South Florida’s commercial real estate markets have enjoyed a strong run for nearly a decade. Although it is rather late in a typical market cycle, there is little sign of a let-up in sales, leasing, investment and lending activity.
Why has the region seen such a prolonged expansion? First of all, metropolitan Miami is one of a handful of large U.S. cities that continues to grow in population. A steady increase in residents, combined with millions of visitors every year, offers an appealing demographic foundation for commercial real estate players.
A second reason is the continued availability of both debt and equity financing. In the global low-rate environment, real estate assets offer an appealing combination of security, income and the potential for appreciation for U.S. and international investors.
In general, U.S. lenders have learned from their past excesses and taken a more disciplined approach to financing real estate investments. Commercial banks have been active in providing fixed- and floating-rate loans, although most are more interested in financing stabilized properties than making construction loans.
For new developments, a number of debt funds with readily available capital have been active participants in the construction sector. While their rates might be somewhat higher than a commercial bank, the benefit of obtaining financing on a non-recourse basis is attractive to many developers. In addition, mezzanine funding is also available to bridge gaps between the construction financing and the developer equity.
While financing real estate investments is very achievable in today’s market, the overall demand for real estate assets has pushed prices upward and there is often a sizeable gap in the bid/ask for purchase price. That may limit the number of transactions in the coming year.
As of mid-year, industrial and logistics properties are leading the commercial sector in terms of attracting institutional capital. Even older industrial properties in close-in locations are in demand for repositioning opportunities to provide “last mile” inventory storage and delivery for online retailing companies.
On the other hand, the high cost of land and construction is limiting new office development in Brickell, downtown Miami and Coral Gables. That has made existing Class A buildings more appealing to investors seeking high-quality core assets. For office developers, there may be opportunities for smaller-scale projects in suburban locations or northward along the coast in Fort Lauderdale and West Palm Beach.
Barring an external shock, South Florida’s commercial real estate markets are well positioned for continued strong performance in 2019. Sound fundamentals and the region’s growing economy will continue to attract investment capital from around the world.
James W. Shindell is a partner at Bilzin Sumberg and chair of the firm’s Real Estate Practice Group.