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Condo Sales Slump, Multifamily Rentals Soar in South Florida

The trend is in full force in luxury, workforce, and shadow markets

For years, condo has been king in South Florida’s real estate market. That title may now be in question, as multifamily apartments are rising in popularity, with more than 51,000 units under construction, in the planning stage, or proposed for development. With home sales continuing to slip and interest rates continuing to rise, many buyers are opting to rent rather than buy.

This shift may signal a major shakeup in the business, and CRE developers should be mindful of its potential consequences.

Multifamily rentals soar

In the first quarter of 2019, Florida had four markets, the most of any state, in the nation’s top 15 for multifamily rent growth:

  • Tampa/St. Petersburg (#5), with average year-over-year rent growth of 6.8 percent and 95.3 percent occupancy
  • Orlando (#9), with average year-over-year rent growth of 5.5 percent and 96 percent occupancy
  • Jacksonville (#12), with average year-over-year rent growth of 5.3 percent and 95 percent occupancy
  • South Florida (#14), with average year-over-year rent growth of 5.1 percent and 95.5 percent occupancy

And the local South Florida market as a whole is seeing high demand and low vacancies.

Why rentals?

Short-term rentals appeal to developers because they introduce a new kind of tenant who can broaden their potential market and bring down the possibility of vacancies. Thus, many condo owners have teamed up with short-term rental operators to attract renters and manage leases.

One flavor of new tenant is the tourist or business traveler, who, in cities like Nashville, encounter a dearth of traditional hotel rooms and a surplus of residential properties—hotel-style accommodations in a condo-size setting. In the Airbnb era, these travelers represent an essential market that is driving the multifamily rental boom and opening up a long-term solution for developers.

Traditionally, hotels want to provide amenities that compel their guests to stick around—health clubs, spas, coffee shops, restaurants—in order to maximize revenue. Short-term rentals have the opposite value proposition—residential properties are situated in real communities and encourage guests to venture out and support the local economy.

Multiple markets

There are several markets at work in this transition to multifamily developments that include rentals.

  • The luxury market. Rents are sky-high in much of South Florida’s wealthiest communities—over $3,000 in some areas. And many have raised concerns that luxury complexes like Florida East Coast Realty’s Panorama Tower have saturated the market and only contribute to the slide in condo sales.
  • Workforce housing. Many of these high-rent communities struggle to provide affordable housing to those who earn middle- and lower-level salaries in industries such as food service, education, health care, and the not-for-profit sector.

    Palm Beach County requires developers to portion a certain number of units as affordable housing. Fort Lauderdale partnered with European property investor Round Hill Capital to create The SIX13, a workforce multifamily housing project with rents far lower than average in the popular downtown area.
  • The shadow market. When condos don’t sell, they end up here. In 2018, Miami-Dade County alone saw over 2,200 shadow market leases, a fifth of all available units.

Morris Southeast Group closely monitors these and other multifamily housing trends and their effect on South Florida’s market—and we will continue to do so. As one sector rises, another often dips, and things could turn around for the condo market as they did well after the “glut” of condos that preceded the real estate crash in 2006-2007.

For a free consultation on our commercial real estate investment or property management services, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

5 Risks That Keep CRE Investors Up at Night

From volatile markets to rising sea levels, the risks (and rewards) are real

Whether you buy a condo in a prime downtown neighborhood, makeover a house in a growing suburb, or sink your money into a commercial office space or apartment complex, real estate can be an essential part of an investment strategy. There are, of course, risks, and any smart investor does his or her homework before signing on the dotted line. But after some initial financial outlay, real estate can be a great way to generate passive income plus remain connected to the larger community.

Below are just a few examples of risks that any new or seasoned CRE investor should keep in mind, whether it’s their first purchase or their thirtieth.

Unpredictable markets

All markets have their boom and bust cycles, and real estate is no exception. Inflation, interest rates, and the economy at large all have a significant impact on a property’s value and prospects. While no one is immune to these ups and downs, the savvy investor keeps tabs on the markets and adjusts accordingly.

Buy when demand is hot and you risk selling when things have cooled down, and a similar cycle applies to varying interest rates. Likewise, purchase during a bear economy may allow you to sell high when the bull returns, but also risks that property remaining on your books and generating little-to-no income if a downturn persists.

The wrong type of property

Not all CRE assets are created equal. Each type of property has its own strengths and weaknesses, complicated further by your local geography. A few tips to keep in mind:

  • Apartments tend to have high demand, no matter the economic cycle, which makes them low-risk. But as a result, they can provide a lower return depending on how hot that specific market may be.
  • Hotels rely heavily on tourists and business clients and therefore may claim higher rates but also more risk, given the cyclical nature of the hospitality industry.
  • An office complex generally (though certainly not always) has less reliance on consumer demand and tends to rely more on keeping current tenants satisfied, but the ongoing cost of tenant improvements creates downward pressure on overall rates of return.
  • Industrial buildings are in high demand by tenants and investors in most major markets around the country, and as a result, the yields for this sought-after product type is generally lower as the pricing is pushed higher by competition. Industrial properties generally require less maintenance, management, and improvements but careful consideration should be given to the location and specific attributes—clear height, power, cross-docking, access, distance to major interchanges, and the major drivers of occupancy in that specific market area.

Whatever corner of the CRE market you occupy, knowing the risks of your particular specialty will manage performance expectations.

Risky locations

The old saying is true—when it comes to real estate, the key to success is location, location, location. It’s first and foremost in your mind when investing in CRE, whether you’re riding the wave of a white-hot neighborhood or placing a pioneer’s stake down on an as-of-yet-undiscovered block.

Both scenarios carry risk. Join the popular crowd at the right time and you’ll see many tenants and high rents; join at the wrong time and it may be too expensive and saturated. An up-and-coming neighborhood has lower costs and more space but also the potential for higher crime rates and less foot traffic.

A location’s rosy prospects can change in a heartbeat. For example, businesses near Chicago’s historic Wrigley Field learned this the hard way in 2015, when the venue mounted a new scoreboard that cut off their once fantastic view of the historic ballpark.

Unreliable tenants

For all income-property owners, tenants are necessary, if complex, part of a CRE investment. The risks here are fairly clear—late or unpaid rent, property damage, and rude or obnoxious behavior that drives current and prospective tenants away. Owners always have eviction as an option, but it takes time and money that has a negative effect on overall yields. Comprehensive tenant screenings are an effective way to mitigate this risk, and far cheaper than having to force out a tenant. A competent property management firm will help you manage the risks.

Foreclosures

It happens to even the most experienced CRE investors—expenses grow beyond expectations and/or vacancies are higher than you could have predicted, all resulting in an inability to meet your commitments. Foreclosure is a real risk in this scenario and the consequences reach far beyond one property. It will certainly impair your ability to get financing down the road.

Due diligence such as a thorough real estate market analysis can prevent such a drastic turn of events. Once you’re up and running, work to pay down the mortgage as quickly as possible—within the framework of the interest rate you are paying—and have a reserve fund at the ready to cover the slow periods and also unexpected tenant or common-area improvements.

Bonus risk (South Florida edition): climate change

Many areas of the country—South Florida chief among them—have begun to factor climate change into their risk assessments for new and existing CRE properties. While this risk is real, local governments in Miami, Miami Beach, and elsewhere, have been working on these issues for some time and are taking active steps to reduce risk and encourage investment.

Morris Southeast Group is confident that Florida will remain a vibrant CRE market, but risks are always a part of commercial real estate investing’s reward. For a free consultation on our commercial real estate investment or property management services, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Using Concessions to Lure Tenants to Your CRE Investment

A few carrots are healthy for your CRE property

When it comes to commercial real estate, there are a few key issues that are of great importance to potential tenants: location, foot traffic, competitor tenants, rents, accessibility, and space size. Many tenants, though, may find several properties all ticking off the right amount of checks—and their decision may come down to exploring which landlord is willing to make some concessions.

At the same time, landlords and owners may be frustrated at not being able to attract any tenant to a vacant space that has been available for some time. Again, the answer may be to look at concessions that can suddenly make a property more desirable.

What is a concession?

In the most basic of terms, a concession is a compromise between the landlord and tenant, one that usually involves the landlord offering something as a “giveback” to get the tenant to sign the lease. Normally, concessions make sense in order to quickly fill a vacancy, at lease-renewal time, during a slow market, or when a property is first entering the market.

While a concession is often viewed as a cost to the landlord, that cost can be offset over the duration of the lease. In addition, before offering anything or everything, it’s imperative to research competitive properties, concessions that are working in similar properties, concessions that make sense for specific businesses, and ones that make sense in a changing marketplace.

What are some of the most common concessions?

Concessions come in all shapes and sizes, and many are changing with the times. Regardless of the concession(s) offered, though, it’s important to spell out the details in a strong lease document. Let’s look at some examples:

  • By far, the most common is to offer some sort of rent deal, such as first month free. This can either be negotiated as an actual first month free or by applying the discount over the course of a 12-month period. Similarly, rent discounts can also be offered to a strong tenant at the time of lease renewal. While some may interpret this as a huge giveaway, collecting a discounted rent is far more profitable than collecting no rent at all.
  • Available space may not be exactly perfect for a potential tenant. Shelving, tables, interior traffic flow may need to be adjusted—and some landlords are willing to increase the Tenant Improvement Allowance to between $20 and $50 per square foot.
  • Start-up and pop-up businesses are always looking for ways to get their feet in the door, but long-term leases often either don’t work or are too much of a commitment. Offering short-term lease options can help sway their decision.
  • Relocating a business to a new space can be an expensive undertaking—and for some ideal tenants, landlords have found it worthwhile to help offset those costs with a negotiated Move-In Allowance.
  • Amenities go a long way in the residential market, so it makes sense that they can go just as far in the commercial arena. Upgrades and services can include Internet access and speed, adopting green measures, designated parking spaces, security measures, landscaping, excellent maintenance and cleanliness of common areas, and even services for employees who bike to work.

Which concessions work for you?

Of course, each concession has its share of pros and cons for landlords and tenants. That’s why it’s important to work with a skilled team that not only knows the market but also knows the concessions that make sense—so both parties can lease happily. The professionals at Morris Southeast Group are that team, and have a winning record of representing owners and tenants in property searches and lease negotiations. To learn more about owner and tenant representation, property 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.

What Do Office Tenants Want?

5 ways to evolve your available space

When “Mad Men” first aired, many viewers looked at it with an eye toward the nostalgia of office design. The show had cubicles and corner offices, executive bathrooms and gobs of square footage to fill. But modern office design and open plans happened, and—well – this isn’t Don Draper’s office anymore.

And while some people find it easy to blame Millennials for practically everything, there is plenty for which to thank them. Their place in the workforce and in executive and decision-making positions is certainly keeping the current office marketplace interesting. As work has often changed from a destination to an experience, property managers, owners, and developers are coming up with more and more creative ways to keep office space current and competitive.

1. Flexibility is at the forefront

The office space pendulum appears to be swinging toward a happy balance of open space and cubicles. One way to avoid expensive overhauls and re-dos that change with the design trend of the moment is to provide and market flexibility. Some properties have started to provide space-planning services to help potential tenants envision a floor plan that works and to help successful tenants adapt the space rather than seek a lease somewhere else.

2. Consolidate some areas

Part of that flexibility is reconfiguring floor plans to create common spaces. Because of technology and working remotely, many potential tenants do not require an abundance of square footage of their own, but they are willing to share space and services with other tenants.

3. Provide services and amenities

Many people wonder what happened to the 40-hour workweek. As a result, basics to everyday living—from picking up dry-cleaning to scheduling some gym time—often get squeezed out. That’s why some landlords are now offering a wide assortment of amenities, including concierge-type services, food options in the lobby, bike racks, rooms with showers and lockers, weekly or on-premises health and wellness experiences, and shuttle services to help bring tenants to public transportation centers. Creativity mixed with a tenant-interest inventory can go a long way.

4. Keeping people and place connected

It goes without saying—and yet, must be said over and over again—tenants require greater connectivity, especially as their dependence on technology grows, both in-house and remotely. Beyond speed and secure connections, connectivity also requires owners, managers, and developers to move the property toward smart technologies, and often green technology is part of this overall trend.

5. Maintaining a secure, safe, and clean environment

These basic items made the list because they’re the things few people ever mention on an office-space wish list—but they can be the first ones noticed when not done well. Common areas, including restrooms and stairwells, should be well maintained. At the same time, we also live in a time of workplace shootings, so steps can be made to ensure tenants and their employees are safe without feeling as if they’re imprisoned. This means lobby security and visitor protocols, as well as employee key card entrance for parking and building access.

The strength of working relationships

When it comes to marketing your building in order to attract a new and dynamic pool of tenants, a lot more can be said—such as the importance of a property’s first impression, as well as the availability and transparency of the landlord/owner. Because at the end of the day, tenant satisfaction comes down to strong relationships and the quality of the product.

The Morris Southeast Group team knows a lot about those things, because it’s how we conduct business. Our professionals can help you evolve your property to meet the challenges of a changing workforce.

To learn more about property investment opportunities, property management, 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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