Tag Archive for: state migration

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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

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Commercial Property Sales Up 183% Across South Florida

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Commercial property purchases have shown few signs of slowing down after a banner year, according to a recent report from JLL Capital Market’s Miami office.

South Florida commercial real estate transactions rose to $25 billion in 2021. That’s a 183% increase from the $8.8 billion in transactions across Miami-Dade, Broward, and Palm Beach counties recorded the year before.

The momentum has spilled over into this year. In the first three months of 2022, JLL recorded $6 billion in commercial real estate transactions completed across the tri-county area industry-wide, up 51% from the first quarter of 2021. (Data from the first quarter of 2022 is preliminary and subject to change, a JLL spokeswoman told the Business Journal.) This sharp rise in deal activity could be found across the industrial, multifamily, office and retail sectors.

Danny Finkle, senior managing director of JLL’s Miami office, credits the new wave of transactions to Florida’s “business-friendly environment and excellent quality of life.”

“Institutional investors have recognized this cultural shift and are tailoring their investment criteria to target markets like South Florida,” Finkle stated in a recent JLL release.

A significant portion of the property sales centered on multifamily housing. In 2021, there were $14.69 billion in real estate transactions involving residential rentals, an increase of 277% from the previous year. In the first quarter 2022, there have been $2.75 billion in trades involving South Florida apartment buildings, a 76% hike compared to the year-ago quarter.

In the office sector, there were $5.38 billion in trades in 2021, a 235% jump from the year prior. In the first quarter of this year, there have been $1.05 billion in office sales, a year-over-year increase of 10%.

Meanwhile, retail property transactions rose 136% in 2021 year over year to $3.88 billion in South Florida. Then another $1.28 billion of retail transactions took place in the first quarter of this year, a 186% hike compared to the year-ago quarter.

As for industrial, sales volume increased 63% from the previous year to $2.3 billion in 2021. In the first quarter of 2022, a total of $908.29 million in industrial transactions took place, a 76% leap from the year-ago quarter.

Companies and well-off individuals have been migrating to South Florida in greater numbers due to the region’s popularity, weather, and lack of income taxes, brokers and developers have told the Business Journal. It’sa trend that’s expected continue through the rest of 2022, making South Florida a prime spot for investment. Multifamily properties likely saw the biggest increases because rents are surging at a faster rate in the Miami area than almost any other metro in the U.S.

The migration has tipped e-commerce into overdrive, creating a shortage of warehouse and distribution space as companies seek to fulfill the orders of a humming economy amidst a continuing supply-chain crunch.

JLL stated that its Miami office handled 121% more investment sales, debt, and equity transactions in 2021 than the year before. To accommodate that growth, JLL promoted Cody Brais, Kenny Cutler and Max La Cava to director status.

Headquartered in Chicago, JLL has 3,000 capital market specialistsacross 50 nations. The data in JLL’s report was supplied from Real Capital Analytics, a New York-based real estate analysis company that has recorded $40 trillion in commercial real estate transactions since its founding in 2000.

 

Source: SFBJ

 

2022 Outlook: Fort Lauderdale A Strong “Magnet” For Businesses, Developers, According To Report

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It’s a good for a city to be called a “magnet,” so long as it’s attracting the right things.

In the case of Fort Lauderdale, business leaders just took heart after PwC, the national auditing and accounting firm, released an annual commercial real estate survey of 80 metro areas that for the first time ranks the city as a top “18-hour city.”

It’s a loosely defined term that refers to smaller cities with amenities, public services, and job opportunities that are comparable to those in larger places such as New York, Chicago and Los Angeles. But Fort Lauderdale is a place where it’s cheaper to live and do business, and where many entrepreneurs and investors find it easier to set up shop. Years ago, the city would button up and workers would go home at 5 p.m.

“Now you have more of an 18-hour city,” said Steve Hudson, president and CEO of Hudson Capital Group, a Fort Lauderdale-based real estate investment firm. “Young people are being attracted here — there are more jobs. People are catching on that this is very laid-back place to live that has a lot of benefits.”

Others cities the category include Charlotte, Denver, Minneapolis/St. Paul, Portland, Oregon, Salt Lake City and San Diego.

The PwC report also said Fort Lauderdale’s downtown is at the leading edge of the nation’s top 10 metropolitan areas that have workers returning to their offices from COVID -19. In addition, retail vacancy rates this year were 4.8%, the lowest in a decade and down from 8% in 2020.

All of it bodes well, according to real estate analysts and leaders of the Downtown Development Authority, for a local economy that is likely to continue a run to the upside in 2022.

The Migration Behind The Magnetism

Much of that optimism is based on a continued surge of population growth as thousands of people moved into South Florida from northern urban areas during the COVID-19 pandemic.

“You’re seeing a pretty strong migration of talent into this area, and the companies are paying attention,” said Ken Krasnow, vice chairman of Colliers Florida, the commercial real estate service firm.

Jenni Morejon, president and CEO of the DDA, said net migration into the city this year was 4,900 people, many of whom took up residence in new apartment towers that are sprouting in Flagler Village. Business leaders expect those numbers to grow in 2022 and 2023, and base their expectations in part on continued inquiries from out-of-town companies looking to expand.

“A rise in the number of downtown retail and restaurant operations is largely attributable to owners noticing a boost in the local population, and taking advantage of rents that are lower than elsewhere in South Florida,” Morejon said. “The downtown population has eclipsed 21,000. Many of the new restaurateurs that came to Fort Lauderdale have seen success in Miami and other places around the country and recognize rent is not as expensive as it is in Miami and West Palm beach. It’s really encouraging. New retailers are coming to downtown Fort Lauderdale. The movement has driven retail vacancy rates in the city’s core downward to 4.8% this year, which is lower than pre pandemic levels.”

Many of the newly arrived residents, Krasnow said, have the ability to work remotely from new homes in Fort Lauderdale while keeping their jobs in their original cities.

“People are free to effectively work or live wherever they want and increasingly they are choosing to live down there,” Krasnow said.

Aside from the well-documented flight from northern cities to the Sun Belt for tax and weather-related reasons, professionals in the legal, financial, technology and engineering fields are looking for more walkable neighborhood spaces and diversified cultural activities.

“The talent is choosing to live in places that have all of those dynamics,” Krasnow said. “We rate very well on all of those scales.”

Tim Petrillo, co-founder and CEO of The Restaurant People, operators of a dozen restaurants in the area, said the pandemic “put gas on the fire” of migration into the city, with many of the new residents being remote workers.

“I know we see all the time these people in the restaurants,” Petrillo said of the demographic. “Before, talent used to follow companies. Now we’re seeing companies following talent. Now companies are looking to establish a presence in our market. One challenge facing the city is that there has not been a lot of office space built in Fort Lauderdale. The 25-story The Main Las Olas which contains 1.4 million square feet of office, retail and residential space at 201 Las Olas, is the only new building with major office space to rise since the Bank of American tower a decade ago.”

Petrillo and Alan Hooper, through their Urban Street Development firm, are in a joint venture with Hines, the Houston-based office development giant, to add to the commercial mix with an expansive mixed-use project in the Flagler Village area, scene of multiple high-end apartment rentals towers.

A key proposed component is a Hines concept called Timber, Transit and Technology [T3], a seven-story structure aimed at attracting technology and financial service firms. The developers expect to complete the project in 2024.

Developers Jockey For Position

The influx of new residents and ensuing demand for places to live hasn’t been lost on developers, who seem to be working overtime at their drawing boards.

“We see that a lot,” said Stephen Chang, chief operating officer of Suffolk Construction of West Palm Beach, which is involved in a variety of commercial projects regionwide. “There is a definite boom going on right now for South Florida,” he said. “You have a lot of out-of-town developers very interested in South Florida because of the climate and its business acumen and how the government has kept the doors open. Financially it’s relatively cheap, when you compare to older cities like New York or Chicago.”

Areas Poised For Prominence

Fort Lauderdale has some areas that developers seem particularly keen on, based on their existing amenities, Brightline among them. For example, the Kushner Companies of New York and Aimco of Denver have proposed a joint venture to build a 540-foot mixed use project at 300 West Broward Boulevard, slightly to the west of Brightllne’s downtown train station. It would be comprised of two 38-floor towers atop a 10-floor podium, with 956 residential units and 23,752 square feet of ground level commercial space, according to the companies’ development application with the city.

The effort would result in the tallest structure in the city, reaching higher than the 499-foot 100 Las Olas building tower and serve, the developers say, as “an urban gateway to the heart of downtown Fort Lauderdale.”

The proposed building follows an earlier proposal Kushner submitted this year for four other high rises called “Broward Crossing,” also near the Brightline station.

Both companies declined to comment. But their application echoed what local analysts say about why developers want to build here: to leverage nearby existing civic and cultural amenities and build momentum toward more growth — and profits.

“The site is located at an important junction between major transportation hubs, civic and cultural institutions, and commercial attractions,” the application says.

It goes on to note the nearby Brightline and the Broward Central Bus Terminal, the civic and cultural landmarks including the future Joint Governmental Campus, the Museum of Discovery and Science, the Broward Center for the Performing Arts, and Esplanade Park.

“The proposed building is an opportunity to create not only an icon for the city, but also a new community space that contributes to the life of the neighborhood and enhances the pedestrian connections from around the city,” the application adds.

The companies also think the project would inspire further development westward along Broward Boulevard.

“The hope is to add new energy to the neighborhood, supporting the local economy and the lives of those throughout the local community,” the application says.

 

Source: SunSentinel

Changing Migration Patterns, New Consumer Preferences Are Driving The Self-Storage Rally

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The self storage sector is thriving thanks to changing migration patterns and evolving consumer behaviors that owe largely to the COVID-19 pandemic, pushing the niche asset class “from a laggard to a leader,” according to senior economist Thomas LaSalvia of Moody’s Analytics REIS.

The sector’s pre-COVID woes are well-documented: too much development, which began in earnest at the end of the Great Financial Crisis, pushed rents and occupancy rates down with a vengeance.  And while net absorption averaged 196,000 units per year from 2019 through 2019, “this wasn’t enough to balance the inventory gains that averaged 311,000 units per year during the same period,” LaSalvia writes: during that time, vacancy rates pushed up to 14.5% from 10.4%.  And since the asset class has a low barrier of entry for investors, he says, it tends to have higher peaks and lower valleys than other sectors.

“At the end of 2019, the market was in one of these valleys,” LaSalvia recently told Scotsman’s Guide.  “The COVID-19 crisis turned out to be the shot in the arm needed to jolt the sector out of its malaise. During the early stages of the pandemic, the self-storage market gained stability that it maintained throughout the course of 2020.”

Specifically, construction slowed down and netted only 40,000 units completed by the end of Q1 2021.  Meanwhile, net absorption grew to more than 100,000 units during the same period and vacancy plunged 90 basis points to 13.7%. Annualized rent growth grew to 2.9%.

Investors are increasingly seeing the self-storage sector as an opportunity to diversify, and overall self-storage sales tallied $7.7 billion last year, one-third higher than 2019 numbers. Single-asset sales rose 13% year-over-year to $3.5 billion, and the number of unique investors also rose to an all-time high by year’s end.

LaSalvia attributes the change in part to changing migration patterns, as well as negative economic pressures and changing consumer tastes.

“The pandemic has undoubtedly accelerated the acceptance of a remote-work lifestyle. This phenomenon has prompted migration, a well-cited and rational factor for self-storage use,” LaSalvia says. “Moving forward, self storage will continue to reap the benefits of migration and catch the tailwinds associated with a strong economic recovery. As people adjust to post-pandemic life, many will find new locations to better fit their new lifestyles.”

 

Source: GlobeSt.