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Inventory Issues Impacting CRE In South Florida

Is there space left for great investments?

It’s easy to understand why some investors and tenants get discouraged about CRE space in South Florida. Gentrification projects are well underway, empty lots are fenced and prepped for new construction, and the tremendous amount of traffic creates a sense that prices are in the stratosphere because all of the good space is gone.

Nothing could be farther from the truth. Depending on the type of real estate owners, tenants, and investors are considering, there are millions of CRE square feet of 2nd- and 3rd-generation space available in South Florida. Finding the intersection of the right real estate at the right price in the right place can certainly still be done – though it’s not always easy.

Flexibility in the CRE landscape

No matter the market – Los Angeles, New York, Atlanta, or Miami – there are essential considerations when matching the unique needs of clients with the proper space.

A key to making this link is flexibility. In South Florida, for example, there is an abundance of warehouse space that has the potential to be repurposed into something else. The low ceilings of many 2nd- and 3rd-generation warehouses are no longer suitable for today’s industrial/distribution center needs. They are, however, perfect for converting into office space or other uses.

Before embarking on such a project, it’s essential to understand the cost of the conversion. Parking, air conditioning, and roofing may need to be updated, and these costs could be very high.

Getting to know zoning

While conversion costs can certainly hamper development plans, another issue can be as much of a hindrance: zoning regulations. The last place any buyer, renter, or seller wants to be is at the table while the deal falls apart because no one thought to investigate zoning regulations and restrictions.

To prevent surprises, it’s essential to understand the zoning rules that are specific to the municipality where the property is located. What’s allowed in location A may not be permitted in location B, and that can make all the difference.

The zoning departments in all municipalities tend to not like surprises. Sooner or later, they will discover the work being done on a property and issue fines and/or work stoppage orders. To prevent these costly consequences, take the time to visit the zoning department in which the property is located. Ask questions and help to bring the municipality on board with the property’s new concept.

On the South Florida CRE horizon

Marijuana provides a great example of how a potential business trend can interface with flexible CRE space. In 2016, Florida voters overwhelmingly approved medical marijuana. Ever since, the proposal has been in a sort of limbo – tied up in hearings and court cases.

Soon after voters approved the measure, the Florida legislature passed a law preventing patients from using smokable marijuana. This then resulted in a circuit court judge ruling that patients have the right to use medical marijuana in any form – and this led to an appeal from the Florida Department of Health, which means an automatic stay so the judge’s ruling cannot go into effect.

This back-and-forth means many obsolete warehouses – many of which can be quickly converted into indoor grow spaces for medical marijuana – remain empty. Florida CRE investors are waiting – and looking at the example of Denver, CO, where marijuana has been legalized and it’s now nearly impossible to find available warehouse space.

Knowledge is the key

When investigating CRE possibilities, it’s important to work with an agency that knows the rules of the market and looming trends. Morris Southeast Group has a 40-plus year history, which translates into a team of professionals who are not only aware of opportunities but also know the ins and outs and changes in zoning regulations in the municipalities which we serve.

For a free consultation or to learn more about our property investment opportunities and other services, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

CRE Transactions vs. Residential Transactions

The complexities that make them different … and similar

In a market like South Florida, where cranes are a part of the skyline and neighborhoods are routinely undergoing transformations, it seems as if there’s an investment opportunity on and around every corner. Before signing on the dotted line, though, there’s a lot to think about – because not all investments are created equal.

When considering a commercial real estate investment or a multi-unit residential investment opportunity, it’s important to consider that each transaction has its own unique complexities, as well as some similarities.

Income stream vs. bricks and mortar

Taking a page from Real Estate Investment 101, the purpose of investing in any sort of property is to generate profit or income. It’s the income stream that’s essentially being purchased in a commercial real estate investment. The bricks and mortar of the property just happen to come along with it.

As a result, it’s important to underwrite the integrity of the current income stream or the potential income stream that could come from that investment. This in and of itself contributes to the complexity of a CRE investment. Two examples better illustrate this idea:

CRE Example 1

You’re interested in purchasing a triple-net investment; a free-standing building that’s currently home to a CVS Pharmacy. With the reputation of its brand, you generally have a sense that CVS is a very strong, credit-worthy company and the risk associated with the tenant is not that high. In other words, you’re likely to get your full income stream remaining on that lease.

CRE Example 2

Now, let’s up the complexity factor – and risk – with the purchase of an office building that has 27 tenants. As an investor, you have a responsibility to read and investigate every lease, as well as know the length of each of those leases, the average lease term on the rent roll, and see how creditworthy each of those 27 tenants are. The findings of this sort of research will help you establish the risk related to that investment. This same due diligence is required for retail and industrial investments, as well.

Residential Example

This doesn’t mean that residential investment opportunities are not concerned with risks or income streams, or that they are “easier” than a commercial investment. In fact, they are uniquely complex because of the nature of the residential tenant.

First and foremost, residential tenants move frequently. It’s generally safe to assume that one-third to one-half of your tenants will move out of your investment property. In a building with 30 rental units, that number translates into 10 – 15 vacant units at any time. As a result, you will have to figure out what your capital expenditure will be to replace those tenants, as well as how to maintain a profit while those units are vacant.

Additional complexities to investment opportunities

As different as residential and CRE investments may be, they also have several items in common — which can add more complexities to the mix:

  • The condition of the property – whether it’s commercial or residential – will have to be maintained or improved;
  • The integrity of the rental income must be fully explored and understood;
  • Leases can quickly become more complex, especially when it comes to delineating who is responsible for what, such as maintenance, security, and technology;
  • Federal and local laws are an additional layer of the equation, and it is the owner’s responsibility to be in compliance with existing laws or those that change. This can especially difficult when investing in properties in various locations. What works in one county may not be allowed in another.

One simple solution in one location

At the end of the day, it may be beneficial to consult with or hire a qualified professional who is adept at navigating investment waters. The professional team at Morris Southeast Group is skilled at property management services and investment due diligence. Our comprehensive services include owner and tenant representation, marketing, lease administration, collections, and financial reporting.

For a free consultation or to learn more about our property management services, current investment opportunities, and/or other services, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

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