Population growth, new jobs and a tight residential market are fueling Florida’s commercial sectors, and that isn’t expected to change anytime soon. That’s how economist Sean Snaith summarized the current market as he kicked off the 2018 CCIM Commercial Outlook conference.
One other major factor has contributed to the rising fortunes, he told the crowd at the Coral Gables Country Club on Wednesday.
“Deregulation is the secret sauce to this [positive] economic outlook,” Snaith said.
That last point could be directly attributed to President Trump, who despite other factors, industry experts say, has been and will likely continue to be good for commercial real estate. During Trump’s first year in office, there have been 22 deregulatory actions for every regulatory action taken. The country is in its ninth year of economic recovery, and the new GOP-led tax law, which slashes the corporate tax rate, will bolster the industry, Snaith said.
But Tere Blanca, founder and CEO of Blanca Commercial Real Estate, said two issues on the president’s agenda could negatively affect the market: foreign policy and sea level rise. Miami is a safe haven for investors from Latin America, especially Mexico and Brazil, and Trump’s foreign policy pronouncements and plans could hurt that kind of investment, experts said.
“We need to address sea level rise,” Blanca said, referring to the effect it’s already having on the insurance industry in Miami and around the country. “It will impact commercial real estate over the next 20 years if we just sit back and let it be.”
A rundown of the major takeaways from the conference follows:
Blanca said South Florida’s growing population and worsening traffic has boosted Coral Gables, Doral, Aventura and Coconut Grove’s office markets. The reason, she said, is because tenants are choosing to live and work in walkable neighborhoods to avoid the congestion. Rental rates are also on the rise, and the spread between the region’s urban cores and suburban markets has grown to a difference of about $20 per square foot.
Blanca expects rents to continue rising at a slower pace than before. She cited the positive impact of Brightline, which will connect West Palm Beach, Fort Lauderdale and downtown Miami when it’s completed later this year, and new tenants like WeWork, which has leased 250,000 square feet in Miami over the last two years.
Peter Mekras, managing director of Aztec Group, asked the crowd if they thought the multifamiy market was about to bust – few raised their hands.
“Just because someone announced a project does not mean it’s going to get built,” he said. “We’re going to have an absorption challenge but we are not going to create a collapse.”
Rent growth is tapering in South Florida, although workforce units are outperforming the rest.
Investors are buying apartment buildings across all asset classes, but the core plus and value add space is the most crowded. “If you’re going nonrefundable at contract, you’re not buying,” Mekras said. And “if you’re not delivering interest-only financing, you’re probably going to lose the deal.”
The number of institutional investors choosing to buy multifamily properties in South Florida is also growing. At the end of last year, AvalonBay Communities made its first investment in Florida with a $138 million purchase of 850 Boca, a 370-unit development at the Park at Broken Sound in Boca Raton. The Arlington, Virginia-based real estate investment trust paid more than $370,000 per apartment.
Blackstone has also become increasingly active, buying Class A, B and C properties, which “speaks volumes to the demand in South Florida,” Mekras said.
As of the third quarter of 2017, transactional volumes were down 7 percent year over year, said Danny Finkle of HFF. While sales were down in 217, debt deals increased roughly 15 percent.
Now that it’s late in the cycle, the pace of fundraising has slowed. Finkle expects more mergers and acquisitions of real estate investment trusts. He also said development will remain difficult to capitalize.
Foreign investment has also slowed. In 2015, foreign capital invested in the country’s capital markets totaled $96 billion. A year later, it was $67 billion, a decline of about 30 percent.
CBRE’s South Florida managing director Arden Karson took the stage to dispel any notion that e-commerce was hurting retail and instead focused on the need for brick and mortar stores to adapt.
Consumers are spending less on clothing, books and hobbies, and at department stores. And they’re spending more on food and beverage, home goods and health and beauty. Despite its massive rise, e-commerce still represented just 9 percent of total retail sales in 2017. But it is expected to continue to climb, and should take about 14 percent of sales by 2021, according to data from CBRE.
South Florida’s industrial market has been on fire, thanks in part to e-commerce.
Top deals include the $40 million sale of PepsiCo’s regional headquarters and distribution center in Doral, said Mike Silver of CBRE. Terra and Terranova picked up the industrial property and will likely redevelop it into a mixed-use project. He also mentioned plans to convert the former Calder Race Course practice track into an 850,000-square-foot industrial park in Miami Gardens. EastGroup properties paid $26.5 million for the 61-acre site in 2016 and unveiled plans for the property last year.
One challenge the region is facing is a shrinking land supply. South Florida has 386 million square feet of industrial space and 56.6 million square feet of developable space remaining, data from the brokerage shows. Over the next five years, projected demand will call for about 40 million square feet.
Wynwood’s transformation into a restaurant and retail haven has also pushed industrial tenants out of that submarket, Silver said, something that could happen with other neighborhoods.