No matter what the national real estate market is doing, South Florida’s market is outperforming it.
This is business as usual, but commercial real estate experts here and elsewhere believe the region's commercial real estate market should be largely unaffected by the difficulties other areas are experiencing.
There is also a lot of concern about commercial real estate and the risks it poses to the banking sector and the economy.
Read more: Jobs and wine: South Florida job market and inflation continue to outpace the nation
“It's clear that there will be stress and losses” in commercial real estate, particularly office buildings, Treasury Secretary Janet Yellen told Congress in February.
Referring to the national view, she said the challenges were “manageable”.
Optimistic buyers
Steven Bittel is not one of those worried about commercial real estate in South Florida. He's owned and operated Terra Nova since he founded the company in 1980. He's a buyer, so he should be optimistic.
Mr. Bittel and two partners bought the 50-year-old, 13-story office building in downtown Coral Gables in August for millions less than it sold for more than a decade ago, and more recently, a nearby office building sold for 25% less than it was last purchased for in 2014.
Terra Nova founder and CEO Stephen Bittel is in a renovated elevator in a downtown Coral Gables office building he and two partners bought for less than the 50-year-old building last sold for more than a decade.
“I thought there was a valuable opportunity here. We could buy the building for less than replacement cost,” he told WLRN in an interview at the building's management office at 255 Alhambra. “There are probably 100 restaurants within a few blocks of walking out of this building,” he said.
The building's previous owners renovated the lobby and elevators, and Bittle said that renovation, along with what he believes to be a dwindling supply of office space in the area, was what convinced him to buy the building.
Some property values have fallen, while interest rates are much higher than they were a few years ago. That, combined with worries that workers won't return to offices and people will shun malls for online shopping, is fueling fears of a real estate downturn.
While some areas are showing signs of trouble in commercial real estate, South Florida is not one of them.
“Certainly, Florida [and] “Miami is not at the top of our list of markets we're concerned about right now,” said Dave Putro, a senior vice president at Morningstar Credit who tracks commercial real estate loans to gauge market conditions.
“I think most of the commercial real estate headlines right now are focused on offices. [buildings]”There are a number of factors that are contributing to this – the slow pace of people returning to the office, the old buildings,” he said.
Concerns about value
The coronavirus has upended nearly every sector of the real estate industry. Home prices have risen in South Florida. Hotel values have risen as Florida reopened faster than anywhere else. Apartment assessments have soared as rents have skyrocketed. Concerns about the value of office buildings remain.
“Hybrid work is becoming more important here, and that will impact office occupancy rates for years to come,” said Darrell Wheeler, head of commercial mortgage-backed securities research at Moody's Investor Service.
“Florida and Miami are not at the top of our list of markets of concern at this time.”
Dave Putro, Senior VP, Morningstar Credit
He spends a lot of his time poring over spreadsheets analyzing the relative health of commercial real estate in dozens of cities across the country. Every quarter, he puts together a “Red, Yellow, Green” report that assesses local real estate markets, categorizing commercial real estate by multifamily uses like apartments, retail, and offices.
His latest analyst report gave Fort Lauderdale and Miami office markets a yellow rating, but they still scored well above the national average.
“A variety of factors come into play — overall vacancy rates, outlook for future supply and demand — and in many cases, those factors trump one another in Florida,” Wheeler said.
With a low unemployment rate of 2.4 percent and job growth, South Florida has been largely protected from a major drop in office building values.
This is good news for commercial real estate loan owners and investors, such as pension funds, life insurance companies and even mutual funds. It's also good news for smaller banks, which tend to be the more traditional lenders of commercial real estate.
“It's not a hotbed of risk for banks.”
“Florida has been spared much of the disruption and price declines that have been seen in other parts of the country,” said Rebel Cole, a professor of energy policy at Florida Atlantic University.
Rebel Cole, a finance professor at Florida Atlantic University;
He used federal regulatory filings to analyze U.S. banks' exposure to commercial real estate loans. Although thousands of banks have significant amounts of loans relative to their size, “South Florida is not a hotbed of commercial real estate risk for banks,” Cole said.
He also cited the trend of people returning to the office and the expanding job market here. “We're not seeing the issues in South Florida office real estate that we're seeing in other parts of the U.S.,” he said.
The U.S. has seen two serious commercial real estate downturns in the past half century. The first, in the early 1990s, was blamed in part on an oversupply caused by easy bank lending.
While much of the attention during the Great Recession has been focused on the collapse in home prices, commercial real estate also took a hit — a double blow for banks that made mortgages and commercial property mortgages — and Cole worries that the national environment for commercial real estate prices is now worsening.
“Prices are still falling. We're not at the bottom of the cycle yet,” he said in an interview with WLRN. “The commercial real estate industry is going to feel the pain as property values fall.”
due date
Just over $1 billion in South Florida office mortgages are coming due over the next three years. Nearly $2 billion in hotel mortgages are coming due this year alone. Retail mortgages also account for $1.5 billion.
These loans will likely need to be refinanced, and just like with any mortgage refinance, lenders will be calculating how much the property is now worth.
But there's little worry that South Florida's commercial real estate market will collapse or take a major hit. One reason is how some neighborhoods have changed, especially since the pandemic: More people are living, working and playing in the same areas, with office buildings mixed in with condos and apartments and dotted with restaurants and shops.
Juan Arias, director of market analysis for real estate data company CoStar, poses near his offices on Las Olas Boulevard in Fort Lauderdale.
Walking down Las Olas Boulevard in downtown Fort Lauderdale during your lunch break on a weekday will give you an idea of how that works.
“This is a very walkable area with a variety of amenities,” says Juan Arias, director of market analysis at real estate data company CoStar, who knows this firsthand: His office is in Las Olas.
During the walk with WLRN, Arias noted that the concept of walkable areas is not new, even in South Florida's car-centric environment.
Lincoln Road in Miami Beach became a pedestrianized thoroughfare in the early 1960s. Subsequent decades saw the redevelopment of the Clematis Street area in downtown West Palm Beach, the boom of Miami's Brickell neighborhood, and the massive 10-block World Center development in downtown Miami. The concept has been repeated in Doral and other suburban areas.
“This is more or less the right recipe to help the real estate industry weather the difficult times we're going to face over the next few years,” Arias said, navigating a crowd of suited men and women walking among the flip-flop-wearing lunchtime crowds at Las Olas.
Additional reporting by Wilkin Brutus.
