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Why there's confidence South Florida is (mostly) immune to a commercial real estate correction

A sunset over high-rise buildings.
Rebecca Blackwell
Sunset illuminates clouds over downtown high-rises, Tuesday, June 1, 2021, in Miami. Experts dismiss worries about commercial real estate values in South Florida despite higher interest rates and concerns over falling values of office buildings.

Whatever the national real estate market experiences, South Florida's market overdoes it.

That's the usual playbook. But commercial real estate experts here and elsewhere think the region's commercial real estate market should be largely immune to the difficulty other areas are experiencing.

And there are plenty of worries about commercial real estate and the risks it may pose to the banking industry and economy.

READ MORE: Work and wine: South Florida's job market and inflation keep outpacing the nation

U.S. Treasury Sec. Janet Yellen told Congress in February it was "obvious there's going to be stress and losses" in commercial real estate, particularly with office buildings.

She was referring to a national view and she described the challenges as "manageable."

An optimistic buyer

Stephen Bittel is not one of those worried about commercial real estate in South Florida. He has owned and run Terranova Corp. since founding it in 1980. He's a buyer, so he should be optimistic.

Bittel joined with two partners to buy a 50-year-old, 13-story office building in downtown Coral Gables in August. They bought it for several million dollars less than what it last sold for more than a decade ago. More recently, a nearby office building was sold for 25% less than its last purchase price in 2014.

Terranova founder and CEO Stephen Bittel inside one of the renovated elevators at a downtown Coral Gables office building he purchased with two partners. They bought the 50 year old building for less than was it last sold for more than a decade ago.
Tom Hudson
Terranova founder and CEO Stephen Bittel inside one of the renovated elevators at a downtown Coral Gables office building he purchased with two partners. They bought the 50 year old building for less than was it last sold for more than a decade ago.

"We thought there was a value opportunity here. We could buy a building below replacement costs," he said in an interview with WLRN sitting in the management offices of the building at 255 Alhambra. "You can walk out of the building here and within a few blocks there are probably a hundred restaurants," he said.

The building's previous owners renovated its lobby and elevators. That work, along with what Bittel thinks is dwindling supply of office space in the neighborhood, helped convince him to purchase it.

Some valuations have come down while interest rates are a lot higher than a few years ago. That coupled with worries over workers not returning to offices and people staying away from malls in favor of online shopping has fed the worries about real estate struggling.

While there are warning signs of trouble in commercial real estate in some places, South Florida is not one of those places.

"Admittedly, I think Florida [and] Miami are not at the top of our list of concerning markets at the moment," said Dave Putro, senior vice president with Morningstar Credit. He pays attention to commercial real estate loans to get a sense of the market.

"I think most of the headlines in commercial real estate right now are focused on office [buildings]. The slow pace of return to office. Older buildings. There's a number of factors that are contributing to that," he said.

Nagging worry on value

COVID upended almost all corners of real estate. It helped South Florida housing prices shoot up. It boosted the value of hotels as Florida reopened much earlier than anywhere else. Apartment building valuations jumped as rents skyrocketed. The nagging worry has been concentrated on the value of office buildings.

"There is a hybrid work factor at work here that will affect the office occupancy over the next few years," said Darrell Wheeler, head of Commercial Mortgage Backed Securities Research at Moody’s Investor Services.

"Florida and Miami are not at the top of our list of concerning markets at the moment."
Morningstar Credit Senior VP Dave Putro

He spends a lot of time with 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 assessing regional property markets. The report separates commercial real estate properties by usage — multi-family for apartment buildings, retail, office, and others.

In his most recent analyst, the office markets in Fort Lauderdale and Miami were showing yellow, but still scored well above the national average.

"A bunch of different factors go into it. The overall vacancy rate, the forward look at what we expect to be supply versus the demand. Frequently, that factor is outweighing for Florida," said Wheeler.

The low 2.4% unemployment rate and job growth has meant South Florida has been largely protected from significant drops in the value of office buildings.

And that’s good news for property owners and investors in commercial real estate mortgages like pension funds, life insurance companies and even mutual funds. And it's good news for small and medium sized banks. Those tend to be the traditional lenders for commercial real estate.

'Not a hotbed of risk for banks'

" Florida has been largely spared a lot of the turmoil and price declines that we've seen in other parts of the country," said Florida Atlantic University Finance Prof. Rebel Cole.

Florida Atlantic University Finance Professor Rebel Cole.
Florida Atlantic University Finance Professor Rebel Cole.

He used federal regulatory reports to analyze how exposed U.S. banks are to commercial real estate loans. Thousands have a significant amount of loans compared to the size of the bank, yet, "South Florida is not really a hotbed of risk for commercial real estate for banks," Cole said.

He also cites the back-to-the-office trend here and the growing job market. "We're not seeing the same sort of issues in office real estate in South Florida that we're seeing in the rest of the country," he said.

There have been two deep commercial real estate recessions in the U.S. over the half half century. One was in the early 1990s, blamed in part on too much supply, fueled by easy bank lending.

While most of the attention of the Great Recession is reserved for the collapse in home prices, commercial real estate also suffered. It was a double whammy for banks that had extended home loans and mortgages for commercial real estate properties. And Cole is concerned the national environment for commercial property values is worse now.

"Prices are still falling. We're not at the bottom of this cycle yet," he said in an interview with WLRN. "There's going to be a lot of pain in the commercial real estate industry as these property values go down."

Due dates

Just over $1 billion of mortgages on office buildings in South Florida come due over the next three years. This year alone, almost $2 billion of mortgages on hotels mature. And $1.5 billion of mortgages on retail properties, too.

Those loans likely need to be refinanced. And, like a home mortgage refinance, the lender is going to figure out how much the property is worth now.

But there is not much worry about South Florida’s commercial real estate market cracking or even slipping much. One reason is how some neighborhoods have changed, especially since the pandemic. More people live, work and play in the same neighborhood. Offices mingle with condos or apartments with restaurants and shops sprinkled in.

Juan Arias, director of market analysis at real estate data firm CoStar, poses near his office on Las Olas Blvd. in Fort Lauderdale.
Tom Hudson
Juan Arias, director of market analysis at real estate data firm CoStar, poses near his office on Las Olas Blvd. in Fort Lauderdale.

A walk down Las Olas Boulevard in downtown Fort Lauderdale during lunchtime on a weekday shows how it can work.

"It's a very walkable area with mixed use amenities," said Juan Arias, director of market analytics for real estate data firm CoStar. Arias knows this first-hand. His office is on Las Olas.

During the walk with WLRN, Arias pointed out the concept of walkable areas, even in South Florida's car-dominated environment, is not new.

Lincoln Road in Miami Beach was made pedestrian-only in the early 1960s. In more decades, there's been an effort to re-development the Clematis Street area in downtown West Palm Beach, the boom in Miami's Brickell neighborhood, and the massive Worldcenter development encompassing 10 blocks in downtown Miami. The concept has been repeated in Doral and other suburban areas.

"This is generally the correct recipe that will help real estate kind of make its way through the trickiness that we're going to see over the next couple of years," said Arias as he navigated Las Olas lunchtime crowds of men and women in business suits walking among people wearing flip-flops.

Additional reporting by Wilkine Brutus.

Tom Hudson is WLRN's Senior Economics Editor and Special Correspondent.
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