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Can Co-Work Spaces Survive COVID-19?

social distancing in co sharing office with sign for safety distance

Down but not out, could they be what the “new normal” needs?

It wasn’t all that long ago that co-work spaces were the darlings of CRE. As recently as September 2019, there was a 70% increase in flexible workspaces, despite the massive difficulties encountered by industry leader WeWork.

Short-term leases, affordable rents, communal creativity and networking, and shared common spaces were celebrated, notably by small businesses and start-ups looking for a cost-saving operational alternative. Just last year, the concept was becoming even more specialized with niche co-work spaces—shared offices geared to very specific ideas, such as construction, women, LGBTQ, and musicians, to name but a few.

Then, COVID-19 happened. At least for the time being, shared spaces in a time of social distancing don’t make a ton of sense.

While larger companies with office space were able to adapt through employees working remotely, many shared space tenants, operators, and landlords floundered. Adapting to remote work has added strain on smaller businesses. The economic shutdown has forced many of them to close for good, opt not to renew short-term leases, or walk away with months of unpaid rent.

Shared workspaces may be down, but perhaps not out

The combination of a lingering lockdown and expectations for yet another mass redesign of offices—this one with a nod toward social distancing—caused many experts to ponder the viability of shared workspaces. For many, the concept was on life-support.

Other analysts, however, say, “Not so fast.” They note that the sector hasn’t been around long enough to weather an economic downturn. In a sense, it must find its footing to prove its mettle and survive. And in their view, shared workspaces may be what a post-pandemic world needs, offering small businesses without fixed office space a necessary outlet for workers.  

At the start of the lockdown, when businesses across the country were forced to adapt, remote work seemed like a novel, short-term measure required to stem the virus’s spread. For workers long accustomed to daily commutes, the effort in those early days was approached with a sense of humor as they fumbled with technology and did their best to avoid interruptions. But what was hoped to be a temporary glitch has dragged on, even as the country re-opens.

As new cases continue around the country, corporate offices weigh keeping employees at home and maintaining permanent office space. In turn, what was once a novelty is now taking its toll on creativity, productivity, and mental health. Shared workspaces—with appropriate precautions—may wind up being an antidote to isolation as corporate offices remain unused or are downsized.

Shared workspaces also have the potential to provide a support structure for small businesses that operate on the edge of local economies. By coming together under one roof, there is a greater possibility for networking, sharing ideas, and gaining access to resources.

Co-working in the coronavirus era

Shared workspaces will need to adapt to COVID-19. The high-density model will likely have to change in favor of a more socially distant property. This may include the addition of freestanding dividers and privacy areas, as well as regulating the number of people allowed in a conference room. 

It will also be imperative for co-work space managers to adhere to health measures outlined by the CDC and other leading state and local agencies. This effort may include taking temperatures, increasing air exchange, sending sick workers home immediately, increasing the frequency of cleaning common areas, and maintaining transparency with other members should an individual become ill.

CRE can design a new normal

With re-opening and constant reminders of a “new normal,” perhaps it’s time to regain a sense of control by having a say in exactly what that will be. For co-work spaces, it means gaining a better understanding of members’ circumstances, concerns, and fears—and working to address them. It could involve examining flexible hours so members can work at off-peak times, providing discounts for longer lease agreements, and updating cancellation policies to meet new demands.

It also means taking a different look at communications and marketing material. Post-pandemic adaptations, such as a new floor plan and health-conscious policies, should be highlighted. And enhanced cleaning policies should be completed and communicated.

Morris Southeast Group continues to monitor CRE trends and possibilities as the economy weathers COVID-19. To learn more about what we 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.

Rent Control in Florida? Exploring the Issue

Rent Control in Florida? Exploring the Issue on morrissegroup.com

Rent control is one mechanism proposed to address affordable housing issues. Here are some pros, cons, and compromises

Long before COVID-19, countries around the world were facing a common crisis: affordable housing. Especially hard-hit were global cities in which developers were keenly interested, and rents were outpacing wages for low- and middle-income renters. The solution for many housing advocates and politicians was a new round of rent-control legislation.

For some, the idea of rent control is a dirty phrase, while for others, it’s a call to action. From London to Berlin, Barcelona to New York, politicians were lobbied, policies debated, and new laws and regulations enacted. By early 2019, the movement reached Florida, where several state legislators introduced rent control measures. Although HB 6053 died in May of that year, rent control is a topic that’s not expected to go away.

South Florida is a unique situation

Different regions around the world have their own set of circumstances for a housing crisis, and South Florida is somewhat unique. A joint effort by RCLCO Real Estate Advisors and the Urban Land Institute’s Terwilliger Center for Housing found that US construction favored larger, more expensive homes and multifamily projects over middle-class housing for more than a decade. The result was a lack of anything affordable for families earning between 80–120 percent of the region’s median income.

Exacerbating the problem in Florida—with its status as a sun-drenched vacation mecca—were projects that specifically catered to wealthy foreign and out-of-state buyers. Locals, in many instances, were left out in the cold. And the problem has only gotten worse as rents in the region have skyrocketed.

The double-edged sword of rent control

In any discussion of runaway rents and affordable housing, it’s understandable that some sort of rent control would be a proposed solution. After all, it’s not a new idea.

Some historians believe Julius Caesar enacted the first such law, while in the US, the idea was used to address the impact of a housing shortage between the two world wars. Recent efforts have included five-year rent freezes, enforced rent reduction, reducing the amount that landlords can raise rents within and between tenancies, and “just cause” eviction provisions.  

Then, there is the flip side. Critics are adamant that rent control does not live up to its intentions. The major complaint is that it discourages developers from building while encouraging some landlords to neglect properties or flip them into condos. The inevitable result is a reduction in the supply of leasable properties and higher prices. In other words, the rent-control solution is viewed as a short-term fix for an immediate symptom, rather than a long-term plan to address the underlying issues.

Florida is landlord-friendly

Thanks to state statute 125.0103, which makes it impossible for any county, municipality, or government entity to impose price controls upon a lawful business that is not a government agency, rent control in Florida essentially doesn’t exist. When coupled with rent-control legislation in other states, the Sunshine State looks very attractive to developers.

This is good news for developers, owners, and landlords, but the fact remains that some tenants can’t afford to lease property. Consequently, some municipalities have adapted by offering incentives to developers—and all parties agree that more can be provided. For inspiration, they’ve looked to other locales:

  • Orlando and Pinellas County, FL, offer an expedited permit process for projects that contain all or partial affordable units.

  • Fort Myers, FL, offers a Tax Increment Financing program to provide tax deferrals as an incentive to develop blighted neighborhoods.

  • King County, WA, stipulates that any extra county-owned lands suitable for residential development be earmarked for affordable housing. Landholdings are reviewed annually.

  • Montgomery County, MD, requires that any capital improvement project that included public facilities (library, train station, etc.) also be revaluated for adding affordable housing units.

  • In 2017, Vancouver, Canada, initiated an Empty Homes Tax, sometimes known as a vacancy tax. The tax was designed to address a rental shortage with a sizeable number of vacant homes by encouraging owners to rent out their vacant properties.

  • In 2019, Oregon became the first state in the nation to enact a statewide rent-control initiative—and it was accomplished through compromise. While rent increases were capped, the limit was set at 7 percent—above the 2 or 3 percent that many proponents advocated.

Could a compromise be the answer?

While each side debates the pros and cons of rent control, it’s fair to say there is no one-size-fits-all solution. What works for one city may not for another. There should, though, be an exploration of ideas that could work for all parties here in South Florida—and ensure that affordable housing exists for our residents. To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

The Prospects For CRE In a COVID-19 World

The Prospects For CRE In a COVID-19 World on morrissegroup.com

How will recovery look, and when will it happen?

It’s interesting to look back at the early predictions on how COVID-19 would impact the CRE industry. Many analysts, either hopeful or looking at something unprecedented, only offered confident short-term calculations. Long-term projections typically referred to a domino effect, but the answer to questions about “how deep and how long?” have been “We don’t really know.”

The nation, however, is now on the other side of the short-term impact—at least, the first one. In addition to a loss of life only seen during certain wars and previous pandemics, the virus has marched through the US economy, pillaging most sectors. With record unemployment, trillions of dollars in stimulus money, numerous lost businesses, and a recession, how will CRE rise out of the settling dust?

The state of the economy

As of this writing, the May unemployment rate provided a glimmer of light at the end of the COVID-19 tunnel. With states reopening for business, 2.5 million jobs were added in May, and many officials seized this opportunity to celebrate some good news. The highest gains were seen in the restaurant/bar/food service industries, with hospitality coming in second place, construction in third, and healthcare in fourth.

Economists, on the other hand, are urging everyone to proceed with caution. With estimates ranging from 13.3% to several points higher (depending on how the number is calculated), the unemployment figure doesn’t yet indicate economic recovery. Most new jobs were for part-time positions, an indication of the fragility of the American economy. And with 30 million Americans still out of work, the unemployment rate remains the highest since the late 1940s.

CRE recovery will be an uphill battle

Recovery, regardless if it’s V-shaped or U-shaped, will take some time, particularly for CRE. Nearly half of commercial rents were not paid in April and May. Many tenants—including national chains—have indicated they will not be able to pay rent for months to come. If large retailers are saying this, then the situation for smaller businesses is even worse.

This adds up to a chain reaction: landlords may be forced to file bankruptcy, CRE prices may drop, banks and private investors may hold back on funding for commercial projects, and local governments may see unpaid property taxes.

Many experts forecast the economy to stabilize in the third quarter and start to recover in the fourth, but CBRE projects CRE to fully bounce back 12 to 30 months later, depending on the sector:

  • Office space is a bit of a mixed bag. Although leasing has slowed, vacancies are on the rise, and tenants and landlords are re-negotiating lease terms, a decrease in new office construction has helped slow falling rents.

  • Hotels were one of the first sectors to fall under COVID-19 containment efforts. Along with retail and food and beverage services, hotels are expected to take the longest to bounce back, especially those located in cities with a strong tourism and convention industry.

  • The retail sector, like hotels, was significantly impacted by quarantines and lockdowns. Many brick-and-mortar retailers felt the financial pinch as unemployed Americans focused their spending on essential items. Overall retail recovery hinges on Americans getting back to work, handling COVID-related debt, and having enough disposable income to begin shopping again.

  • Industrial properties are expected to bounce back the quickest, in large part due to the rapid growth of e-commerce and the need for localized logistics locations.

Some good news on the CRE front

Despite the caution on unemployment numbers and the prediction of a slower CRE recovery, investors interested in playing the long game that is commercial real estate investment are in a very interesting position. Incredibly low interest rates and discounted property prices give investors an opportunity to expand real estate holdings. Particularly attractive are properties owned by smaller landlords who are less equipped to deal with a COVID-19-controlled economy.

Similarly, foreign investors, especially those from Latin America, are looking to the long-term strength of the US market as a means of surviving the pandemic’s economic fallout in their own countries. With an eye toward shopping centers and mixed-use properties, Latin American investors—some more accustomed to economic uncertainty at home—see promise and stability in US income-producing assets.

Hope in South Florida

Each day, especially as cities and counties have reopened, we have all heard the phrase “new normal.” And while there are some confident predictions to make, how that situation will look remains fluid. With any economic and CRE recovery discussion, it’s important to remember that other issues can quickly have an impact: consumer anxiety, civil unrest, and a second wave of the pandemic, to name just a few.

Morris Southeast Group is keeping a close eye on all of these factors, and we will continue to revise our outlook and provide information as events unfold. If you have questions, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

The Marriage Between CRE & Infrastructure

The Marriage Between CRE & Infrastructure on morrissegroup.com

A rocky road means a rocky relationship

It’s time to take a break from COVID-19—somewhat of a break, that is. When the lockdowns started in March, area roadways were mostly absent of traffic. This presented an opportunity to speed up several major infrastructure upgrades in the Miami area, including interstates 395 and 195, as well as the Dolphin Expressway. The lack of traffic translated into a lack of inconvenience for commuters during these projects, and the result is hoped to be an early finish.

At the same time, the virus took the spotlight off of Ft. Lauderdale’s own infrastructure issues—last year’s series of water main and sewage line breaks, including one that was the largest in South Florida history. The city became a good example of the overall issues that the U.S. has with old infrastructure.

Why infrastructure is important to CRE

In the simplest terms, infrastructure is all of those systems and structures that allow a country to function. From communication systems to the power grids, roadways to railways, and water delivery to sewage removal, all of these items allow people to live, work, play, and move. They are also instrumental in growing the economy and allowing it to function.

To that end, maintenance, improvements, and expansion of infrastructure are key ingredients to the success and strength of commercial real estate. The more reliable or efficient these systems are, the more competitive a specific area can be—and that adds up to a stronger economy, higher property values and rents, and an increase in occupancy. For example, one study indicates that rents for office space located near public transportation are nearly 80% higher than those farther away.

When infrastructure fails, CRE feels it

Every four years, the American Society of Civil Engineers (ASCE) publishes its Infrastructure Report Card. In its most recent 2017 report, the U.S. received a D+ (poor). Issues on the national level include a $90 billion backlog of transit maintenance, 6.9 billion hours lost in traffic, an abundance of power outages, and failing wastewater treatment plants. At best estimate, the country is 30 years behind many of its global counterparts.

Florida fared better but not much, receiving a C (mediocre). Of greatest concern, according to the report, is the state’s drinking water, roads, public transit, energy, wastewater management, stormwater impacts, and coastal vulnerability. And all of this is strained by a population that increases by one million people each year.

Whether it’s on the national or local level, the bottom line is that failing or poor infrastructure hurts CRE. According to JLL, these issues have a tremendously detrimental impact on business operating costs, construction and production delays, and job growth and business expansion. Therefore, they hurt the demand for commercial properties. 

The infrastructure solution

As with many things in life, it all comes down to money. And necessary infrastructure improvements—typically financed through public-private partnerships—would require the United States to invest more than $2 trillion over the next 25 years on repairs and upgrades. According to the ASCE, funding sources could come from infrastructure trust funds, raising the motor fuel tax for the Highway Trust Fund, and implementing rates and fees to maintain and upgrade various infrastructure systems.

This, however, is 2020. And all roads, crumbling and otherwise, lead to COVID-19. A year ago, the sum of $2 trillion over 25 years was an unheard-of amount of money. But now, the government has spent well over that amount in just a matter of months to offset the economic crisis.

But is there a silver lining to the pandemic?

Can post-COVID-19 realities drive infrastructure improvements?

According to the World Economic Forum, the pandemic’s economic fallout may be just what American infrastructure needs—an opportunity to initiate a “New Deal” for the Age of COVID. Despite the Federal Reserve having exhausted its options to combat the recession, fiscal policies, innovative projects, and federal action regarding infrastructure could help right the economy. Among the suggestions are:

  • To create an infrastructure agency at the federal level to centralize some of the decision-making, develop a long-term and cohesive vision, and to improve accountability.

  • To harness the power of data to prioritize projects and to make the process and results more efficient.

  • To better utilize innovation and the Fourth Industrial Revolution to improve and streamline construction technology.

Morris Southeast Group wants to build something better

Infrastructure is a funny thing. It’s always there, just under the surface, and no one ever really pays attention to it—unless something goes wrong. While our plates have been full for the past few months, we can’t afford to continue to ignore all of the facets—systems, services, and people—that make our communities function. And perhaps one of the lessons from COVID-19 is that we have to build something better.To learn more about what Morris Southeast Group can do for you now and in the future, call us 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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