Will the commercial real estate boom continue?

Jan 11, 2016

When one thinks of real estate in South Florida, one probably thinks of the housing market. That wouldn’t be wrong, but the other big slice of real estate -- and one with the cranes and big construction projects -- is coming off a big year.  Last year South Florida saw more than a dozen commercial real estate deals of more than $100 million dollars.  Billions of dollars of office buildings, condo buildings, shopping malls and warehouses were bought and sold throughout the region. Can the boom continue?

The Sunshine Economy spoke with three veteran players in commercial real estate. This trio play different roles in the commercial real estate industry here. Here's how they describe the market in 2016:

Here is a map of the Related Group's projects in South Florida (blue) and properties owned by TIAA-CREF (red):

The Banker -- Bank United Chairman and CEO John Kanas

There's a lot written about the South Florida market slowing down. We have not seen any anecdotal evidence of that.

We’ve seen the condominium construction boom continuing and beginning to spill over into some of the other commercial real estate areas -- the office [market], retail, industrial and warehousing out near the airports, for instance.

  • 2016 Forecast

There's a lot written about the South Florida market slowing down. We have not seen any anecdotal evidence of that. I'm not saying that it's not. It may be, but we don't see it yet. There's no evidence finding its way to us that would indicate that. What we've seen is that other sections of Florida are catching on. We're doing very well in Tampa and Orlando and more recently established a footprint in Jacksonville.

  • What’s driving your forecast?

Probably the biggest thing that we've seen is driven by the technological revolution as it relates to Wall Street. All of the financial institutions and people who are related to the financial services business don't need to be sitting at a desk down at Wall Street anymore. Lots of these companies are starting to move to more attractive places in the country to live and do business. Miami is a living, breathing example of that. We're starting to see financial companies spreading their wings in South Florida like we've never seen before.

  • Interest rates?

It is not a fait accompli that interest rates will continue to rise [in 2016]. They will continue to rise if this economy continues to be robust. But I believe that at any sign that this economy is faltering we could very well give up [the recent Federal Reserve rate hike] and possibly even go the other way. I don't think people are making investment decisions around that issue right now. I think if we get to May or June and the Fed has moved two more times since now that will start to get into people's decision-making.

  • Cautious confidence

I've been through four or five [real estate busts] since 1976 when I started running a bank. They're all driven by the same thing: that is over exuberance, over zealousness and people forgetting that there's two sides to this story [and] beginning to believe values can't correct themselves. We see that in stocks and we see that in real estate;  we see that other assets. So we're watchful. But what's happening this time is there are a lot of a long-term bells that are already ringing. The regulators are cautiously advising banks to be careful about this. Economists are already starting to warn that straight up may not be forever. I view that positively because it's a sobering experience, and I think it's gotten people to start looking at this hopefully early enough.

  • Bubble?

There’s no evidence of it.

The Builder – The Related Group Condominium Division President Carlos Russo

We have buyers buying properties with very little leverage.

  The important thing is to really understand that this is a marathon here in Florida and not a 100-meter chase as it was before. We have buyers buying properties with very little leverage. I think we are going to have slowdowns and we're going to have parts of the race where we're going to race faster.

  • Latin America influence

We still go to Mexico [to promote our projects]. We go to Brazil. We go to Colombia. We're going to Spain. We're trying to do more promotions in Spain. I think the [stronger U.S. dollar against Latin American currencies] is a shock effect for the [Latin American] economies. In a couple of months, that will become the new normal for those economies. Most of these economies are going to grow because as the U.S. dollar strengthens they can export more goods to the U.S. The wheat that is growing in Argentina and the steel that is produced in Brazil are cheaper now. It’s more income for those families. So the moment that that becomes a new normal people will start buying again. Now, everybody [has] a little bit of a shock.

  • Chinese interest

We are seeing a lot of money coming from China. We are seeing a lot of investors coming from China. We're seeing Chinese developers. We've already seen Chinese developers in New York and Chinese banks also in New York. [More and more] they're coming to Florida. We haven't seen Chinese buyers. I think Chinese buyers will come. The main issue is the [lack of]  direct flights from China (to South Florida]. The moment that we have direct flights, I think we are going to see Chinese buyers.

  • Bubble?

In this cycle we are building less. Before it was a lot easier to get buyers to pony up with 20 percent deposits. Now we have to get 50 percent deposits. We are not allowing anybody to flip his or her contracts before the building is finished, which is also a huge change. And the banks are being a lot more stringent with the lending.

The Buyer – TIAA-CREF Senior Director and Manager South Region Mike Fisk

We plan to be active in South Florida

  South Florida is one of our strategic target markets. We will be looking for four property types [office, retail, industrial, residential commercial properties] in South Florida in 2016. We're also exploring student housing as a potential sector to invest in. We plan to be active in South Florida and as well as our other key markets of New York and San Francisco.

  • Location, location, location

You could probably guess the areas that we really like. For office [properties], we like Brickell and downtown Miami. We have two large class A buildings in downtown Miami. Around Brickell we own 701 Brickell and 801 Brickell, which are great assets and probably [will] be very long-term holds for us. We also own 1.4 million square feet at Waterford at Blue Lagoon across the highway from Miami International Airport. That project has also done very well for us. We just broke ground on a 10-story office building in the  Waterford [office] park.

  • Most recent South Florida purchase

It's called the Manor at Flagler Village. It's a multi-family project in Fort Lauderdale. It's located right on Federal Highway about half a mile north of Las Olas and right across the street from a Fresh Market. It has a little bit of retail on the ground floor. What we liked about this was, first of all, we like the location. It really appeals to the millennial population that wants to live and work close to the urban core. It's a seven-story mid-rise. It's got all the bells and whistles that a new luxury apartment has today, including a really cool pool area and granite countertops. It's new,  so it doesn't have maintenance issues. We think that Fort Lauderdale has good long-term potential in terms of urbanization. It's not Miami, but it's a good alternative to Miami. We will probably hold it for at least 10 years. For multi-family [buildings] we want to be where there are a lot of demand generators: where it's close to work, close to retail amenities, close to transportation and where we think the location is going to stand the test of time

  • Bubble?

It appears to be fairly priced on a relative basis. We don’t really see a bubble in the commercial real estate area right now.