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The industrial sector experienced a moment of worry several weeks ago amid the mounting economic and financial sector turmoil. That moment appears to have passed, based on Prologis’ Industrial Business Indicator, which moved back into expansionary territory in April with a score of 56.2, after falling to its lowest level in 30 months for March.

Prologis, too, apparently is feeling sanguine about the sector, tweaking its forecast to a 10% increase in rents for the year, given that there has been 275 million square feet of net absorption and deliveries of 445 million square feet to date.

Prologis’ research also reported that the utilization rate stabilized in the 85% to 86% range, which is considered good for logistics users. The rate averaged 85.6% in the first quarter of this year and was close but a slightly lower 84.9% for April, which translates to an absence of shadow space.

It also found that the true months of supply (TMS) number—the time it would take to absorb available supply at the current demand run rate–increased to 30 months, up five months from the fourth quarter. The markets and submarkets with the biggest construction pipelines should have the largest TMS increases and lead to variations in availability, as well as rent growth, depending on locations.

“Macroeconomic crosscurrents may lead to some delayed decision-making, which could push demand from 2023 into 2024,” Prologis concluded. “The U.S. vacancy rate should drift up to the low-/mid-4% range by year-end, well below the historic average.”

If supply drops off sharply in 2024, it may raise the potential for demand to outpace supply and pull the vacancy rate down to the mid-3% range by year-end 2024. Also affecting the longer-term prospects next year is a 40% drop in construction starts due to increased costs and a lack of financing. Prologis suggests customers may face a narrow window to act as projects get done this year but decrease next year, particularly in highly desired locations.

Some markets are also expected to experience more interim vacancies due to an abundance of speculative space under construction. Such possibilities include Dallas, Phoenix, Savannah and Austin. Beside such markets, vacancy rates may remain below 2019 levels, in part due to the existence of few unleased buildings available.

 

Source:  GlobeSt.

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The Live Local Act will significantly change how real estate is developed in Florida, Miami land use attorneys said at a recent webinar.

Held May 4, the webinar was hosted by Bilzin Sumberg partners Anthony De Yurre, Sara Barli Herald, and Carter McDowell. During the hour-long event, the attorneys urged developers to gather with their teams, consult with municipal planning staff, and take another look at their planned projects.

“This opens up a whole area of potential development that was not there before,” said Herald, who specializes in affordable housing and tax credits. “There are a lot of changes. This is probably the most significant land use change in decades.”

De Yurre, who specializes in zoning and complex land use, added “This is the Magna Carta.”

Also known as Senate Bill 102, the legislation was signed into law in late March, effective July 1. Among other things, the bill grants developers the ability to build the maximum amount of units a local jurisdiction allows – and at the maximum allowed height within a mile of a project’s site – on almost any property zoned commercial, industrial, or mixed-use. And that developer can obtain those rights without a public hearing.

The catch is that 40% of those units must be reserved for households earning up to 120% of a county’s area medium income (AMI) for the next 30 years. (A developer can seek the same rights with just 10% of the units reserved for affordable housing, but that will require approval from the jurisdiction’s elected body.)

In addition, SB 102 does not destroy other zoning rights reserved by states such as setbacks and parking requirements. However, the law states that cities and counties must consider reducing parking requirements for affordable projects built within a half-mile of a transit stop.

Besides zoning variances, the code grants developers property tax breaks if they constructed or substantially rehabbed a building in the past five years in which at least 71 units are affordable housing. If those units are reserved for people who earn between 80% to 120% AMI, the landowner is entitled to a tax reduction of 75% for those apartments. If the units are for households earning below 80%, a landlord can secure a 100% reduction on a property tax bill. The catch is rents must conform to HUD rent income restrictions or 90% of an area’s market rate, which ever is less, for the next three years.

 

Source: SFBJ

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As with so many areas of real estate, there was an operational and profit high during the last few years that was like an industry getting drunk and then waking up with a headache.

Looking back can create regret, but here are some things that MSCI in its Q1 2023 U.S. Industrial Capital Trends Report suggests are easy to underestimate.

1. Immediate Comparisons Are Unrealistic

Would you compare a little kid running around with a blanket tied around the shoulders like a cape to an actual superhero? Of course not. Nor would you reasonably undergo a once-in-a-blue-moon experience and then expect that should become an everyday event. That is the difficulty in looking at typical year-over-year business comparisons in industrial.

“Industrial deal volume hit a record high of $40.6b for any first quarter in 2022,” MSCI wrote. “The next-highest first quarter period was in 2020 when $34.4b traded. Any comparisons of the current quarter to these record high points for the market are going to look harsh. In truth, the market simply slipped back closer to a normal level at the start of 2023.”

According to MSCI’s analysis, average first quarter deal volume from 2005 to 2019 is $11.2 billion. This year’s Q1 transaction volume fits in with the past.

2. The Industry Was Already Gearing Up For Higher Rates

“It can be difficult to think in terms of anything aside from Covid given the collective trauma experienced, but back in the fall of 2019, investors began to adapt to a rising rate environment,” the analysis said, remembering that concerns about rates existed before the pandemic.

CRE professionals attending industry conferences at the time were concerned about the Federal Reserve tightening its balance sheet. But it had been more than a decade since the Global Financial Crisis. Realistically, how long would the Fed put off cleaning its inflated balance sheet?

“Investors wanted to focus more on asset types that had low capex relative to the NOI for a rising interest rate environment, and the industrial sector matched this need.”

3. Investors Were Under-Allocated

The MSCI report suggests that investors hadn’t allocated enough of their capital to the industrial sector. This was true for multifamily, as they reported in a separate publication.

“It is not yet clear that investors have the allocations that they desire as there are many moving parts in place. But with the RCA CPPI for industrial slowing to only a 3.3% gain from a year earlier and volume back to average levels, one might make that case.”

4. Cap Rates Are Up, But Not That Much

One of the stories floating around is the return of cap rates. They are up some, but that’s in comparison to the depths they visited in 2022. Cap rates are nowhere nearly as high as pre-pandemic levels.

“The RCA Hedonic Series cap rate reached5.5% in Q1 2023, up from a low of 5.2% seen in Q1 2022 before interest rates surged. Cap rates have increased only 30 bps in a time when the 10yr UST has increased 170 bps.”

 

Source: GlobeSt

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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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The rising cost of capital has stalled most commercial real estate development in 2023.

Unless projects were already underway or financing had been secured, there will be few projects started, according to John Chang, senior vice president of research services, Marcus & Millichap.

In the firm’s 2023 Construction Trends Report video, Chang said that otherwise, “builders are being pushed to the sideline.”

“The cost of capital is rising due to the Federal Reserve’s decisions to raise rates considerably, making it difficult to get a construction loan, and if you do, it’s rather expensive,” Chang said.

Loans are running 350 to 400 basis points over the Secured Overnight Financing Rate (SOFR) of 4.5%. Alternative debt financing is running between 8.75% and 10.5%.

Forecasting Growth for Key Asset Classes

Forecasting for what’s coming online in 2023, Chang said apartments are forecasted to complete 400,000 new units in 2023, growing the overall inventory by about 2.1%. Some 43% of that will be in just 10 metros.

Industrial will see 400 million square feet in 2023 for an inventory gain of 2.3%. Half of that construction will be in eight metros.

Marcus & Millichap expects 42 million square feet of retail to be completed, a “meager” half-percent of growth, Chang said, and two-thirds of that will be single tenant. Office will see 86 million square feet or growth of 1 percent and two-thirds of that will be situated in the suburbs.

Self storage should see 2.5% inventory growth – or 47 million square feet, which is well below the 73 million square feet completed in 2019. Self storage is a rare asset class where completions possibly will also grow in 2024.

“Demand drivers should begin to strengthen by early 2024 for most property types,” Chang said. “There has been relative relief in materials costs for lumber (currently 38% above pre-pandemic rates) and cement (28% above). Supply chain issues are now mostly under control.”

 

Source: GlobeSt.

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Over the last few years, Florida has benefitted from tremendous in-migration, which equates to approximately 1,000 people per day moving to the state.

The trend includes not only the movement of individuals, but also employers, capital sources and developers who are expanding into the Florida market. For the first time in 65 years, Florida leads the nation in population growth.

This recent growth has been a catalyst for development, particularly in South Florida, Orlando and Tampa, which are some of the most active development markets in the U.S. In the last few years, development was primarily limited to residential and industrial, but there is renewed interest in office, hotel and retail projects. New residential developments extend beyond traditional multi-housing to build-for-rent communities, senior housing, student housing, affordable housing and manufactured housing.

As a result of the robust development pipeline, developable land is in high demand and selling at record prices. JLL’s Capital Markets team has sold more than $6 billion in land sites over the past 25 years in South Florida, $1.6 billion of which was sold in the last three years alone, demonstrating the sharp uptick in demand. In addition, compared to the broader U.S. market, South Florida / Miami land sales totaled $3.2 billion in 2022, up 49% year-over-year, while the U.S. land sale volume equaled $28 billion, down 10% year-over-year.

Some of the record setting JLL sales include the $363 million sale of 1201 Brickell Bay Dr., which is slated for Citadel’s new headquarters and 700 North Miami Avenue, a 4.7-acre site that sold for $94 million.

“We’ve really seen an uptick in non-traditional real estate owners monetizing their land holdings as well – groups such as schools, religious institutions and non-profits,” said Maurice Habif, Managing Director, JLL Capital Markets. “They see the record setting prices others are getting for their properties and realize they can fund more of their goals and missions by monetizing their land holdings. It’s been really fulfilling working on behalf of the non-profit organizations, and we look forward to seeing this trend continue in the near term. Land is only becoming more and more coveted throughout Florida and that demand should continue for the foreseeable future.”

“Florida really is experiencing phenomenal growth on all fronts,” added Simon Banke, Senior Director, JLL Capital Markets. “With more than 1,000 new residents moving to Florida every day, the state currently leads the country in population growth. Now, for the first time in forty years, Florida boasts more jobs than New York. Investors are acutely aware of these trends and hyper focused on investing in our market. In addition to a wealth of developers and capital providers that are already active in the state, we are speaking with new investors that want to be in Florida on a daily basis.”

 

Source: MarketScreener

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With uncertainty and market readjustments being some clear watchwords for 2023, knowing how and where to pivot becomes both necessary and challenging.

A recent Hines report noted that investors, owners, and operators can’t completely rely on what happened in the past because every cycle has its own quirks.

“Recognizing what is different and what may at least rhyme with previous cycles can provide insight into how to navigate what is both challenging, as it relates to existing holdings, and opportunistic, as it relates to the potential to deploy capital in a more sober and attractive pricing environment,” the firm wrote. “All parts of the cycle require a bit of both defense and offense.”

Two factors at work are upward pricing pressure of financing (if it’s available at all) and the “shortage of broader seller capitulation thus far,” which GlobeSt.com has also described as a lack of current price discovery. Defensively preserving capital and looking for opportunities will vary by global geography.

In the US, “commodity Class A office appears fairly illiquid at the close of the year, but bidding pools remain healthy in the industrial and multifamily markets, albeit thinner than at the start of 2022.”

There are two broad signals that Hines suggest watching. First is changes in transaction volume.

“With a longer time series of transaction volume in the U.S. spanning multiple cycles, we can observe the historical relationship between volume and price growth,” they wrote. “Unfortunately, the relationship is concurrent rather than predictive but the stabilization of transaction volume and subsequent increase during past cycles has been a good sign that prices found a bottom and should begin to rise if volume continues to rebound.”

Which makes sense. Given what GlobeSt.com has heard from multiple sources, with a lot of capital waiting on the sidelines ready for deployment, there’s already anticipation that transaction volumes could start changing soon. But that will likely vary significantly by region, just as markets do. Rather than settling for an eye on national transaction volumes, a focus on regional ones is more likely to give an indication whether specific markets are likely to offer an opportunity.

The second signal: rising availability of traditional debt.

“In the third quarter, the Federal Reserve’s Loan Officer Survey (from which 2022 data is derived) showed that 50% of survey respondents reported tighter underwriting standards for commercial real estate loans, comprised of 57.6% for construction and land development loans, 52.9% for non-farm, non-residential loans, and 39.7% for multifamily properties,” they wrote. “All three categories recorded a significant increase from a year ago when banks reported they were loosening their standards in the second half of 2021.”

 

Source: GlobeSt

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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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Butters Construction & Development broke ground on a warehouse in Tamarac after securing a $26 million construction loan.

TD Bank provided the mortgage to Hiatus Industrial Venture LLC, a joint venture between Coconut Creek-based Butters and New York-based BlackRock. It covers the 12.55-acre site at 5601 N. Hiatus Road. The site is just off the Sawgrass Expressway near the Commercial Boulevard exit.

Butters Construction & Development will build a warehouse at 5601 N. Hiatus Road, Tamarac, for Sonny’s Enterprises. (RENDERING CREDIT: RLC ARCHITECTS)

Butters already announced a tenant for the 201,000-square-foot warehouse there. Sonny’s Enterprises, a manufacturer of car wash equipment, will occupy the entire space as its headquarters and distribution facility. The company currently has several locations in Tamarac.

The developer purchased the property for $16.23 million in 2021 and demolished an office building there.

 

Source: SFBJ

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Industrial has been on quite a tear over the past few years, as changes in consumer behavior have driven demand for more logistics and fulfillment facilities in key markets.

And according to one industry expert, the sector should stay a favored asset class for experienced investors, despite rising capital costs.

“Post-pandemic consumer behavior has changed and the rate of growth in ecommerce has slowed which has already led to pullbacks by some companies,” says Greg Burns, Managing Director at Stonebriar Commercial Finance, noting Amazon’s recent announcements regarding its industrial portfolio. “Demand for industrial though was driven by other factors as well including a move toward onshoring and the disruption of just in time supply chains.”

With that said, however, Burns said “depending on the what and the where, I would not be surprised to see cap rates widen another 50 to 100 basis points.”

“The cost of debt and equity capital have increased and cap rate hurdles have increased for institutional buyers,” Burns says, adding that he recently saw an increase of 100 basis points in an appraisal for a property in a market where his firm closed a deal six months ago.

Burns will discuss what’s happening in the capital markets in a session at next month’s GlobeSt Industrial conference in Scottsdale, Ariz. He says Stonebriar’s definition of industrial includes not just warehouse and distribution facilities, but manufacturing, life sciences, cold storage and data centers as well, and notes that “each of those sub-categories have their own dynamic and, broadly, all are growing.”

“We prefer properties with multi-modal access, especially those near ports, with most opportunities we’ve seen recently being to the southeast of a line drawn from Baltimore to Phoenix,” Burns says. “We also pay attention to outdoor storage capacity as that has become a greater consideration for tenants. There have been several announcements of new manufacturing sites relating to microchip and electric vehicles which should lead to demand for new logistics properties nearby.”

As the costs of debt capital rise, Burns says Stonebriar’s underwriting will continue to focus on the sponsor, asset and market and “that won’t change.”

“We do few spec development deals and will likely be more granular on understanding the demand/supply side of a respective market,” Burns says.

Ultimately, a recession seems likely and Burns says the changing economic landscape will have “varying impacts” on investors and individual markets alike.

“From our perspective, there will be a premium on a sponsor’s experience and capacity,” Burns says. “I anticipate industrial will remain a favored asset class for investors although those with less experience in the sector could pull back until the economy recovers.”

 

Source: GlobeSt.

 

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Core CPI inflation and headline CPI both decelerated last month, in a trend experts say could portend more disinflation factors in the near term.

Analysts from Marcus & Millichap note in a new analysis that the prices for some commodities also fell in October, including apparel and used motor vehicles, and the fees certain medical services.

“And these may be early signs that less disrupted supply chains are alleviating some of the structural drivers of inflation,” Marcus & Millichap say.

Headline CPI increased 7.7 percent over the 12 months ending in October, the smallest year-over-year increase since January of this year. While the deceleration is notable, Marcus & Millichap experts say the downshift is unlikely to be enough to fend off another hike in the overnight lending rate in December.

“The Federal Open Market Committee noted in its most recent forward guidance that it is looking for a clear trend of inflation normalizing toward the 2 percent target,” Marcus & Millichap say. “Even so, the FOMC has also acknowledged that there is a delay between when monetary policies are put in place and when the economy responds, and last month’s slower price climb, paired with an uptick in unemployment, support a more moderate rate hike. The current expectation is for a 50-basis-point December rise in the fed funds measure, capping the fastest year of increases since the early 1980s.”

But October’s inflation news offers a “mixed outlook” for retail CRE: while rent growth has improved and vacancy has tightened over the last year, prices continue to keep pace at restaurants and grocers. Gas prices also ticked up in October after three months of decreases, and higher energy bills are predicted to constrain consumer spending entering the holiday shopping season.

High housing costs are good news for the multifamily sector, where rents continue to rise at a rate that’s half the typical house payment. Over half of last month’s CPI increase was driven by higher housing costs, Marcus & Millichap says.

“In recognition of these housing needs, multifamily construction activity is set to hit a record magnitude next year,” Marcus & Millichap say. “While the new supply is warranted in the long-run, in the short term it will drag on fundamentals, especially as high inflation and rising interest rates weigh on economic outlooks and prompt more households to stay put in 2023.”

Lenders are also pumping the brakes as the cost of debt continues to increase. CBRE’s Lending Momentum Index fell by 11.1% quarter-over-quarter and 4.7% year-over-year in Q3, while spreads widened on 55%-to-65%-loan-to-value (LTV) fixed-rate permanent loans running from seven to 10 years in length. Marcus & Millichap has noted that pricing is recalibrating across most property types as the expectation gap between buyers and sellers widen and lending criteria have tightened.

“But once interest rates stabilize, however, investors and lenders will be better able to determine valuations and move forward on trades,” the firm says. “In the interim, the dynamic environment fostered by the Fed could lead to unique options for buyers, who may face less competition now than when rates plateau.”

 

Source: GlobeSt.

 

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Pesky, lingering inflation that is higher than we’ve seen in years, along with six interest rate hikes totaling 375 basis points since the beginning of the year have had varying degrees of impact on all sectors in commercial real estate.

The speculation of further hikes later this year and in early 2023 doesn’t help.

Industrial real estate remains one of the darling sectors, though it is being tested by current economic conditions.

Four industrial real estate professionals, including owners, investors and brokers, three of them based in Chicago and one based in Houston, participated in a roundtable discussion, giving their perspectives on inflation, interest rates and industrial real estate. The participants: Alfredo Gutierrez, Founder, SparrowHawk; Rick Nevarez, Director of Acquisitions, Clear Height Properties; Kelly Disser, Executive Vice President, NAI Hiffman; and Hugh Williams, Principal and Managing Broker, MK Asset Brokerage.

What are the implications of the five 2022 rate hikes on transaction/acquisition activity?

Alfredo Gutierrez: It’s a challenging time as there are more investors stepping to the sideline. This means that if you are selling an asset today you might get three or four offers versus a dozen one year ago. On the  buy side, if investors have cash or lines of credit tied to a low rate, they are utilizing their resources. The fundamentals on the income side of the equation, because of rent growth, are still strong—that’s factual. Some are putting down their pencils because they are concerned about the potential for a recession and whether we’ll see the same levels of rent growth.

In reality, cap rates are a function of how much capital there is to invest into something. The question is how much dry powder remains on the sideline. We’re seeing an erosion of capital on the retail side and people starting to get squeezed. However, banks, life companies and institutions still have capital to place, and I believe it will flow into industrial.

Rick Nevarez: Activity has slowed, but it hasn’t come to a grinding halt. Overall, we continue to see deal activity and are expecting a big fourth quarter. It’s like airplane turbulence:  some respond with white-knuckle gripping of the arm rest while others acknowledge it’s taking place and go about their business. It’s really a matter of understanding the fundamentals of the real estate and how the current economic environment impacts those fundamentals.

Kelly Disser: It’s an interesting time with different groups being impacted in different ways. Owner occupants, private investors, institutional investors—all have acted or reacted differently. The demand for industrial space and leasing absorption today is still very strong. Inventory/vacancy is at an all-time low. As a result we’re seeing rent growth like we haven’t seen before. In certain underwriting acquisitions, we are seeing the impact of interest rates on values somewhat mitigated by rent growth and rents trending even higher than what we see today. The equation is evolving.  The development and investment sales markets have reacted and adjusted. Those with large funds have the ability to remain active and aggressive—and they are distinguishing themselves. Investors/developers who are sourcing capital on a deal by deal basis may be having issues in the current environment.

Hugh Williams: There was a point this summer when large institutional investors essentially said, “pencils down on all deals,” unless it was a perfectly placed asset/tenant combination in the middle of the fairway. Investors and developers are proceeding with haunting caution because at some point the math does not work.  You cannot acquire an asset when you underwrite debt costs that are greater than your projected return. That is problematic.

But we need to remember we’ve been in a low-rate environment for a long time, an environment that couldn’t last forever; and there are geopolitical events taking place that are also important considerations.  I have heard people say they are pulling back but some of them aren’t sure why. Overall, leasing activity is quite strong, and things are still moving forward particularly in select markets and micro-markets.

How are the rate hikes changing the flow of acquisitions and dispositions, if at all? And are they impacting different size buildings differently?

Nevarez: Interest rate hikes have pushed some buyers and sellers to the sidelines. But we are still buyers, looking at a variety of opportunities including value-add acquisitions. Sometimes you have to tweak underwriting to have a deal pencil out and make sense. Now more than ever, you need to understand ALL elements of the transaction, and what is motivating buyers and sellers.

Gutierrez: The effect based on size is really a case by case situation. But in general, if you had two assets where essential building characteristics except for size were essentially the same, the smaller asset would feel the pinch more. While smaller buildings are more likely to have shorter term leases, it will depend on the tenant roster and the lease terms. At the same time, because the rent roll may turnover more quickly, smaller buildings may be able to adjust pricing more quickly, too.

Disser: Interest rate hikes are impacting the flow of acquisitions and dispositions. The  pace has slowed in the second half of 2022 from what we saw the prior 18 months. But it is all relative, the first 18 months coming out of covid we saw activity levels, values and rents not seen before—in Chicago and across the country. An adjustment was needed.  There was simply too much money chasing too few assets:  the definition of inflation. Impact varies from case-to-case, according to location, submarket, or quality of asset.

Williams: My hypothesis is that if you go to a smaller, non-institutional building, it’s generally a different type of buyer, with a different mentality. For example, an operator like Blackstone is taking the long view. They are likely focused on main and main locations. When they go to build, they are focused on operating their platform as a business, not necessarily the conditions of the moment or focused on a near to short term exit. Smaller owners may be at greater risk—real and emotional—based on being prisoners of the moment (as we all are).  The short stroke is big boats are better ballasted against storms. Small boats get tossed about.

In other asset classes—like office and multifamily—some say that activity has slowed as the market looks for a re-set. To what degree is that occurring in the industrial sector, and are there other considerations (i.e., size, etc.)?

Nevarez: It’s really hard to say that any asset class is recession-proof, but industrial certainly is close. If the market was overbuilt, the impact might be different. There may be a scaling back and slight reset of pricing, but it’s not the same as other sectors because demand has been so strong. Our portfolio, for example, is 96% leased due to lack of product in the markets we own and operate in.

Gutierrez: A lot of people have put pens down, so to speak. Unless you need to place capital, you won’t. With some of the overall questions that exist, and fewer offers to consider, there isn’t necessarily a lot of pricing clarity. As 2022 wraps up our volumes will be down, particularly for the second half of the year.

Disser: It is always dangerous to generalize. The idea of a price reset isn’t absolute in industrial, as it may be in other sectors. In the industrial sector I think value equations are evolving, given rent growth. We see absorption, leasing and rental rates continuing to increase. The user/occupier clients of mine generally are operating businesses that are still strong and eyeing expansion.  In addition to scrutinizing interest rates, many are watching how lenders behave—as many have slowed loan origination activity. For some groups, the ability to secure the capital for a project in some cases is as much of a question as the cost of the capital.  If you lose your equity partner or can’t get a loan—you’re out.

Williams: There is a group that has been waiting 5-6, 10 years for a reset! The sky is continually falling.  Say it long enough and eventually you will be right. Pricing may fluctuate from its peak, but I don’t anticipate an incredible swing. The reality is that developers are much more rational today and have been that way for the last decade. What is going on in the interest rate environment forces additional austerity measures onto industrial developers.

All of the various elements at play lead me to believe that the sky will not fall, maybe a little rain, but rainwater is one of the keys to life—ask California.

How are higher interest rates impacting user sales/acquisitions? Are the higher rates making them any more or less likely to look at renting versus owning?

Nevarez: Higher Interest rates make it harder for users to come up with the capital to purchase an asset. Most users would rather place their capital in their actual business operations (machinery, employees, etc.).  Current owners may also look at their overall business plan to determine where they may need additional capital and find creative ways on how to get that capital. They look at their actual real estate as an opportunity to raise capital—through a sale leaseback—and to Clear Height (landlords) as a way to get that capital, creating a win-win situation for both parties.

Gutierrez: One of the factors that pushes users to consider an acquisition is the upward trajectory of rental rates. They figure they might as well buy. But in the current interest rate environment, the cost of ownership—if there was an inventory of buildings for users to buy—is up as well.

While there are concerns across the industry about interest rates, inflation and their overall impact, Alfredo Gutierrez suggests that the potential for stagflation would be worse. “If the Fed is going to push us into a recession, put us there and make it short-lived.”

Disser: Everything is getting more expensive across the board; that is why inflation is so crucial at this point in time. I don’t believe the increases in interest rates have impacted user sales whatsoever.  The most limiting factor is just availability of space or available options that could be purchased.  There is virtually no inventory. I have clients who want to sell their buildings—they need more space—but have no where to go; because there is nothing larger for them to buy.   Clearly the higher cost of funds results in larger interest payments, but the demand and growth seems to be greatly outweighing borrowing costs.

Williams: Not everyone needs to own a home, not everyone needs to own industrial real estate. Unless there is a specialized need, most operators should probably focus on their business and not try to get into the real estate game. The other consideration is that because of the overall tightness of the market, it’s hard to make a move—hard to buy a building. For many owner-users real estate is as emotional as it is practical.  Those that really want to buy will find a way but my supposition is that things slow on the user front because higher interest rates also affects the entire supply chain of activities within a warehouse as much as the cost of acquiring that warehouse.

 

Source: REjournals