In this article, we have the privilege of interviewing top academics in real estate from the Hollo School of Real Estate at Florida International University.
Our conversation explores the many layers of the real estate domain, examining everything from the shifting market forces and the promise of eco-friendly advancements to the transformative impact of digital technology on property dealings and the complex world of international real estate investment.
William G. Hardin
With differing opinions on future interest rate trends, some predicting a decrease while others argue current rates are here to stay, what is your perspective on this matter and the reasoning behind it?
If one could easily and accurately predict future interest rates, one would not be reading this, but would instead be living a life of wealth and luxury. Nonetheless, analysis and commentary are possible. We are likely at the higher end of the general interest rate range and will likely be at this point through the first and second quarters of 2024. In short, no substantive reduction in rates in the near term. Employment strength, consumer spending, boosted by much lower long-term residential mortgage rates locked in during the period when real interest rates were historically low, and limited increases in working age population will keep the economy resilient. In the long term, rates will likely drift lower as interest rate risk related to unexpected inflation is reduced.
One must remember that we are coming out of a period where most all rates were too low, especially those tied to short-term monetary policy. For commercial real estate, as lower fixed rate debt matures, more capital will be required even if the underlying properties are meeting expectations. The market’s attention will be directed towards determining when, how, and if property owners can obtain enough equity to manage their maturing debt. Owners will need to consider options such as rolling over, extending, or replacing their existing debt as it reaches maturity.
How are geopolitics and national trends influencing the domestic real estate landscape?
It has been stated that simple demographics account for most economic and commercial real estate performance. In essence, people have core requirements for housing and other necessities that drive the need for space: the built environment. Consequently, global and national trends that flow to the local level are impactful. Work from home (WFH) and e-commerce trends are related. It is likely that WFH will continue to impact office demand which will have an indirect impact on the service real estate associated with the office ecosystem. It is not hard to understand that if people are only in the office 4 days per week instead of 5, then there will be less economic activity associated with the office ecosystem. The end result is a localized demographic trend with fewer people in the ecosystem at any one point than in the past. Concurrently, with more WFH, e-commerce activities and neighborhood activities will increase impacting when and where people (demographics again) engage.
Within a global context and noting that many of the most affluent in the world can work or control assets from afar, we continue to see a flight to markets with stability and the rule of law. Both of these factors are associated with reductions in risk. The movement of people and their related consumption and wealth to a subset of cities like Singapore and Miami (globally) and Nashville (nationally) will benefit these cities and regions even as other regions are negatively affected. In some sense, the local effects will be more profound given the greater ability of the most affluent to have choice in location. There is also within region or city movement. With a need for fewer in-office days, living choices will change as commuting costs have less of an impact. We may see a re-prioritization of urban, suburban, and exurban residential choices.
Clay Dickinson
How might commercial real estate, specifically office spaces, be affected by both higher interest rates and uncertain rental income?
2023 was a tough year for the commercial real estate industry, particularly for the office sector. Unfortunately, 2024 is not looking much brighter. Not all locations and office property types are benefiting from the demand that there has been, nor will future demand growth likely to be evenly distributed. Sustainably conceived Class A office buildings that provide for a high-quality experience, offer first class amenities, and a judicious blend of highly private spaces juxtaposed against flexible public spaces, seem to fare the best. A location in a vibrant, safe, and predominantly sunbelt city like Miami, Nashville, Austin, Phoenix, or West Palm Beach appear to contribute to superior market performance. In fact, one sees substantial new office spaces being added to some of these markets. The future of Class B and C buildings is less certain, whether they be situated in a crime-ridden central business district (CBD) or in the middle of suburban parking deserts, these structures offer very little in the way of adaptive reuse.
In summary, not all office buildings or markets will be affected in the same way. Higher-quality prospects will be successfully resolved, while the resolution of other less advantaged properties might not be as smooth or ‘elegant.’
Our real estate markets have faced troubled times in the past and will invariably do so again in the future. Such is the beauty of the creative destruction associated with free market capitalism: the office sector will work though its difficulties and come out on the other side stronger than before. In fact, that process may well be underway now.
Walter D’Lima
What do you see as the most significant opportunities and challenges for the real estate industry in the coming years?
Climate change may be an important factor for the real estate industry in the coming years. It will present challenges if the built space gets significantly affected by events such as sea level rise, changes in extreme weather occurrences, etc. Such climate change related events may serve as a dis-amenity in residential and commercial real estate markets. The demand for space in affected areas may be significantly altered by the incidence rate. Rents and acquisition bids that factor in the overall set of amenities, supply and demand may be lower. This may affect homeowners as well as institutional investors that have real estate in their portfolios.
However, climate change also presents opportunities to market participants that account for related factors earlier than others. Market participants may adjust their portfolios and bidding strategies to account for climate change and the perceived risk. In the absence of an adequate discount that factors in risk during acquisition, buyers may be exposed to the possibility of a lower return. Market participants have an opportunity to learn from academic and industry-based research that relates to climate change and real estate markets. Investors that adapt early may mitigate their exposure to properties that are expected to be affected by climate change.
Eli Beracha
What specific factors differentiate the South Florida real estate market from other regions, and how do these unique characteristics influence investment strategies and development opportunities in the area?
The main factor that differentiates South Florida from other regions in the US is the rapid population and economic growth that the region experienced in the past, which is likely to continue. In recent years, Miami (and southeast Florida, in general) has become a choice for individuals and businesses. This implies that Miami is now a true gateway city that is attractive for many other reasons aside from tourism. Clearly, with growth come real estate opportunities and challenges. At the core, developers are now navigating the market to provide housing for different wealth and income levels. Beyond housing, more retail, office and industrial space are also needed to support the growing number of households. Because land prices and construction costs have increased significantly in recent years, the obvious struggle for developers is to provide affordable housing, but recent incentives at the city and county level are helping to bridge the gap. Moving forward, south Florida will face significant challenges with respect to its infrastructure and public transportations that must be improved in a meaningful way to support its growth. Finally, the state will need to provide additional support and regulation to reduce property insurance costs and increase its availability.
About the Master of Science in International Real Estate (MSIRE) program
Florida International University (FIU) is the 4th largest public university in the U.S. and is ranked #1 globally for Real Estate Research Productivity by the Journal of Real Estate Literature.
The MSIRE program provides students with the option to earn their master’s in 10 months, fully online or in person at FIU Downtown Brickell – the heart of Miami’s financial district. Known for being the home of one of the top business schools in the nation, FIU now has the largest real estate program in Florida.
Its curriculum covers all aspects of real estate with a focus on high-level investment real estate transactions. To learn more about this program visit the Master of Science in International Real Estate program page at FIU Chapman Graduate School of Business.
Watch MSIRE program overview: