Regardless of the national real estate market’s experiences, the South Florida market overdoes it.
This is the usual playbook. But commercial real estate experts here and abroad say the region’s commercial real estate market should be largely immune to the difficulties experienced in other regions.
And there are many concerns about commercial real estate and the risks it can pose to the banking sector and the economy.
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Dry. of the US Treasury. Janet Yellen told Congress in February that it was “obvious there would be stress and losses” in commercial real estate, particularly office buildings.
She referred to a national vision and described the challenges as “manageable”.
An optimistic buyer
Stephen Bittel isn’t one of those worried about commercial real estate in South Florida. He owns and operates Terranova Corp. since its inception in 1980. He is a buyer, so he should be bullish.
Bittel teamed up with two partners to purchase 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 sold for more than a decade ago. Most recently, a neighboring office building sold for 25% less than its last purchase price in 2014.
“We thought there was a value opportunity here. We could buy a building below replacement costs,” he said in a WLRN interview sitting in the building’s management offices 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 the lobby and elevators. That work, along with what Bittel sees as a diminishing supply of office space in the neighborhood, convinced him to buy it.
Some valuations have fallen while interest rates are much higher than a few years ago. This, coupled with concerns about workers not returning to the office and people staying away from malls in favor of online shopping, has fueled worries about real estate’s woes.
While there are warning signs of trouble in commercial real estate in some places, South Florida is not one of them.
“Certainly, I think Florida (and) Miami are not at the top of our list of markets of concern right now,” said Dave Putro, senior vice president at Morningstar Credit. He is looking at commercial real estate loans to get a feel for the market.
“I think most of the headlines in commercial real estate right now are focused on office buildings. The slow return to office space. Older buildings. There are a number of factors contributing to that,” he said. he declared.
Persistent concern over value
COVID has upended almost every corner of real estate. This has contributed to rising real estate prices in South Florida. This increased the value of hotels, as Florida reopened much earlier than anywhere else. Valuations of apartment buildings jumped as rents soared. Continued concern has focused on the value of office buildings.
“There is a hybrid workplace factor at work here that will affect office occupancy over the next several 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 markets of concern at this time.”
Dave Putro, Morningstar Senior Vice President of Credit
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 it produces a “Red-Yellow-Green” report evaluating regional real estate markets. The report separates commercial real estate properties by use: multifamily to apartment buildings, retail, office and others.
According to its most recent analyst, the Fort Lauderdale and Miami office markets are showing yellow results, but remain well above the national average.
“A lot of different factors come into play. The overall vacancy rate, the forecast of what we expect to be supply versus demand. A lot of times that factor outweighs Florida,” Wheeler said.
The low unemployment rate of 2.4% and job growth have allowed South Florida to be largely protected from a significant decline in office property values.
And that’s good news for real estate owners and investors in commercial real estate mortgages like pension funds, life insurance companies and even mutual funds. And that’s good news for small and medium-sized banks. These are typically traditional lenders for commercial real estate.
“It is not a source of risk for the banks”
“Florida has been largely spared the unrest and falling prices we’ve seen in other parts of the country,” said Rebel Cole, a finance professor at Florida Atlantic University.
He used federal regulatory reports to analyze U.S. banks’ exposure to commercial real estate loans. Thousands of people have large loan amounts relative to the size of the bank, but “South Florida is not really a hotbed of commercial real estate risk for banks,” Cole said .
He also cites the trend toward returning to the office and the growth of the job market. “We don’t see the same kinds of problems in office real estate in South Florida as we do in the rest of the country,” he said.
There have been two deep recessions in the U.S. commercial real estate industry over the past half-century. One occurred in the early 1990s, partly blamed on too much supply, fueled by easy bank loans.
While most of the attention of the Great Recession is reserved for the collapse of real estate prices, commercial real estate has also suffered. This was a double whammy for banks that had provided home loans and mortgages for commercial real estate properties. And Cole worries that the national environment for commercial property values is worse right now.
“Prices continue to fall. We’re not at the bottom of this cycle yet,” he said in an interview with WLRN. “The commercial real estate sector is going to suffer greatly as property values decline.”
Due dates
Just over $1 billion in mortgages on office buildings in South Florida will come due over the next three years. This year alone, nearly $2 billion in hotel mortgages are coming due. And $1.5 billion in commercial property mortgages as well.
These loans will likely need to be refinanced. And, like refinancing a mortgage, the lender will determine how much the property is worth now.
But there’s not much concern about a crack or even a sharp decline in South Florida’s commercial real estate market. One reason is the way some neighborhoods have changed, especially since the pandemic. More and more people live, work and play in the same neighborhood. Offices mingle with condos or apartments with restaurants and stores dotted around.
A walk down Las Olas Boulevard in downtown Fort Lauderdale at 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 analysis for real estate data firm CoStar. Arias knows this firsthand. His office is in Las Olas.
During the walk with WLRN, Arias emphasized that the concept of walkable areas, even in South Florida’s car-dominated environment, is not new.
Lincoln Road in Miami Beach became pedestrian-only in the early 1960s. In recent decades, there have been efforts to redevelop the Clematis Street area of downtown West Palm Beach, the booming Brickell neighborhood of Miami and the massive Worldcenter development encompassing 10 blocks in downtown Miami. The concept was repeated in Doral and other suburban areas.
“It’s generally the right recipe that will help real estate navigate its way through the difficulties that we’re going to see over the next couple of years,” Arias said as he walked through the crowd of men and women business at lunchtime in Las Olas. suits walking among people wearing flip-flops.
Additional reporting by Wilkine Brutus.
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