three were accelerated due to the pandemic..

E-commerce was a huge driver of industrial real estate expansion before the pandemic and — after a short pause initially in 2020 — it’s only expanded in cities of all sizes.

Industrial real estate demand is a natural reaction of the marketplace, which has doubled down on online sales — not just business to consumer, but also B to B. Corporations are expanding how much they’re willing to buy via e-commerce just like household consumers.

We’re living in a world where competitive delivery pressure is ratcheting up every day. Everyone needs to find warehouse space to help them deliver goods to their customers. They want to offer expedited delivery and develop last-mile e-commerce supply chains to compete against giants like Amazon.

Fulfillment and third-party logistics companies are increasingly in need of distribution centers within a short distance of urban and suburban areas. That’s not going to change. Demand is only going to grow, especially in secondary and tertiary markets. In-fill industrial — as well as new construction — will continue to grow in 2021.

Will Curtis

“The biggest things that has driven the growth in industrial is online shopping and the changes in the consumer purchase process. Between delivery driving the need to last-mile distribution to the click and pick up has increased the need for warehouse space for retailers.

The other thing that is adding to this trend is the move to suburban office space and looking at flex properties to combat COVID concerns like shared common areas, elevators or shared HVAC systems. Flex buildings have the ability to mitigate those issues and have driven the demand for more industrial demand.”

Fletcher Dilmore

“One of the main drivers of this expansion is that traditional big box retailers are conceding market share to online retailers, creating increased demand for industrial warehouse and fulfillment space from these growing online retailers who do not have a traditional physical presence.”

Michael Edwards

“Construction on industrial projects is booming, because we’ve seen consistently that despite periods of economic uncertainty or even crisis, industrial properties tend to remain stable. This means consistent cash flow and reliable investment growth. Industrial may not be the sexiest part of the real estate industry, but it might be the steadiest right now.

Additionally, sectors like e-commerce, data centers, and self-storage have recently seen higher-than-normal demand, and low supply. The onset of the COVID-19 pandemic accelerated the need for infrastructure to support these industries.”

Max Levinston

“Industrial was already growing at a fast pace before Covid, and this pandemic has accelerated many of these trends. In our market warehouse space either for sale or lease is quickly absorbed, both by investors and owner users.”

Bruce Lowry

“In our experience, the drivers in construction has two main drivers, (1) increased demand for warehouse space in general and (2) the lack of modern industrial and warehouse space. Increased demand for industrial warehouse space has significantly increased over the past several years as consumers have increasingly changed their purchasing habits from brick and mortar in person purchases to online orders with door step delivery. The global pandemic has increased this demand for door step delivery of online goods and services including perishable goods such as groceries.

Older consumers were forced to learn new technology and they are learning that they like the convenience of door step delivery. In turn, this increased demand for online ordering and door step delivery has increased the demand for both large warehouse projects and so called last mile warehouse space.

Secondly, outdated building infrastructure including lack of access to technological innovations such as communication and data infrastructure, buildings designed for automated sorting and delivery systems are increasing demand for newly constructed warehouse and manufacturing space. Buildings with narrow spans containing repetitive floor to ceiling support structures simply will not accommodate modern automated manufacturing and warehouse logistics systems and these buildings are being replaced with structures that contain these innovations.”

Bryan Shaffer

“E-commerce sales was growing before the pandemic, but the crisis accelerated this trend, with consumers unable to obtain goods from some retailers. Further, it was harder for manufacturers and sellers to get their goods to the market therefore many small suppliers have partnered with Amazon to keep their distribution line open. Overall, year over year industrial values increased 8.1% from February 2020 to February 2021, more than any commercial real estate asset class. The E-commerce sales resulted in much stronger demand for logistics and more demand for cold storage space.”

 

Industrial real estate has fared better that other asset classes in the last year. How has 2020 affected the industrial market this year and beyond?

Grigoriy Azayev

“The industrial market in 2020 has become the sweetheart ofCRE. Everyone is chasing industrial deals and some of the biggest players inother asset types are jumping ship to bid on industrial deals. Unfortunately,it is creating a supply shortage in the market throughout the country, and prices for both leases and investments are on the rise. I don’t see this trend slowingdown because companies like Amazon have publicly stated they want to doubletheir square footage in the next year and are paying top dollar for class A industrial space and land. Regrettably, it’s weeding out the little guys and small-to-mid-size businesses that also rely on supply chains and logistical real estate.”

Steve Buss

“Another huge factor driving demand for industrial real estate is a much greater awareness of supply chain risk, which was exposed due to the pandemic shutdowns. Shortages of all types of goods revealed just how tight supply chains were for many sectors. For example, some U.S. automakers weren’t able to operate because they couldn’t get onboard computer chips. That led to sustained automotive inventory shortages. Until the pandemic, that was an unseen or under-rated risk in the supply chain. Now, it’s impossible to ignore such risks. Businesses are diversifying those supply chains and rethinking how they manage risk, including where they want to store finished goods.

While it’s typically more profitable to run a really tight supply chain, businesses faced a rude awakening and discovered it’s also much riskier. Businesses and their customers found they were taking on far more risk than they realized by holding very little inventory. They weren’t ready to handle the supply chain disruption. Now, they’re asking how much more inventory they should have on hand to make it through the next supply disruption.”

Will Curtis

“Certainly of returns is always going to drive investments. With large players like Amazon, Walmart, and others that they need additional warehouse space has added to the investment-grade properties and brought in more demand.”

Fletcher Dilmore

“2020 has made industrial real estate an essential asset class. Distribution and warehousing went from being apart of everyday business to being the everyday business. Had it not been for the pandemic, I think it is safe to say we would not have seen as quick of an adaptation of online grocery shopping, something that had been available, but was a minuscule amount of overall grocery sales in previous years. ”

Michael Edwards

“2020 was quite a year – and it was fascinating to see the shifts in the real estate industry. In commercial real estate in general, most markets saw a decline in demand – but industrial saw a significant increase in growth and investment. We anticipate that investors will be eyeing industrial properties favorably in the months ahead.

Part of the reason for this growth in industrial investment is the consumer behaviors that accelerated e-commerce and data centers when the pandemic rocked our worlds last year. Grandparents who’d never ordered anything online before were suddenly getting groceries delivered and medications shipped and birthday gifts sent directly to their kids and grandkids from fulfilment centers. We expect this trend to continue, so demand will remain for the industrial properties needed to support those activities.”

Max Levinston

“Online shopping has been a huge reason for the increased demand. Many of these shifts in consumer shopping will not revert back once we’re further out of this pandemic..” 

Bruce Lowry

“The industrial and warehouse real estate market is strong and the demand for new industrial and warehouse properties across all sectors will continue as companies innovate and automate their manufacturing, logistics and delivery programs. We see only increases in this sector for the foreseeable future due to high consumer demand for e-commerce goods and the need to continue to automate manufacturing facilities.”

Bryan Shaffer

“The pandemic forced people to adapt to E-commerce. It likely pushed forward the market in the US by 5-10 years. People who were possibly thinking of looking at eCommerce were forced to utilize it during the pandemic to receive their needed supplies and services. In addition to industrial logistics demand, the vaccine also created more cold storage space. New technology has also developed quicker because of additional capital being invested in this space.”

 

Are there any other use-types besides e-commerce and cold storage that you see expanding more in the future?

Grigoriy Azayev

“We’re starting to see some secondary uses come into play,such as fleet parking for delivery providers and there has is a growing demand for movie studios and film production campuses in New York City. This is due to some excellent tax incentive programs for film production here and tremendous demand growth for instant and fresh content. There is also movement in the smaller “maker spaces” and manufacturers here in New York and other cities. The costs of shipping andoutsourced manufacturing on the rise, paired with long delays of production due to COVID-19, the cost of manufacturing in the U.S has become comparable to outsourcing due to a growing supply chain. It has become more and more seamless and cost-effective to manufacture all types of goods here in the states.”

Steve Buss

“Another issue that will drive industrial real estate in the years to come is reshoring or bringing manufacturing operations back to the U.S. Because of the pandemic supply chain issues, some companies are less convinced they want all their goods coming from one country like China if they can find local alternatives.”

Will Curtis

“In San Antonio, we are seeing a huge push for Cyber Security. Flex space is showing as a great cost-effective option compared to traditional office buildings. Cyber Security SCIF (Sensitive Compartmentalized Infrastrcture) is expensive to build out and flex gives a lower-cost option. Things like Port San Antonio has been a huge driver for the growth in San Antonio.”

Fletcher Dilmore

“I have seen an increase in demand in my local market for smaller flex space by tenants that have a specialized manufacturing or business specific needs.”

Michael Edwards

“Data centers, undoubtedly, will continue to grow in importance and their needs will evolve along with the technology that’s stored inside them. We’ve also seen self-storage grow over the past few years as a result of more people moving to smaller homes in urban settings. And, self-storage is a sector that tends to resist the overall trends during economic slowdowns – including this COVID-related one. More people than ever before are “working from wherever”, which means they can put their things in storage and hit the road.”

Max Levinston

“Self-storage and flex spaces.. Many investors are targeting the lucrative nature of self-storage, both industrial conversions and new construction. Flex space is also highly desirable for companies who need a few offices/conference room for staff which is connected to the warehouse.”

Bruce Lowry

“Self-storage and flex spaces.. Many investors are targeting the lucrative nature of self-storage, both industrial conversions and new construction. Flex space is also highly desirable for companies who need a few offices/conference room for staff which is connected to the warehouse.”

Bryan Shaffer

“Industrial overall is very affordable to build. Over time I expect to see an over-supply. This usually happens with real estate asset classes after they become over heated. I believe that e-commerce will drive more activity and offer a hybrid space between industrial and retail and logistics space will be incorporated into current retail properties. Walmart is an example of a brand where we are seeing this trend now.

The other likely impact on industrial will be the emergence of more food service, commercial kitchens, located within industrial properties, which will service the food delivery companies.”

 

What’s the #1 challenge industrial is facing in 2021?

Grigoriy Azayev

“The biggest issue that industrial real estate faces is beinga follower of the market rather than the leader. It’s great that Amazon candeliver my package to me in under 2 hours here in NYC from one of their manyfacilities, but if workers don’t return to the office and come back to living in the city, to who will they be delivering these packages? At the height ofthe pandemic, vacancy rates in NYC for residential buildings touched 25%, and to-date,offices are still at 15% occupancy. These huge investments into last-miledelivery will be a tremendous loss if the theme continues and people don’treturn back to NYC.

The second issue is more industrial real estate leads tomore air, water and noise pollution, and a substantial increase intraffic. In NYC, there is scarce industrial space and they depend on only a fewmajor roads that trucks can go on to reach the facilities. There are more andmore trucks and vans on the road, causing ridiculous traffic, and it’s alreadybecome an ongoing concern in the city.”

Steve Buss

“Industrial real estate is one of the few big winners of the pandemic. We see enormous investment potential in industrial properties due to the expansion of e-commerce and the growing demand for warehouse space. We’re expecting growth not just in big cities, but also in secondary markets, particularly in the Midwest.

For tenants looking for industrial properties to lease, it’s very competitive. It’s hard to find space. Due to high demand, industrial rents are going up. When tenants get ready to renew their leases, they’re getting sticker shock. They’re not used to that. That all means, of course, that industrial real estate is a particularly sound investment.

While many bigger box distribution centers are going up in the biggest markets, we see huge potential for developing or building smaller industrial properties closer to urban centers in secondary and even some tertiary markets. You can find 20-, 30- and 40-year-old buildings in excellent locations and make them very functional for multiple tenants. If you stay near urban centers, you can deliver last-mile supply chain accessibility, but also access to workers.”

Will Curtis

“Lack of inventory and pricing smaller users out of the market. I am working with a client now, who is more price-sensitive and we simply can not find space and the few things we do find are more expensive than what can be unwritten into the business plan.”

Fletcher Dilmore

“Keeping up with demand with functional product. Industrial has been the safe haven for real estate investors during COVID, but that doesn’t mean all industrial product is created equal or as equally valuable. There are many industrial buildings across the U.S. that are for practical purposes functionally obsolete. This can be because of low ceiling height, inadequate power supply, difficulty moving trucks in and out, lack of proper sprinkler systems, distance from major transportation arteries, etc.”

Michael Edwards

“We feel really optimistic that challenges will be few for industrial properties this year, at least relative to the opportunities in this part of commercial real estate. But it will be interesting to see how many people miss shopping in brick and mortar stores or having face-to-face interactions, cutting into the growth of e-commerce. We don’t expect that to happen, but it’s something industrial investors should be looking at.”

Max Levinston

“Supply, the availability is between 1 – 2% right now for quality industrial space, both for lease and for sale.

Developers cannot keep up with the demand which has also caused the prices of industrial land to go up as well. We’re seeing the prices/sq ft go up and some buildings getting leased before construction is completed.”

Bryan Shaffer

“Developers will race to add more industrial and flex inventory to the market because of the lower cost compared to other types of real estate and the current low vacancy rates. At the same time, overall changes in the retail market caused by e-commerce, will lead to more repurposing of existing better located retail properties into some type of hybrid distribution/ retail projects. Both factors together can lead to oversupply in some markets. Markets with higher land cost and more limited development opportunities will out preform markets with unlimited expansion potential. The long-term need is going to be for better located properties closer to shipping and population centers This will ensure that products can be delivered quicker. For 2021, I believe industrial will overall remain very strong, but the new growth in development may hurt the asset class in the future.”

 

Source: CommercialCafe

Permanently Altered Industrial Sector Will Drive Demand For 4B SF: Prologis Report

The coronavirus pandemic has reshaped the global logistics market in fundamental ways, spurring its long-term growth, but also putting new stress on the system as consumers adopt online retail sales more quickly than they might have otherwise, according to a new report by industrial real estate giant Prologis.

That could lead to demand for 4B SF of new logistics stock.

The report, “Forever Altered: The Future of Logistics Real Estate Demand,” said perhaps the main driving force in change for the industrial sector will be the accelerated growth in e-commerce. Though the pandemic will end, that will remain as one of its prime legacies.

E-commerce penetration will continue to be robust post-pandemic for a number of reasons. One is that many consumers overcame barriers to e-commerce during the pandemic, and they aren’t going back, the report says.

Also, innovation and supply chain investments made during the pandemic will hone the competitiveness of online options for retailers. That will be especially the case for retail segments with low e-commerce penetration before the pandemic, such as grocery retailers and home improvement specialists, Prologis predicts.

“Consumer expectations have increased in a permanent way,” the report notes. “Prologis Research forecasts that global e-commerce penetration will rise by 150 basis points a year over the next five years. Physical retail will increasingly require rapid replenishment operations to compete.”

Growth in consumption-oriented uses will drive growth in logistics real estate, even as production-oriented uses decrease, Prologis also found. Consumption is now the main driver of demand for logistics space on the global level, with retail sales having a higher correlation with logistics demand growth than more traditional uses of such space, such as manufacturing or wholesale trade.

These changes will naturally mean opportunity for industrial real estate owners and developers, but there will also be growth pains in logistics going forward.

“The resilience of the supply chain is being tested as companies expand globally, in turn driving the need for modern stock and decentralized networks,” the report notes. “Coupled with a rising consumer class, this worldwide upgrade should generate the need for 3 to 4B SF or more of modern logistics stock over the next cycle.”

 

Source: Bisnow