What Could Brexit Mean For Your CRE Investment?

Searching for likely outcomes amid uncertainty

January 31 is the due date for Brexit to happen. Boris Johnson, Great Britain’s Prime Minister, selected that date as the date for his nation to divorce itself from the European Union, with or without a deal. The result, not surprisingly, is that those on both sides of the issue have varying predictions about the impact of the transition period—ranging from a slight blip to a collapse of the global economy.

While many of the issues will most likely be contained to Great Britain and other EU-member nations, investors in the United States are curious about what to expect when the Brexit pebble is tossed into the pond and the ripples or tidal waves arrive on American shores.

Brexit 101

From the moment of its inception, much of the UK was never really convinced that a coming together of European nations could work. In recent years, though, that uncertainty has grown, especially as additional countries were allowed to enter. There is notable skepticism from some analysts about Central and Eastern European nations that have not fully embraced representative democracy, and Southern European nations that are not considered fiscally disciplined.

The Brexit issue is a divisive one for Europe, and it has turned out to be just as divisive on British soil. While EU-member nations will certainly feel the loss, experts generally agree that UK citizens will most likely absorb the brunt of the divorce, deal or no-deal. How long those consequences last is anyone’s guess. Among the key predictions are:

• Trade deals and tariffs will all have to be renegotiated. Until this is accomplished, there will most likely be a shortage of various goods and merchandise, especially of those imported by Britain. This list may include food items, building materials, and medications.
• Labor issues will have to be resolved. These include construction-labor issues since the UK relies on a pool of workers from Eastern European EU-member nations, and white-collar, European, non-UK citizens based in Britain.
• Uncertainty about the EU. There is a possibility that other European nations may follow the UK’s lead and leave the EU, creating a sort of economic domino effect.

Post-Brexit CRE investments in the UK

Brexit has a history of being an ever-changing process, and the word at the outset of its execution is caution. The greatest worry is that the level of uncertainty will result in a decrease in demand for UK properties, falling prices, and a reluctance to enter the UK CRE market.

Additionally, the dust of transition will settle at varying speeds. Besides labor and building material shortages, there may also be changes made to safety and building codes and legal and tax regulations, as well as to the process of moving funds across borders. To help navigate these waters, it will be essential to work with a UK-skilled due diligence consultant.

While a cautious approach certainly sounds like a wise option in times of change, it’s also important to remember that potential opportunities also appear. When Great Britain leaves the EU on January 31, expect to see an increase in new deals and projects, especially as UK investors seek to partner with the US, Canada, India, and China.

Post-Brexit CRE investments in the US

The most volatile Brexit challenge that may impact US CRE firms is cross-border investment, especially if other EU nations either leave the union or re-examine their own policies as a result of policy changes in the UK.

That being said, the US CRE marketplace is expected to see more positive outcomes as a result of Brexit. The combination of chaos in the UK, the attractiveness of REITs and EB-5 investments, and continued low-interest rates translate into global investors seeking the stability and economic security found in the US commercial sector.

Investors must be proactive

When reading Brexit predictions and various what-if scenarios, it’s inevitable to have even more questions and concerns. Because the situation is uncertain now—and likely to remain so for the next several years—US and global commercial real estate investors should seek answers from a skilled team, like the professionals at Morris Southeast Group.

To learn more about investment opportunities and what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

How South Florida CRE Is Addressing Climate Change

A new way to invest in a weather-weary world

Not a day goes by when there isn’t some sort of mention of climate change and sea-level rise. Pundits may debate the validity of the science behind the issue, but Miamians and other South Floridians are becoming increasingly adept at wading and driving through flooded streets and sidewalks.

Businesses, too, keep a supply of sandbags on hand to protect their investment from flood damage, while neighborhoods have seen tidal flooding rise from an infrequent to a regular occurrence.

With more than $130 billion of US commercial real estate (CRE) located in the top 10% of cities most vulnerable to sea-level rise, the CRE industry is at looking at ways to help investors weigh the risks, prepare for the challenges, and make wiser investment decisions.

Investing at water’s edge

While experts are in no way recommending a mass sell-off of coastal properties, they are advising that if investors do not prepare today, their real estate values could be severely impacted tomorrow.

• In 2017, the year of hurricanes Harvey, Irma, and Maria, damage to US properties hit a record high at more than $300 billion.
• In 2018, from May to July, rainfall along the entire east coast was three times higher than normal.
• In 2019, temperature records, including those throughout October in SoFlo, were shattered on a daily basis.

Because the real estate industry is especially vulnerable to climate change, the Urban Land institute embarked on a global study that looked at the issue and its long-term impact on property investment. Results indicate that meeting the climate-change challenge will require futureproofing structures and projects, as well as working with governments to develop proactive policies and plans.

Assessing the risks of climate change

When assessing the risks associated with a particular property, developers and investors generally rely on insurance data. But because insurers usually determine prices on an annual basis, long-term risk factors—such as those associated with climate change—are often not considered. It’s difficult for that industry to use actuarial science to charge for future risks that are as unpredictable as the weather.

As a result, a new analytics industry—one that merges climate science with business and policy decisions—is emerging. It allows real estate professionals and investors to become better informed and it’s rapidly becoming a part of the due diligence process.

In addition to assessing the physical risks to a specific property as it’s impacted by climate change, these analytics also include transition risks or those factors that will most likely occur as a result of climate change. These include:

• An increase in disruption for tenants as weather-related events become more frequent.
• Higher operational and capital costs as properties experience greater wear and tear due to extreme weather.
• Higher taxes as cities and municipal jurisdictions cover protection costs. In Miami, for example, residents approved bond issues to raise their taxes to pay for pump station installation and raising sidewalks, roads, and seawalls.

Meeting the climate change challenge in South Florida

In case you haven’t figured it out, the Morris Southeast Group team fully believes that South Florida is worth fighting for—and it will meet the challenges posed by climate change. And we’re not alone.

In more and more projects around the region, developers are adding soil to raise the ground level beneath new construction, as well as investing in and incorporating climate-mitigation and adaptation technologies. These building-for-resilience strategies, in turn, help to lower operational costs while increasing the potential return on a CRE investment.

Speaking of resilience, it’s more than just a means of meeting the needs of a property. City leaders, for many reasons, want to ensure that their municipalities remain attractive for residents and developers.

In many regions, resilience strategies are taking center stage, and it’s important for investors to let policymakers know—on local, state, and national levels— that they’re interested in the issue and want to see action.

To learn more about these issues or Morris Southeast Group’s commercial real estate investment and 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.

Commercial Real Estate Trends For 2020

5 key areas that will shape the new year and beyond

A television commentator recently claimed that 2020 isn’t a year. He did say, tongue-in-cheek, that it’s the name of a news show on a competing network. He also said it’s a word that defines hindsight and perfect vision—but not a year.

In commercial real estate (CRE), though, hindsight and vision are essential to determine the trends and cycles that will define the industry in 2020 (which is, indeed a year).

It’s no wonder, then, that as the calendar page has turned to a new year and a new decade, so many experts have offered their insights on the shape of things to come. Here are 5 of the top things that may be on the horizon:

1. Will the economy continue to expand?

At the moment, the United States is in the midst of its longest expansion in history. While there are national issues (constant talk of an approaching recession, a looming Presidential election and an impeachment process, and a slowing down of GDP) and global issues (Brexit and the potential for war), the steady strength of an expanding economy is expected to continue.

This could further expand job growth and consumer confidence. And, according to CBRE, these factors and Federal interest rate cuts are expected to have a positive impact on continued CRE growth.

2. Changing demographics

Just about everything that could be said about Baby Boomers (aging) and Millennials (blamed for just about everything) has been said, but it’s still worth noting that both generations will continue to have an impact on all real estate sectors. At the same time, Generation Z and a yet-to-be-named generation will also start to exert their influence on the CRE marketplace.

CRE opportunities are expected to meet the needs of longer life expectancies among Boomers and steady population growth that has already outpaced Japan and is expected to surge past Europe. Ground Zero for many of these projects will be seen in the Sunbelt states.

3. Property trends

A word often repeated in many of the 2020 predictions is “steady.” In other words, trends, especially as they relate to properties, will follow the same path seen in recent years:

• E-commerce growth and competition will continue to steer the industrial and warehouse sectors.
• Co-living and co-working trends, especially in urban markets, are creating greater consumer demand for flexibility and fluidity in those sectors.
• Alternative properties, such as data centers and self-storage, will continue to grow.
• Don’t be quick to ring the death knell for brick-and-mortar properties. While some sectors, such as retail chains, are struggling to keep doors open (thanks to e-commerce, by the way), others are in great demand. Among these are premium and necessity retailers, restaurants, and grocery and drug stores.

4. Due diligence and data continue to take center stage, in new ways

No matter if a CRE transaction involves a single party or a group, and no matter if a CRE project is small or grand, there are risks. As a result, due diligence is a must—and that simple fact cannot be stressed enough, particularly as we move into 2020 and beyond.

A key tool aiding due diligence is the gathering and use of data in all areas—from the state of a building’s operating systems today and how they are expected to perform tomorrow, to funding issues and the impact of climate change on specific properties in specific locations. And this last item is expected to become a larger one as we move into this decade.

What hasn’t changed and won’t? A well-informed CRE deal is still far likelier to be a strong one.

5. Digitization

At the start of the 21^st century, most people in the developed world were terrified of Y2K and the potential collapse of the global economy. Twenty years later, globalization, urbanization, a changing workforce, AI, and the IoT have transformed CRE. That’s why the findings of Deloitte’s recent survey of 750 CRE executives in 10 countries are so interesting.

While most respondents rated tenant experience as a top priority, the majority had not truly addressed the digital tenant experience. To that end, expect investors, owners, managers, and landlords to embark on a smart building, mobile app odyssey to meet tenant demands while improving efficiency and performance.

2020 trends that work for SoFlo

When you look at these trends through a South Florida lens, the region appears to be headed in the right direction. As a Sunbelt state, Florida has already witnessed an increase in population, a building boom, and an embrace of co-living and co-working environments.

At the same time, there are large tracts of industrial and warehouse spaces, as well as climate-change-mitigation technologies that are being incorporated into new construction and retrofits. To learn more about these trends and what Morris Southeast Group can do for you in the coming year and beyond, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

What Investors and Developers Need To Know About EB-5 Investment

The impact of changes to the EB-5 program on commercial real estate investment in South Florida and beyond

For developers, one of the keys to seeing a proposed project completed is sufficient capital. At the same time, investors are looking for the right projects with the best potential returns on their investments—wherever those investors are from. Enter the Immigrant Investor Program or EB-5.

A brief history of EB-5

Created by Congress in 1990, the program was designed as an incentive for foreign investors to help stimulate the US economy through capital investments and job creation in exchange for green cards and eventual US citizenship. In its early years, the program was practically dormant. But during the Great Recession, when banks were reluctant to approve construction loans, EB-5 was able to help fill that void.

Mixing immigration with money, it’s no wonder the EB-5 has, over the decades, seen its share of criticism. While some have seen this as a green-card-for-cash initiative that favors wealthy investors, others view it as a highly beneficial job (at least 10 jobs per project) and investment program that’s good for the US economy.

Changes to EB-5

Nevertheless, the Obama and Trump administrations have each taken a very critical look at EB-5, with each making its own set of recommendations and changes. In July 2019, the Department of Homeland Security (DHS), which oversees the program, released its latest rules:

• At the core of EB-5 are targeted employment areas (TEAs), which are determined by unemployment rates. For TEA investments (high unemployment), the minimum investment is $900,000, up from $500,000. For the non-TEA projects, the minimum investment amount is $1.8 million, up from $1 million. While these increases were made to account for inflation, the higher minimum amounts may shrink the pool of potential foreign investors.
• The Office of US Citizenship and Immigration Services and DHS will now designate TEA areas. In the past, this was left up to the individual states. While some projects may no longer qualify as being located in a high-unemployment area, the change is meant to stimulate job growth in the newly defined and targeted areas.
• When an immigrant investor files an EB-5 petition, he or she receives a priority date, which is the date the USCIS receives that petition. In essence, this is the investor’s place in the green-card line. In the past, the immigrant would receive a new priority date each time a new EB-5 petition was filed. With the current change, investors can retain their first priority date.
• The final regulation is designed to clarify the technical and procedural issues as the immigrant investor files an I-829 petition, which must be submitted within 90 days preceding the second anniversary of when he or she received conditional resident status. Additionally, the regulation clarifies which family members can be included in the principal investor’s petition and who must file independently. The change is meant to bring the EB-5 green card process in line with the current USCIS green card process.

EB-5 advice for developers and investors

Very often, EB-5 is considered an immigration program—but that doesn’t even begin to scratch the surface. It is, in fact, so much more than that and it’s constantly evolving. As a result, developers and investors have to be aware of the changes and be willing to adapt to them.

• EB-5 is actually a security. And as a result, it is heavily regulated and full of financial complexities.
• EB-5 is often thought of as a means to acquire quick funds for a project when it’s really a slow-money concept. As a result, not all projects are suitable for EB-5 investment.
• While the EB-5 interest rates are low, they are rising. In addition, foreign governments have their own regulations and fees when monies are transferred across borders.
• As part of the investor’s due diligence process, they will require a developer’s strong history of completing other EB-5 projects and possibly request tours of those sites.
• Because of political and economic turmoil, Latin America has surpassed China in EB-5 demand. At the same time, gateway cities, such as New York, Los Angeles, and Miami, continue to be attractive locations for EB-5 interest.

It’s important for all parties to work with a team skilled in the nuances of EB-5. Morris Southeast Group is one such group. And because of our reputation in South Florida, we are especially skilled at building the EB-5 bridge between Latin America and the SoFlo region.

To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.