After the past few years we’ve experienced, nobody would have imagined what came our way in 2022. We began the year cautiously optimistic about a return to some sense of normalcy after two years of uncertainty, first due to the abrupt and sweeping shutdowns of 2020 and later because of supply chain difficulties and rising inflation in 2021.
However, the war in Ukraine pushed energy prices through the roof and a tight labor market, and increasing inflation roused the Federal Reserve to increase interest rates a number of times, pouring over into the capital and debt markets, stock markets and housing market and creating incessant predications of a coming recession.
In addition to this, from Europe’s energy crisis, to Hurricane Ian, to some of the country’s largest companies such as Disney, Apple and Tesla hitting significant stock price lows, 2022’s bumps in the road were felt across practically every industry, and commercial real estate was no exception. Post-pandemic, South Florida saw an unprecedented explosion of popularity and growth with historically low capitalization and interest rates, and while these factors have not rendered it completely undisturbed by external factors they have helped see the industry through the year with certainly a more optimistic view than others across the country might have. Persistent high interest rates have massively sloed down capital market volumes on both equity and debt, freezing the market to an almost standstill!
Indeed, CBRE has predicted a 15 percent year-over-year drop in commercial real estate investment volume in the United States, although that forecast for 2023 still leaves returning to levels higher than prior to the pandemic. According to the firm’s report, investment activity will reach its lowest by the first quarter but gradually improve, leaving a clearer picture of the overall economic outlook available by the second quarter.
Stephen Bittel, founder and chairman of the commercial real estate firm Terranova Corporation, told the website GlobeSt.com that he expects the national lending market will go on bracing itself in the new year, with only banks and life insurance companies lending off their balance sheets. He said that while loan sales from existing lenders will accelerate, non- and under-performing loans will need to be moved off balance sheets. However, he notes that there will still be a continuation of trends, with places like Miami that were previously experiencing booms outperforming others such as Chicago, San Francisco and NYC will still see outflows of businesses and the population.
With over four decades of experience in alternative investments and a particular focus on real estate in the United States, Bittel has a seasoned outlook that has seen him weather many periods of uncertainty prior to this one. Starting his company with a single commercial property investment and growing it to an institution in South Florida that has served as owner/operator for more than $5 billion worth of commercial projects, Bittel has worked to make Terranova a national leader with a powerful impact on the commercial real estate industry it serves and on the South Florida community.
South Florida ended 2022 strongly
The commercial real estate market for the greater tri-county area – and indeed much of the Southeast part of the country – is starting 2023 on a high note for a number of sectors, including retail, industrial and multi-family. Bittel noted that over the past few years there has been an influx of companies making their way to the Sunshine State, resulting in office rentals being very strong even as debates rage as to whether work-from-home policies are sustainable.
According to research, by the end of 2022 nearly two-thirds of employees have returned to working full-time in an on-site location, 13 percent are still fully remote, and 29 percent are in some form of hybrid between the two. While it has been found that technology, financial and professional/business sectors currently have the highest percentages of employees working from home, new national businesses that have moved into offices in Miami include WeWork, Microsoft, Citadel and Blackstone amongst others. Bittel said that the South Florida office market has experienced a strong period of growth that he does not see waning – as states like California and New York had the most people moving out last year, census data showed that Florida adds roughly 800 people per day.
Bittel has said that industrial assets are proving to be advantageous for institutional investors, and data from the end of the year has proven that to be the case. South Florida has seen strong demand in the industrial sector as it absorbed new warehouse inventory, and its vacancy rate fell to a record 2.2 percent in 2022. Online retail continues to grow and has shown no signs of slowing down, leading to a rise in demand for e-commerce distribution centers. Additionally, as the pandemic caused shifts in the residential real estate market, self-storage facilities have also become a hot commodity.
Predictions for 2023 are that vacancy rates should remain low for the industrial sector. Roughly half of the industrial space under construction has already been leased, and due to the finite amount of industrial land available in Miami rental rates are some of the highest in the nation – the national average is $11 and the Florida city’s is sitting as high as $18.
Financing in flux
In spite of the many positives South Florida has going for it at the start of the year, Bittel says that financing and lending remains tenuous due to national trends. He previously noted that in 2022 banks had begun to conserve capital and limit risk by holding back on loan issuing. Increases in credit requirements resulted in a smaller percentage of business owners being eligible for loans, leaving CRE investors without available capital stuck between a rock and a hard place. With lenders taking a “wait and see” approach, it may be difficult for many in South Florida to take advantage of its growth. They are instead focusing on existing clients and assets, waiting to see how the dust settles before beginning to open up lending again. Consequently, as those with loans enter the new year needing extensions or not meeting their covenant may find themselves in trouble.
In spite of the challenges in place, Bittel says that with careful considerations of the trends in both financing and business, investors should be able to take full advantage of South Florida’s hot markets. High demand in the multifamily sector means that value can still be created even at the cost of some temporary reduced profits, and the low unemployment rate when combined with an influx of new-to-market tenants has made office real estate a strong opportunity. Industrial assets also have their place in 2023, and knowing how to best use your balance sheet is critical to sidestepping any new challenges that will inevitably be faced in the new year.
Miami and its surrounding cities are poised for a year of continued growth, both in population and business, and while investors should still be wary of the external factors that are hindering stability, Bittel says they should still be entering the year with a lot of enthusiasm for the future of South Florida.