They agreed that South Florida — where the industry is among the region’s largest economic engines — stands to benefit from the trend.
The fifth annual Market Review, held Dec. 13 at Jungle Island in Miami, provided attendees with an update on the state of South Florida’s key real commercial estate markets, specifically retail, industrial, office and residential. Berkowitz Pollack Brant Advisors and Accountants, Stiles Corp. and Cambria sponsored the conversation.
Six major players in the local market shared cautious – yet optimistic –outlooks for 2019. They remain bullish about the tri-county region’s opportunities in the sector, while recognizing warning signs of a slowdown in the broader U.S. economy.
Panelists on hand were Tere Blanca, CEO of Blanca Commercial Real Estate; Michael Comras, president of The Comras Co.; John Ebenger, director of real estate and tax services for Berkowitz Pollack Brant Advisors and Accountants; Rocco Ferrera, chief investment officer of Stiles Corp.; David Martin, president and CEO of Terra; and Brian Smith, managing director at JLL.
Here were their biggest takeaways on the region’s real estate market in 2018, and their predictions for next year:
Long-term plays are key
Panelists gathered ahead of a rise in the interest rate for the fourth time in 2018 — a move that economists say could slow down deals nationwide as the cost of borrowing money grows.
But the panelists weren’t shaken.
That’s because the interest rate is historically low, at nearly half of what it was prior to the Great Recession. The unemployment rate is also reaching all-time lows. And no matter what direction the stock market moves in, South Florida’s population continues to rise steadily and rapidly.
FOOD & LIFESTYLE
The new residents are fueling demand for shopping destinations that are closer to where they live. Developers are responding with plans for major retail-focused projects across the region, even as many shopping malls across the country struggle with the rise of e-commerce.
The region also remains among the top for small businesses, which employ a majority of the local population, with South Florida often earning national recognition for its business-friendly environment. Economic indicators say local companies are expected to raise wages as the labor market tightens.
Experts on the panel said those factors make for a strong commercial real estate sector in South Florida for years to come.
“Yes, the stock market is volatile and interest rates are uncertain, but our economy is strong,” Ferrera said. “That makes us bullish.”
Despite its revving economy, South Florida isn’t without its own red flags. The strong dollar continues to thin out the region’s pool of foreign buyers, which is contributing to slowed residential sales. Another potential roadblock to growth is the scarcity of land available for new development, and zoning laws can pose a real challenge.
“Everyone’s very confident that we’re not going into any kind of deep recession next year, but everyone is concerned that it will come and they can’t pinpoint exactly when,” Blanca said. “But we’re seeing a continued solid performance across the region, and it seems we’re going to grow at a decent, modest pace.”
Some panelists said they are shifting their assets toward more long-term plays to weather the economic slowdown expected to come.
“People are looking for stability with the equity markets so volatile,” Martin said. “We can’t continue to think year-over-year …. Next year is going to be challenging, but we have a good long-term perspective.”
Rising retail transforms South Florida neighborhoods
Prominent developers want to shape South Florida’s neighborhoods into places where residents can spend more money at their projects, rather than spend more time in their cars.
Plans for new neighborhood-centric projects with a combination of residential, office, retail and restaurant components are cropping up in emerging neighborhoods between established districts, creating new destinations. Opportunities are arising from those connections that didn’t exist just a few years ago, Terra’s Martin said.
“All these areas are much more dense, and densification is making them much more walkable,” Comras said. “This is what Miami is becoming; like New York City, there’s no longer just one area that’s hot.”
And in areas that are already home to dense populations, developers are paying premiums to revamp and repurpose existing properties to fit that vision.
“The Grove continues to be the shining star in our eyes,” Comras said of Miami’s Coconut Grove.
His company is behind the redevelopment of CocoWalk along with local partner Grass River Property and Rockville, Maryland-based Federal Realty Investment Trust (NYSE: FRT). They expect to complete construction in the fourth quarter of 2019, with redesigned space for retailers and a new office component. The project will bring the first new office product in two decades to the area.
The partnership is also behind the redevelopment of the Shops at Sunset Place, part of which will be demolished for apartments and a hotel to complement the retail.
“What we’re doing is taking what was once known as a weekend destination and making it part of everyone’s daily lifestyle,” Comras said.
Retail vacancies are down across most of South Florida. Even failing shopping centers are seen as an opportunity for investors to purchase at lower prices, according to Colliers’ third quarter South Florida Retail Market Report.
When it comes to big-box retailers that have announced closures nationwide, landlords aren’t having trouble filling the spaces. They simply sought out new tenants after Macy’s, JCPenney, Winn-Dixie and Toys R Us downsized.
“There are no big boxes sitting unaddressed,” Comras said. “These spots get repurposed almost as quickly as they become available.”
The tax benefit to acquiring such investments for redevelopment is also appealing, said Ebenger, of Berkowitz Pollack Brant Advisors and Accountants.
“They’re buying an existing property and repurposing it to take advantage of accelerated depreciation to get the dollars they’re looking for,” he said.
E-commerce, the culprit behind the legacy brands’ shrinking sales, is only expected to grow its share of total U.S. retail sales, panelists said. But brick-and-mortar stores, where the lion’s share of the nation’s retail sales still happen, are here to stay.
“We have space left for development, but with the e-commerce surge that’s happening, it could be significantly less,” said JLL’s Smith, whose company was brought on to dispose of Sears’ assets after more than 100 stores were marked for closure. “People will have to get creative by grabbing some older product.”
With the evolution of e-commerce, he predicts that retail landlords will pivot in the future to integrate more industrial tenants — a sector that’s still underserved in the local commercial real estate market, Smith said.
Demand for industrial nears record highs
South Florida’s industrial real estate market has showed no signs of slowing down.
In Miami-Dade County, rents are rising for industrial spaces as absorption of available square footage nears record highs. Its neighbor to the north, Broward County, has such a scarcity of available industrial spaces remaining that a development boom was sparked. Palm Beach County remains of interest as major industrial tenants sign leases, according to JLL’s third quarter Industrial Observations report.
The rise of e-commerce is part of what’s driving that industrial boom locally. Additionally, the tri-county area’s trade and logistics sectors are thriving, with three major airports and seaports less than 100 miles apart, and many more throughways for trade in between.
“I am very bullish on industrial,” Martin said. “How retail and industrial merge into one, that’s the question – and maybe the answer – of what’s going to happen here.”
Office spaces get upgrades
Rents continue to rise for office space across the tri-county area, but prices are likely nearing their peak, according to a third quarter report from JLL. Vacancies remain in the double digits.
Demand is cooling in Miami, according to the report, which offered a positive outlook for the over 300,000 square feet of office space being delivered in the third quarter, and an additional 750,000 square feet under construction.
In Fort Lauderdale, negative absorption is not “ringing alarm bells in the market,” JLL’s latest report says. However, tenants have given back about 275,000 square feet as they downsized or relocated to less-expensive spaces.
For the West Palm Beach market, negative absorption was at its highest since 2008, but lack of development for new office product keeps rents growing.
The value proposition may be in renovating older office buildings or constructing new product outside of South Florida’s busiest cities.
“You’ll find office development today in the niche markets because traffic is killing us,” Blanca said. “Not everyone can get to the high-density places like downtown.”
Blanca’s firm was recently behind the renovation of Courthouse Tower, at 44 W. Flagler St. in Miami, which upgraded its elevator, lobby, restrooms and common areas.
“Capture value by investing in assets that deserve repurposing,” she said. “At that project, we were signing leases for $18 to $20 [a square foot] gross. Today, we’re signing leases at $34.”
Developers are facing the challenges of negative absorption and rising vacancy rates as they start construction on new office products.
Stiles and Shorestein Properties are behind the Main Las Olas Project, which recently received a $211.9 million construction loan. The large mortgage serves as a significant vote of confidence in the office market in downtown Fort Lauderdale, as it will be the first new major office building there in a decade.
However, preleasing has been tough, Stiles’ Ferrera said.
“Getting a tenant to commit at a very high rent is very difficult to do,” he said. “There has to be a compelling reason for an office tenant to commit in advance.”
Main Las Olas will also have ground-floor retail, restaurants and hundreds of apartments.
Residential in flux
Empty-nesters who are leaving single-family homes to move into condos are creating significant demand, Terra’s Martin said. The increasing demand he sees coincided with strong condo sales in November, according to Florida Realtors’ latest data.
While it can be argued that there is an oversupply of condos in the Miami-Dade market, it appears sellers softened their pricing in order to execute deals. In fact, the majority of new condos in greater Miami traded at a loss to their original developer sales, according to a study by CondoBlackbook.com, part of HB Roswell Realty. And there is a lot of inventory to choose from, making it a buyers’ market.
It’s a different story in the Broward and Palm Beach markets, which recorded rising median sales prices due to a smaller inventory for buyers.
As developers contend with the supply of condos, demand for single-family homes remains healthy.
However, other Florida markets – including Orlando, Tampa and Jacksonville – consistently outpace South Florida in sales growth.
“We’re seeing a single-family rental product existing strongly,” Martin said.
A weaker dollar could boost residential sales once again.
“For the last two and half years, we’ve seen a residential slowdown on the sales side,” Martin said. “I see a scarcity of development land to provide new housing. Now we’re seeing pressures on the interest rate.
“I’m optimistic about the future of our city, but the question becomes: What happens next year?”
MEET THE PANEL
Market Review 122818 – Meet the Panel
Tere Blanca of Blanca Commercial Real Estate.
Tere Blanca
CEO, Blanca Commercial Real Estate
1450 Brickell Ave., Suite 2060, Miami 33131
305-577-8851
tere.blanca@blancacre.com
Michael Comras
President, The Comras Co.
1261 20th St., Miami Beach 33139
305-532-0433
michael@comrascompany.com
John Ebenger
Director of Real Estate and Tax Services, Berkowitz Pollack Brant Advisors and Accountants
515 E. Las Olas Blvd., Fort Lauderdale 33301
561-361-2010
jebenger@bpbcpa.com
Rocco Ferrera
Chief investment officer, Stiles Corp.
301 E. Las Olas Blvd., Fort Lauderdale 33301
954-627-9300
rocco.ferrera@stiles.com
David Martin
President and CEO, Terra
2665 S. Bayshore Drive, Suite 1020, Miami 33133
305-416-4556
david@terragroup.com
Brian Smith
Managing director/South Florida industrial lead, JLL
200 S. Biscayne Blvd., Suite 4300, Miami 33131
305-906-8403
smith.brian@am.jll.com
Sea-level rise won’t keep development at bay, experts say
Although one in eight South Florida homes could be underwater by 2100 due to sea-level rise, according to a study by Zillow, developers aren’t backing away from investing in the region.
“Does it come up? Absolutely,” said Rocco Ferrera, chief investment officer of Stiles Corp. “Do people run away from opportunities because they’re afraid of what will happen 30 to 120 years from now? No.
“I’m not saying it’s not an issue; it’s just not something scaring anybody away.”
Panelists with properties in the coastal areas most at risk say they are spending additional dollars that will provide their investments with some protection against the effects of climate change.
For instance, The Comras Co.’s BLVD at Lenox project could raise its ground floor to counter flooding in Miami Beach. That project, expected to be completed in June 2019, is being planned with sea-level rise in mind.
“We’re working on a project that will be built for resiliency,” said Michael Comras, president of The Comras Co.
Terra President and CEO David Martin says that sea-level rise is becoming increasingly important to builders – and the business community at large.
“The environmental disturbances on our economy is real,” he said. “Whether it takes you longer to get to the office or the small-business owner who can’t survive being out of power for a week — all of that will influence how we enhance and improve our infrastructure.”
Banks remain selective in lending
John Ebenger, director of real estate and tax services for Berkowitz Pollack Brant Advisors and Accountants, said his clients are finding it slightly difficult to get debt. Whether banks will bite depends on the quality of the project and its timing, he said.
“As long as you have a good project and a good deal, you’ll get financing,” he said.
The rising interest rate isn’t a barrier to lending for his clients.
“As rates go up, you factor that into your overall cost. It may push a few deals aside but the changes in rates haven’t risen enough to stop opportunities,” he added.
For Rocco Ferrera, chief investment officer of Stiles Corp., relationships with lenders have helped their projects move forward, but nontraditional routes to secure funding are increasingly appealing.
“We focus on the right types of projects in the right locations, but there are always sources of capital beyond the traditional commercial banks and they aren’t burdened by regulatory restrains like commercial banks are,” he said.
Debt funds could be a complementary source of funding if banks aren’t willing to fully fund a project, Terra’s Martin said.
“The banks today are very cautious and that’s why we see these debt funds coming around,” he said. “Banks today for instance may not do the deal, but they may bank the debt fund to do the deal, so that’s an interesting hybrid.”
Ultimately, the barriers to lending and restrictive zoning keep the South Florida market from being overrun with mediocre developments.
“When not everyone can get a loan, it controls our supply,” Martin said. “The lack of new development plans because of how restrictive our zoning is protects the assets we have.”
QUOTABLES: Investments to focus on or avoid
“There’s a phenomenon of getting into Opportunity Zones and taking advantage of the tax benefit, but the pricing has risen dramatically where it may not make it economical to do these transactions. Make sure it’s a viable project 10 years from now.” – John Ebenger, Berkowitz Pollack Brant Advisors and Accountants
“We work with developers in assessing a site and if you fight with the identity of an area or its master plan, it’s never going to fly in certain markets. We see people trying to force the issue and they don’t do as well.” – Brian Smith, JLL
“I think we have some incredible neighborhoods for long-term and short-term plays. We’re seeing these niche neighborhoods develop with interesting dynamics, creating these dense urban nodes with each community developing their own character.” – Tere Blanca, Blanca Commercial Real Estate
“Over the last 15 years, retailers got much larger. Back then, everyone wanted a flagship store. Today, it’s not as necessary. If you’re buying a mattress, you want to jump on a bed. A millennial might buy it online. There’s a need for both.” – Michael Comras, The Comras Co.
“Miami Dade is one of the most underserved retail markets in the entire country. I do think how you curate your tenant mix includes seeing how resilient their businesses models are and what their online game plans are.” – David Martin, Terra
“There’s not a surge in office, but rather finally some activity since there has been zero supply for a long period of time. Rents are at unbelievably high levels as a result of the cost to support projects.” – Rocco Ferrera, Stiles Corp.
Emon Reiser, South Florida Business Journal
Read more here: bizjournals.com/southflorida
