COVID-19 has influenced nearly all facets of life, and its impact on the economy has been massive yet highly variable. The demand in certain CRE sectors, like office, retail, and hospitality, has taken severe hits compared to previous years due to the virus and radical changes in behavior. But other property types have boomed or remained relatively unscathed.
The overarching theme for many aspects of the economy and CRE is uncertainty. And this is not a word that financial institutions like very much.
Despite historically low interest rates, lenders—and smaller banks, in particular—have tightened their standards for issuing many loans. Caution over what the future holds combined with lower returns on their money mean there can be a significant risk for lenders without the correlating reward.
Here’s a look at what’s going on with commercial real estate lenders, along with information on how investors can still get a loan.
One day in the near future, the government may announce the effective “end” of the COVID-19 pandemic in the United States—or, more likely, the end of pandemic-related restrictions. But we don’t know exactly what will happen once things return to “normal,” especially if some form of the virus sticks around at a lower incidence.
Will most employees return to the office, and how many days per week?
How much do consumers long for the days of in-person shopping?
Is there an immediate appetite for travel to crowded tourist locations?
The answers to those questions will soon present themselves, and many analysts project a massive increase in pent-up consumer demand. But the extent of the boom and which hard-hit sectors will recover fastest is uncertain.
For example, the hotel industry has suffered one of the most severe downturns because far fewer people travel for work or recreation. It stands to reason that once things are completely open across the country, work conferences will resume, and vacationers will return to South Florida.
But what if they don’t travel at pre-pandemic levels? How will worldwide approaches to the virus impact the influx of international travel in South Florida?
Hospitality is just one example, of course. The essential point is that we just don’t know exactly how things will play out, and neither do lenders.
Financial institutions are cautiously evaluating borrowers and loan criteria. But despite their hesitancy, it’s worth noting that lenders of all sizes are still making money available to CRE investors. They’re just using a more conservative approach.
First, small lenders, in particular, are becoming increasingly reliant on borrowers with whom they have an existing relationship. If you’ve already borrowed from an institution and repaid your loan on time, there’s a much better chance they’ll let you access funds for additional commercial real estate projects.
Lenders are also carefully scrutinizing the type of property that secures a loan and the outlook for the investment’s success. Office space, retail, and hospitality, for example, may represent more risk and have higher barriers to obtaining capital. In contrast, warehouses and fulfillment centers are booming, making defaults less likely on those property classes.
There’s also a chance you’ll have to put up more of your own money on a commercial real estate deal. For example, Valley National Bank is seeking an additional 5-10% equity from CRE borrowers before granting a loan. Many lenders want you to have more skin in the game because they feel you’ll make less risky decisions under those circumstances.
You should also be prepared for a lender to do its homework before granting your loan. Banks are conducting more thorough market research than ever before and doing tenant due diligence to ensure the businesses to which you’ll be renting have good enough financials to keep up with payments. They also want to see longer-term leases than many of the short contracts that became common in 2020.
The bottom line is that while money is indeed available at very low interest rates, lenders aren’t exactly rubber-stamping loans, either. And the key lesson is something that smart CRE investors live by in any economy and lending environment: If you’ve done your research and the analysis projects that a commercial real estate plan has a sound financial return, there is money available.
With the distribution of vaccines, there’s a lot of hope right now. However, lenders will likely stay diligent in the short term because industries will recover at different speeds, and some businesses might not bounce back at all.
Many financial institutions will wait and see how office space, for example, rebounds. Some form of the remote work trend is durable, which seems to be leading to revised demands of office space, including less square footage overall. If this holds true, it could influence how easy it is to get a loan for a massive office building in a downtown urban center.
Again, that is just an example. The crucial lesson is due diligence, due diligence, and more due diligence. Realistically assess opportunities and projects and show lenders that the numbers likely work.
Morris Southeast Group is available to answer any questions you might have on the post-pandemic recovery of the CRE industry. Give us a call at 954.474.1776 today to learn more. Ken Morris is also available directly at 954.240.4400 or firstname.lastname@example.org.
South Florida has always been a hot spot for New York City’s elite, as the weather and entertainment scene make it the perfect place to head for a weekend or longer in the winter. But COVID-19 encouraged many of NYC’s wealthy to spend a lot more time in the area, escaping the heavy caseloads and restrictions in the Northeast.
The pandemic has also created a newly mobile workforce where employees and employers are comfortable working from anywhere, and executives are conducting an increasing amount of business remotely.
These factors, combined with the beautiful weather, comparatively inexpensive real estate, and zero income tax, make South Florida an attractive place for many New Yorkers to set up permanently. And some NY financial firms are following suit by establishing offices in the area, too.
Here’s a look at what’s currently happening with financial services companies relocating to South Florida and what it could mean for commercial real estate.
New York City was hit particularly hard by the coronavirus, particularly in its first few months, causing many Wall Streeters to head south. Even with the pandemic declining, the trend continues as some large financial firms test South Florida’s waters. Notable examples include:
Executives can handle much of their work remotely, so setting up somewhat smaller offices in South Florida and living there full-time while enjoying the weather and tax benefits is attractive. This trend could see the region become an increasingly significant player in the global financial industry.
We know that many northerners, for the most part, love the benefits of living in South Florida. The main reason for staying in New York is that it’s the world’s financial hub, and they felt the need to be close to everything. Since there is increased comfort with conducting business from anywhere, it makes sense that we could continue to see executives relocating to South Florida and taking smaller divisions of their empires with them.
However, New York may have been down during the pandemic, but it’s not out. And residual loyalty to Manhattan and the prestige of working and living there retain appeal. We could see some more youthful firms and portions of companies set up some operations in South Florida. Much of this trend depends on how quickly New York City and other large urban areas bounce back and how related trends, like remote work, smaller offices, and even a shift to the suburbs play out long term.
On the surface, it might seem evident that financial firms relocating to South Florida will encourage a great deal of development.
However, we might not see a significant influx of new, mammoth office buildings in South Florida. The reason is that office work, in general, is changing. And these firms could allow many employees to work from home or stay back in New York.
There could be demand for different types of offices for these financial firms, as they prioritize adaptive spaces that cater to a more mobile workforce. For example, a hedge fund that sets up a headquarters in Miami would likely retain an office in New York—or vice versa. And the overall square footage needed may be lower, as many companies adopt hybrid onsite-remote work arrangements permanently.
We’re also seeing the emergence of a reimagined office environment that very few anticipated before the pandemic. Commercial real estate investors should keep a close eye on the changing needs of those looking for office space.
Miami—or South Florida overall—probably isn’t destined to take the crown of the world’s financial hub from New York City anytime soon. But technology and new work paradigms are blurring these lines, and our region looks like it’s gaining ground.
Morris Southeast Group helps commercial real estate investors remain current on the latest trends as they look to expand their portfolios. To learn more, call us at 954.474.1776. You can also reach out to Ken Morris directly at 954.240.4400 or email@example.com.
Pretty much everything on the planet has a cost. When you head to the supermarket, items on the shelves have price tags telling you what you need to pay. However, that doesn’t necessarily mean that a box of cereal is worth $2.50 or a loaf of bread’s actual value is $1. Those are merely well-researched numbers that represent what consumers are willing to pay.
Prices on staple consumer goods tend to be similar, but you could visit another store up the street and find the same cereal for $2 and the exact loaf of bread for $1.50. The difference between the prices—and a successful sale—reflects the seller and potential buyers’ perceptions.
The same concept applies to any goods or services exchanged for money, especially as the price tag increases and the reasons for buying them become more diverse. Consumers will pay the price if they perceive that cost as the commodity’s true value.
Here’s a look at why perception creates a disconnect between price and what an item is genuinely worth, particularly as it applies to real estate.
In short, value is a human construct. People with a vested interest in a product, be it an item at the grocery store or a commercial building on Brickell Avenue, assign a value to it. If you want to own that item, you’ll have to pony up the money to meet a price that matches this perceived value.
Even a commodity like gold, which is traditionally used as a bulwark against volatile currencies, has an arbitrary value assigned to it via the market. That doesn’t necessarily mean that its price equals its actual value. According to billionaire investor Mark Cuban, the price of gold is based entirely on narrative. Sure, it’s used in jewelry and manufacturing, but other, more useful commodities don’t hold the same prestige.
Cuban argues that this perception doesn’t mean that gold is worth more than other precious metals; the narrative has simply convinced consumers and investors that this is the case.
Is a piece of commercial property in downtown Miami genuinely worth more than a similar-sized building in Davie? It will cost more, but that doesn’t mean it has more value to a specific investor or tenant. However, since Miami is a more prestigious location, it’s perceived as being more valuable and, therefore, is more expensive.
Even the same properties can fluctuate significantly in price based on their perceived value. Take Lee County, FL, for example, which saw its median home price reach $322,300 in late 2005. Real estate speculators were driving much of this perceived value, as they were buying homes and flipping them to people who couldn’t really afford them.
By 2009, after the Great Recession, Lee County had a 13% unemployment rate. Mass foreclosures followed, and by the end of the year, the median home price was only $90,000—a precipitous 72% reduction. You could get many homes for far less than that, too. These homes hadn’t changed at all in a material sense; there was just no one left who was willing to pay $322,300 for one of these properties.
Today’s median home-sold price in Lee County, Florida, is about $186,000. Buyers are willing to pay that number, so that’s the perceived and current actual value of a home in that region.
The median list price is trending up by over 7% per year, as well. So, the narrative is that Lee County’s economy has recovered and that real estate in the area is once again an attractive buy. The pandemic and urban unrest in other parts of the country have also contributed to a surge in southwest Florida (and most suburban) home prices. The same properties that many buyers wouldn’t touch 12 years ago are now viable investments because of perception.
This concept applies to CRE, too, of course. The price of a particular space comes down to buyer or renter perception and the narrative that those who stand to make money on the deal create.
When investing in commercial real estate, it might tempt you to jump at properties in a prestigious location with a higher price, assuming that they’re the most valuable. And choices like this can certainly pay off. However, it’s important to remember that the narrative assigns some of those numbers. And the underlying aspects of a location and your individual needs are what should drive decision-making.
These figures don’t take into account what’s best for you. Do you really need to buy a high-profile office on Brickell Avenue? Will it make you more money? Or would converting an abandoned big box store or mall in Sunrise into an office provide a better return?
Only you—and a set of economic and need-based considerations—can come up with a good answer. By researching the fundamentals of a property and applying them to your situation, it’s possible to find investments that are more valuable in the real world than their market prices suggest.
Value and price aren’t the same because changes in perception can alter a commodity’s cost without changing its true worth. Since every organization and investor is different, identifying properties that are valuable to you and/or potential tenants—rather than merely relying on market comps—can provide better returns.
Morris Southeast Group works with commercial real estate investors to expand their portfolios and find exceptional value in the market. To learn more, call us at 954.474.1776. You can also reach out to Ken Morris directly at 954.240.4400 or firstname.lastname@example.org.
COVID-19 has been on everyone’s mind for the past year. And for CRE investors, the pending return to “normalcy” and economic recovery are crucial topics. But the pandemic has taken a lot of attention away from a long-term issue to which there isn’t a definitive solution.
Climate change is a problem that could significantly impact our lives, particularly in coastal areas. We could be approaching a point where sea levels reach dangerous levels and mega-storms batter properties on the shoreline multiple times per year.
Here’s a look at how climate change affects South Florida right now and what we might expect in the future.
Climate change is the result of an increase in the amount of carbon dioxide in the air. And estimates suggest that we have 40% more CO2 than we did in the late 1700s, warming the lower atmosphere and the planet’s surface in the process.
Temperatures in Florida have increased by over one degree Fahrenheit in the last century. While this might seem like a minor difference, we live in a very sensitive ecosystem—and throwing off this balance even slightly can have significant impacts.
Because of the increasing temperatures, sea levels in Florida are climbing one inch per decade, and storms are becoming more severe. Since 1958, the amount of precipitation during intense rainstorms has increased by 27% throughout the Southeast, bringing heightened flood risks to inland locations, too.
Scientists aren’t certain whether the recent surge in massive hurricanes is a long-term trend. But there have been more of them in the last 20 years, and warming ocean levels contribute to a storm’s potential energy. All signs point to climate change causing issues in South Florida in the decades to come.
In terms of solutions, problems, and financial safeguards, climate change isn’t cheap. Increasing storms and flooding alone have a very high economic cost.
In 2019, storms caused $45 billion in losses. While that number is high, it was down from the $91 billion in losses from 2018 and the record $306 billion in 2017. The numbers for 2020 aren’t official yet, but it was the most active storm season on record. Twenty-two storms caused at least $1 billion in damage apiece, and estimates suggest that the total cost could approach $100 billion.
The direct expenses are significant. And the bad news for commercial real estate investors is that insurance premium increases often follow as insurers assess the risk they’re taking on in these areas. Because of this risk, investors in specific areas should double down on protecting their buildings from severe storms.
Those with CRE investments in hurricane zones should closely evaluate the current climate change assessments and what they mean for the future. And some proactive measures can reduce property damage in the event of a major storm.
First, have a contractor regularly check all roofs for damage. The better a roof’s condition, the more likely it is to protect the rest of the building during the storm. Installing perimeter flashing is also a good idea because it protects the roof’s edge, keeping the cover in place. If necessary, replacing a roof with hurricane-resistant materials may be a solid investment.
Buildings with equipment on the roof will want to make sure it’s appropriately mounted so it can’t slide, lift, or overturn in heavy winds. Not only will this equipment damage the building if it isn’t securely fastened, but it can also become a danger to people in the area if it’s blown off the roof. This, of course, could cause a tragedy and expose a building owner to liability.
You’ll also want to make sure any commercial doors on the building are securely connected to their frames and install retractable hurricane shutters over the windows. Hurricane-proofing a building, to the extent possible, mitigates damage and may result in lower insurance costs.
Investors can also do their small part to reduce climate change effects by pursuing LEED certification and other green-building certifications. Tax incentives may offset these expenses. Another benefit of sustainable buildings is that they can attract tenants and improve indoor air quality, an appeal that has gained renewed focus during COVID-19.
Examples of LEED-certified buildings in Miami include Brickell World Plaza, 1 Hotel, and Met II Office Core & Shell.
Despite the effects that climate change is sure to have on South Florida, this isn’t a hopeless situation. Technology and science are advancing quickly, and there are some potential solutions to these issues on the horizon.
One possible step is the 13-foot-high seawall that the Army Corps of Engineers has proposed for downtown Miami. This wall would protect buildings in that area from incoming storm surges and, hopefully, reduce flooding. And researchers are raising the alarm that investments in climate change protection are necessary, noting that every dollar spent will save or generate many more in the form of jobs and less property damage.
Morris Southeast Group is watching South Florida trends and strives to provide valuable insight and expertise for commercial real estate investors. Call us at 954.474.1776 for more information. Ken Morris is also available directly at 954.240.4400 or email@example.com.