Tag Archive for: post-pandemic economy

2024 on blocks_shutterstock_2317182725 770x320

Despite an undeniable slowdown in 2023, optimism still permeates Miami’s commercial real estate sector — buoyed by the Federal Reserve‘s recent signaling that rate cuts are on the horizon.

“The problem is not South Florida real estate,” said Arnaud Karsenti, managing principal at 13th Floor Investments. “We’re probably way better off than our peers around the rest of the country.”

The city has settled into a new normal and is positioned to see continued growth in 2024 despite challenges in office supply, multifamily dynamics and construction costs, nearly a dozen industry insiders told Bisnow in interviews this month.

“Out of all the markets we’re in, and we’re at a decent amount across the country, South Florida is far and away the healthiest,” said Ryan Shear, managing partner at PMG.

The rapid growth spurred by the pandemic — with corporate behemoths from Citadel to Microsoft moving to the region and an influx of $7.4B in wealth in 2022 — has slowed, but it remains the driving force behind the city’s expansion.

Investment volume has also tailed off, but the latest signal from Fed Chair Jerome Powell that 2024 could see as many as three rate cuts has buoyed the expectation among investors, developers and brokers that Miami will see an increased flow of capital next year.

“2023 was a throwaway year,” said Michael Fay, managing director of Avison Young’s Miami office and chairman of the brokerage’s U.S. Capital Markets Group Executive Committee. “People are looking for reasons to be back in the market and looking for opportunities, but to do that they need to have rates participate in that look.”

‘We Feel Like We’re At The End Of The Cycle’

Miami was far from immune to a rate-driven slowdown. The office sector saw 12 transactions through the first three quarters of 2023, compared to 26 deals over the same period a year prior. But even as volume plummeted, the sales that closed signaled confidence in the market, with the price per SF dipping only slightly from 2022 and outperforming 2019, before the pandemic helped boost the city’s profile.

Investors and brokers told Bisnow deal volume across all asset types is poised to rise again next year. But there is some debate as to when capital will begin flowing more freely, with some expectation that any rate cuts from the Fed will take time to percolate down to banks and loan originators.

“A lot of us are expecting some rate decreases in the first half of next year, which will lead to a more attractive forward curve,” Karsenti said. “Banks will start to lend on that curve and will ultimately provide loans at lower rates.”

The presidential election in November is likely to increase the political pressure on the Fed, said Fay, who described rate cuts as “candy” for the market. He said the beginning of 2024 will likely see a few deals before deal volume picks up in the back half of the year.

“We feel like we’re at the end of the cycle,” Fay said. “We’re hopefully going to be at a point that will mark stability. When you have stability and clarity, people can price in risk in a much better way.”

Investors across the country are raising billions of dollars to target distressed assets facing loan repayment hurdles, especially in the office sector, where an estimated 44% of properties have more debt than value at this point.

But South Florida’s office market has been an outlier to national turmoil, with Miami, Fort Lauderdale and Palm Beach all among the top five markets for annual rent growth through October. South Florida office asset values are expected to grow in 2024, according to CoStar, while most of the country is still in correction mode.

Miami’s apartment market is also ranked as the most competitive in the country, with a 97% occupancy rate and the fifth-highest rents in the country.

The $5.5B in CMBS loans on South Florida properties set to mature in 2024 account for only around 5% of the national total, according to CoStar. Falling interest rates are expected to spur acquisitions, but assets trading in South Florida are unlikely to be facing debt challenges.

“I am concerned that rates are going to come down and everybody that’s been on hold, waiting and delaying, they’re all going to try to run through the same gate at the same time, which will just drive prices right back up,” Shear said.

‘They’re Not Massive HQ Moves’

Office buildings in Miami are forecasted to grow in value in large part because the pandemic-era leasing boom has waned, but not abated.

“There’s around 3.8M SF of pent-up office demand among tenants touring in Miami,” said Tere Blanca, the CEO of Blanca Commercial Real Estate.

Around 20% of those companies are new to the market with much of the remaining activity being driven by firms that opened offices in Miami during the pandemic that are now looking to expand their footprint.

“Every lease that we do today in our existing buildings, that’s a record for the highest rate in that building,” said Brian Gale, vice chair at Cushman & Wakefield in Miami. “I think office rents could rise another 25% in 2024.”

Office development remains the third rail of real estate investment, even in South Florida where the sector has continued to perform well. Few new office developments are expected to break ground next year, leaving tenants that are engaged in an ongoing flight to quality with limited options for space.

Miami had 1.6M SF under construction at the end of the third quarter, according to Blanca, half of which is the fully leased 822K SF 830 Brickell tower.

“The lack of new construction will hinder leasing activity next year with the new-to-market tenants pausing and sitting on the sidelines because the new product is not in place,” Blanca said. “For a new office project to get financing, lenders often want to know an anchor tenant has signed on, and the companies currently in the market are generally looking for spaces ranging from 5K SF to 20K SF. A lot of these deals are not getting done, because they’re smaller transactions than the Citadels of the world,” Blanca said, referencing the 90K SF lease the hedge fund signed at 830 Brickell last year. “They’re not massive HQ moves.”

‘I Can’t Imagine A Multifamily Project That Would Pencil Out’

Apartment development is also expected to face headwinds in 2024. Rent growth has tapered off amid a wave of new supply — there are around 30,000 luxury apartments alone under construction in Miami — and cuts to interest rates won’t be enough to offset the high cost of construction, developers told Bisnow.

“I can’t imagine a multifamily project that would pencil out, and I can’t imagine a lender that’s going to lend money to multifamily,” said Armando Codina, executive chairman of Coral Gables-based developer Codina Partners. “That space is going to go down significantly.”

The state-level effort to spur apartment construction through the Live Local Act generated a wave of interest, but those proposals are also facing financial hurdles. The law created tax abatements and other incentives for projects with at least 40% of units set aside for workforce housing, but those tax savings have so far been outweighed by the high cost of debt and construction.

“In the meantime, the projects that are expected to move ahead are those near mass transit stops, which can leverage county-level zoning to achieve the needed density to make projects financially viable,” said Iris Escarra, co-chair of the land use practice at Greenberg Traurig.

Miami-Dade County has been adding to its Rapid Transit Zones as it encourages the use of rail and bus lines to alleviate growing traffic congestion and increase density around transit stops before an expected push for federal funds to expand the rail system.

“There’s always a chicken or an egg with transportation and rail lines,” Escarra said. “For the county to extend the line north, for example, they need to show that there’s enough density on the line to qualify for federal dollars.”

“Condo development, by contrast, has remained attractive for developers. Financing for condos can be easier to secure because the deposits on units that are pre-sold can offset the size of construction loans and the shorter-term investment horizon is more attractive for lenders,” said Edgardo Defortuna, CEO of Miami-based developer Fortune International Group.

Condo sales have declined from pandemic highs, but the buyer pool has been boosted by international interest extending beyond Latin America. Many buyers see the purchase of a pre-construction condo at today’s pricing as a hedge against inflation and a way to avoid today’s high cost of debt.

“In a way, they have the best of both worlds, protection against inflation because they’re fixing the price, and also potentially getting lower interest rates when they need to close on their acquisition and finance,” Defortuna said.

Contractors ‘A Little More Hungry’

A slowdown in new development this year has reduced some of the upward price momentum on construction. With fewer projects breaking ground, developers said they have regained some leverage in negotiations with construction firms and contractors, even though material prices remain high.

“The numbers have gotten better but, even more important, I’m seeing the contractors being a little more hungry,” Codina said. “I’ve had [subcontractors] a year ago say to me, ‘I don’t want to bid unless I’m going to get the job, I’m too busy.’ Now, we’re breaking ground because we’ve seen a little bit of a different attitude.”

Jay FayetteSuffolk Construction’s president for the east coast of Florida, has seen the number of proposals coming across his desk decline but said he still expects to have a busy year as his firm moves through a backlog of projects that have been waiting to begin construction.

“We’re going to be very busy, and busier than last year,” Fayette said. “But that’s not necessarily due to the abundance in the market, it’s really due to the abundance that we had in the pipeline that we’re finally getting shovels in the ground. The shortage of workers that has plagued the construction industry is expected to continue, and Suffolk is investing resources into worker recruitment and retention to try to offset some of the challenges.”

Raw materials like wood and concrete have become more available, but switchgears, the backbone of a building’s electric system that became difficult to source during the pandemic, remain one of the largest hurdles for new construction.

“We don’t dare tell an owner it’s less than 65 weeks” to secure switchgears, Fayette said.

Construction costs have also begun to stabilize, but a crowded development pipeline in the region means strong demand for materials will keep prices from falling significantly in the year ahead.

“I think there is a world where construction costs come down. I can’t say that it’s in the Southeast region,” Fayette said. “We’re in nine regions nationwide, and we are seeing some softening of construction costs in other regions, but the state of Florida is a robust construction market.”

 

Source: Bisnow

Red Percentage Symbol Surrounded By Dollar Sign

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

water-ripple_27847879_s-770x320-1.jpg

Retailers, third-party logistics firms and e-commerce groups alike are eating up the most big-box warehouse space in today’s red-hot market.

Retailers and wholesalers accounted for the most industrial deals at 200,000 square feet or larger last year, or 35.8% of all leasing activity, a considerable increase from 24.7% in 2020, according to CBRE Group Inc. E-commerce fell from the No. 1 spot in 2020 to third last year, accounting for 10.7% of all deals, while 3PLs grew from 25.8% to 32.2%, ranking No. 2 among large industrial leases in both 2020 and 2021.

Propelled by a surge in online ordering, and changes to consumer preferences in part because of the pandemic, retailers and 3PLs have ramped up their distribution networks considerably in recent years. That demand is expected to be sustained this year, and could become even more frenzied with the recent surge in gas prices.

The cost of regular gas has risen nationally 20.9% in the past month, from an about $3.50 a gallon to $4.32 on Tuesday, according to figures from Heathrow, Florida-based American Automobile Association Inc.

James Breeze, senior director and global head of industrial and logistics research at CBRE, said transportation accounts for at least 50% of a typical industrial occupier’s costs, even before the recent hike in inflation and oil prices. But, largely because of sanctions imposed on Russia from the war in Ukraine, oil prices have risen dramatically, although Brent crude futures — a key benchmark for oil prices — just began to decline. National gas prices were down 0.2% between Monday, March 14 and Tuesday, March 15, according to AAA.

“Any run-up in transportation costs will likely outpace warehouse rent growth, even while that’s growing at a rapid clip, which could result in even more demand for warehouse space,” Breeze said.

Carolyn Salzer, senior research manager of industrial logistics at Cushman & Wakefield PLC said higher gas prices could have a ripple effect on the industrial market, depending on the user and their supply-chain model. Both Salzer and Breeze said real estate costs for warehouse users have typically been about 5% of a company’s costs but, more recently, that’s gotten closer to 10%, Salzer said.

“If you bite the bullet and pay the more expensive rent to be close to the population center, and be more competitive with the labor pool and provide easier options for commuters to get to where you’re located, it can cut your transportation costs on gas and mileage in general,” Salzer continued.

Cushman & Wakefield is forecasting rent growth for warehouse and logistics space will rise by more than 15% in the next two years. Class A and new construction rents are anticipated to grow at an even higher rate. Those rental surges are creating a squeeze for some users, with tenants looking at lease terms sooner than what’s typical, or negotiating an early renewal or a smaller extension to resize a facility or consider real estate farther out, Salzer said.

But, Breeze said, for most industrial users today, higher rental rates generally aren’t causing companies to hit the brakes on expansion because they need the space to store inventory and lower transportation costs.

Salzer said she anticipates e-commerce users will occupy about the same share of the market it has since the pandemic, or 40%. That’s compared to 28.2% of all industrial absorption from 2016 through 2019, according to Cushman. Many retailers are opting to work with 3PLs to bolster their supply chains, which will continue to comprise demand in 2022 and beyond.

“CBRE so far this year has seen ramped-up leasing activity for groups that deal in building and construction materials, as well as medical supplies, which typically represent a lower share of the overall warehouse market, Breeze said. “That’ll likely mean a more diversified occupier base this year.”

 

Source: SFBJ

Businessman looking through binoculars

Change is a major theme in this year’s Emerging Trends in Real Estate, an annual report by the Urban Land Institute and PricewaterhouseCoopers LLP, heading into 2022.

Housing affordability, soaring construction costs, climate change, proptech and the lasting impacts of remote versus in-office work are, unsurprisingly, some of the major topics and trends identified in this year’s installment. The report includes data, insights and survey responses from 1,700-plus real estate industry professionals.

While the economic recovery for the real estate industry has been better than expected since the pandemic, some adaptations and changes to the office, the way consumers shop and even how and where people live will be changed forever. The report’s survey found 47% of real estate professionals didn’t think changes implemented during the pandemic would revert back in 2022.

 “Long-term impacts from pandemic changes, such as the growing acceptance of work-from-home on the office market, are still unknown. But there’s a greater understanding that such shifts will impact commercial real estate,” said Anita Kramer, senior vice president of ULI’s Center for Real Estate Economics and Capital Markets. “A big lesson has been how things don’t have to change completely to have impact,” Kramer continued. “In the office sector, it’s not that everybody has to be working from home for changes to occur. The office sector is not dead but there will be a bit of a shift within it.”

She said when a fuller picture of how work-from-home will affect office emerges, that’ll prompt further questions: What happens to downtown businesses that rely on lunchtime crowds during the week, or older office buildings and retail centers that may be obsolete in a post-pandemic world?

Real estate investors’ capital war chests have been bolstered this year, but a disproportionate amount of money is flowing into a few sectors.

Tom Errath, managing director and head of research at Chicago-based Harrison Street Real Estate Capital LLC, said during a real estate economic forecast panel at ULI’s fall meeting this week that investors — some fairly new to real estate — are more recently wanting to understand alternative asset classes, which Harrison Street specializes in.

“We are seeing great interest from not only domestic capital but foreign capital,” Errath said. “These asset classes we focus on exist in other countries but they’re not as well developed there. If you want to access them in a meaningful way and take advantage of the transparency and liquidity that exists here, you have to be the in United States.”

Ben Breslau, Americas chief research officer at Jones Lang Lasalle Inc., also said foreign capital has been constrained during the pandemic because of travel restrictions and the inability to tour assets or markets. Once those restrictions lift, he said even more international capital will likely flow in to U.S. real estate.

Ken Rosen, chairman of Rosen Consulting Group of Berkeley, California, also said investors want to pile into the same few sectors. Disproportionately, industrial, multifamily and more niche sectors like life sciences are seeing the greatest competition from capital. The success of those sectors and more broad real estate fundamentals set the stage for more capital flowing in to commercial real estate in 2022.

But what about more traditional asset classes that have become less certain since Covid-19?

“Office remains a bifurcated sector,” said Breslau. “The flight-to-quality theme touted by many in the office space applies to investors, too. It’s not a rising tide lifting all boats but the best office space is seeing bidding wars from tenants. We have a lot of clients and investors who are getting incredibly frustrated, trying to deploy everything in two-and-a-half asset classes,” he continued, referring to industrial, apartments and alternative sectors.”That could propel savvy investors to find opportunities within sectors like office.”

“Properties are available to acquire now but investors may have to have more courage to buy what he called the more contrarian stuff,” Rosen said.

The ULI and PwC survey found most respondents felt there will be a year-over-year increase in availability of capital from lending sources, especially non-bank lending sources, in 2022 as compared to 2021. Sixty percent said they felt equity capital for real estate investing would be oversupplied in 2022.

Perhaps underscoring the continued optimism of the commercial real estate industry, 89% said they were confident about making long-term strategic real estate decisions in today’s environment, with 45% “strongly” agreeing with that statement.

ULI and PwC also identified several markets to watch in 2022.

“The scoring criteria is based on survey respondents’ scores on a city’s investment and development prospects, and other opportunities, said Kramer. “Smaller Sun Belt cities like Nashville, Tennessee, and Raleigh, North Carolina, are identified as supernova cities because of real estate fundamentals, in addition to having walkable downtowns and other factors.”

 

Source: SFBJ

 

31118274 - clock with words time for change on its face

Mark Zandi, the chief economist of Moody’s Analytics and founder of Economy.com told more than 1,000 attendees of NAIOP’s CRE Converge conference taking place in Miami Beach, that while the pandemic is altering the U.S. economy, changes in store bode well for commercial real estate.

On the positive side, the economy has recovered 17 million of the 22 million jobs that were lost due to the pandemic. The policy response on the part of the Federal Reserve, Congress and the White House, including maintaining low short- and long-term interest rates, the CARES Act and the American Rescue Plan, have collectively kept the economy from failing.

“I’m assuming that the pandemic is going to continue to wind down, and that with each new wave the disruptions to the economy will be less significant. Over the course of the next 18-24 months, the pandemic doesn’t go away but it largely fades away in terms of what it means in terms of our work and lives,” Zandi said.

Zandi noted that however it shakes out, the infrastructure spending packages will also be beneficial to the economy. And he said that with respect to monetary policy, the Fed will slowly take its foot off the monetary accelerator – raising short term interest rates by spring of 2023 and tapering the quantitative easing of buying bonds.

The pandemic has not only accelerated certain trends, it is causing permanent shifts. These include remote work, less domestic travel generally, less business travel and an increasing net migration from urban cores.

Prior to the pandemic, a net of 275,000 people on average were leaving urban cores in the U.S. to live in other locales; during the pandemic, that number jumped to more than 600,000.

Zandi also identified the risks inherent in the post-pandemic economy:

  • The Delta variant of COVID-19 has unnerved consumers and workers.
  • Fiscal policy is at risk with Congress threatening to not fund the government’s fiscal year, which begins Oct 1.
  • Housing prices are stretched and possibly primed for a correction as interest rates begin to increase.
  • Maybe not today, but at some point down the road, government debt and deficits will become a problem.
  • Supply chain shortages continue to make it difficult to obtain building supplies and consumer goods.

Meanwhile the pandemic has also fueled a significant rise in productivity.

“There are fundamental things going on in the economy that argue for stronger productivity growth. Businesses are investing in labor-saving software, baby boomers are retiring, and the workforce is becoming younger,” Zandi said. “That’s a big deal for the economy. It goes to profits, wages, and our ability to address our fiscal policies.”

 

Source: GlobeSt.