Commercial Real Estate’s Winners and Losers in the COVID-19 Economy

Although the pandemic is creating economic challenges worldwide, some industries are faring better than others and thriving because of the shift in consumer behavior.

COVID-19 has done a number on the American economy, with unemployment rates reaching 14.4% in April. By November, that number had dropped to 6.7%, but we’re still seeing fallout because consumers now aren’t using certain businesses in the same way.

In Florida, a shift in consumer behavior is driving much of this downturn rather than government-mandated restrictions. For example, people aren’t traveling as frequently as in pre-pandemic days, leaving much of the state’s hospitality industry in a difficult position. 

However, it isn’t all bad news, as some businesses are thriving in this economy. Here’s a look at how COVID affects various industries throughout the country and what it may mean for commercial real estate:

Struggling industries

Perhaps no sector has experienced more significant COVID challenges than the hotel industry, which has seen occupancy and revenue decrease at record levels. 

In Q2 2020, overall occupancy fell by over 60% from the previous year, despite the average daily rate (ADR) falling by over 37%. Rooms were cheaper, but people still weren’t renting them. The result: revenue per available room (RevPAR) is down by 75%. 

The Royalton Hotel NYC, once considered one of the city’s most exclusive properties for the rich and famous, sold to investors for $41 million in September. This price tag is a 25% reduction from its selling price in 2017. People simply aren’t visiting hotels as much during the pandemic, and it’s causing issues for investors.

Another industry that’s struggling is retail, which saw total sales decrease by 8.1% in Q2 of 2020. This decline is the most significant since the recession of 2009. 

However, it’s worth noting that some retailers are thriving in this economy, particularly e-commerce outlets and those that sell essential goods. It’s the smaller stores, certain big-box retailers, and shopping malls are struggling, although some of these spaces were being repurposed, even before COVID.

With the pandemic forcing employees to work from home, the office sector is experiencing some challenges keeping spaces occupied. The second quarter of 2020 saw leasing activity fall by 44% from the previous year, and the national office vacancy rate increased to 13%. 

Demand for downtown office space is decreasing at a more rapid rate than suburban real estate. This trend suggests that offices will still have plenty of value in the future, even if space in prestigious high-rises remains in less demand. 

Businesses benefiting from the shift

Again, it isn’t all bad news—some industries are actually reaping rewards from the change in consumer behavior. 

Amazon’s e-commerce successes are well-documented, with the company posting a record-level revenue increase of 37% during the second quarter of 2020. 

This trend isn’t exclusive to Amazon or online retail, though another windfall is related to the fortunes of e-commerce. The industrial and warehouse sector is seeing a bump due to the shift away from brick-and-mortar stores. Warehouses and distribution sites are in high demand, and these properties are experiencing low vacancy rates and asking for record-high rents as a result. 

Distributors are also relying less on China and other overseas entities because of the logistical issues with shipping goods right now. Keeping the supply chain moving involves ordering more products at once and storing them until needed, which is good news for industrial property owners. 

Also, since we’re dealing with a global health emergency and have an aging population, it makes sense that there’s a greater need for laboratory space. The life sciences industry is exploding, with properties re-selling for as much as 22-times their previous values. 

Strong tenant demand is driving this trend. And it could continue because of the need for facilities adhering to the Good Manufacturing Practice regulations for human pharmaceuticals. Labs that can meet these requirements have immense value, and many remain open 24 hours per day to keep up with demand throughout the pandemic.

Somewhere in between

Multifamily properties are going through the ups and downs of the current economy. Despite the harsh economic downturn in Q2, there wasn’t quite the expected rise in vacancies in apartment buildings and condos. The assumed reason: stimulus packages provided people with unemployment benefits aimed at keeping a roof over their heads. 

An average month’s rent has dropped by 1.4% since Q1, and vacancy rates increased slightly. But it could have been much worse, given the high unemployment rates. 

Urban areas and states with particularly high unemployment rates are being hit much harder than others, and there is a great demand for affordable housing all over the country.

A vaccine and the return to normalcy

Of course, the challenges caused by COVID-19 are driving many changes to the commercial real estate industry. People can’t interact at the same levels as this time last year, so there’s far less immediate need for spaces that encourage gathering or travel.

But there is some light at the end of the tunnel that could see us return to normalcy sooner rather than later. With the Pfizer and Moderna vaccines rolling out to the public and others potentially soon to follow, we might largely put this pandemic behind us by Q3 2021. 

At that time, hotels and retailers could see their numbers start to rebound, and demand for all office space could return, as well. For CRE investors, the coming months are incredibly important because a potential recovery could drastically change the economic landscape again.

For more commercial real estate insights, property management services, or CRE investment guidance, reach out to Morris Southeast Group at 954.474.1776. Ken Morris is also available directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Sunrise, FL; December 16, 2020 – Morris Southeast Group President Ken Morris, SIOR, RPA, announced 100,000 square feet of recently completed South Florida lease and sale transactions, plus a new listing in Plantation, FL.

Ken Morris, SIOR & Adriana Lilly represented Keratin Complex in a seven-year lease for 55,134 square feet at the Hillsboro Technology Center from Bristol Development and Butters Development. Keratin Complex is a leading maker of shampoos, conditioners, and related hair-care products. The company revolutionized the beauty industry in 2007 when a group of industry innovators discovered a new way to care for hair by merging proven keratin science with cutting-edge technology. They created Natural Keratin Smoothing Treatment, a first-of-its-kind smoothing treatment that pioneered the way to healthy, smooth, frizz-free hair. Keratin’s products are favored by salon professionals.

lease in Reno, NV (also owned by Scannell Properties). The firm also executed a renewal of 61,137 square feet plus 8,700 square feet of expansion space at a Weston, FL property on behalf of Legacy in a building owned by a U.S. subsidiary of UBS.  

In addition to the closed transactions, Morris has been hired by BHT Partners to lease the Medical Services Building located at 4101 NW 4th Street in Plantation, FL 33317 that consists of a total of 48,560 square feet. The building is a medical office building located on the campus of Plantation General Hospital.

About Morris Southeast Group

For more than 35 years, Morris Southeast Group has been recognized as one of South Florida’s leading providers of commercial real estate services. Located in Sunrise, FL, Morris SE is a full-service firm specializing in owner and tenant representation, multi-market services, and investment sales in the office, industrial, and retail sectors throughout Miami-Dade, Broward, and Palm Beach Counties. Further, the firm serves corporations, private investors, and entrepreneurs in various U.S. markets through its membership in the Society of Industrial and Office Realtors® and other professional real estate relationships developed over years of industry networking. For more information, contact President Ken Morris at (954) 474-1776 or visit www.morrissegroup.com.

Positives, negatives, and the COVID effect

When people get involved in commercial real estate investments, their goal is to increase the property’s value, diversify portfolio holdings, avoid volatility while hedging against inflation, and gain some tax benefits. In short, it’s about making money.

One of the available tools to achieve that goal is leverage. Also known as debt-financing, the idea is that in some cases, assuming debt on a property may be more financially lucrative than bypassing a loan. That being said, there is a time when leverage makes sense and, more importantly, when it does not. 

What is positive leverage?

In the simplest of terms, positive leverage occurs when the cost of borrowing money is less than the return on that property. This results in greater profits for the investor, ROI that can then be used to upgrade the property or diversify into additional properties, especially those that are less risky. 

For example, let’s say a property comes on the market for $3 million. The buyer faces two options:

• The first is an all-cash purchase, which results in an NOI (net operating income) of $250K. Without a loan, there is no debt service and a cash flow of $250K. The result is a cash on cash percentage (cash flow/cost of property) of 8.3%.
  
• The other is to initiate a leverage option with a $2 million loan at 6%. The NOI remains the same at $250K, but this encompasses the debt ($120K) and cash flow ($130K). The cash on cash result is $130K divided by $1 million (the out-of-pocket cost of the property) or 13%. In other words, there is a 4.7% higher return with positive leverage rather than an all-cash purchase.

Depending on economic indicators, leverage may not be in the investor’s best interest, particularly if the cost of borrowing money vastly diminishes the cash return of the investment. The closer the cash-on-cash leverage result comes to the all-cash result, the less wiggle room there is to survive any unanticipated crises, such as immediate repairs to the property or an economic slump. 

Using leverage wisely

When leverage makes sense, some investors can fall into the assumption trap—assuming that if some leverage on a property deal is good, then more property leverage is better. But as the saying goes, never “assume” anything, or you can make an “ass” out of “u” and “me.”

To avoid the potential pitfalls of leverage, investors should wisely consider some key points:

• The CAP rate should be higher than the Effective Cost of Debt (ECD), which takes into account other costs beyond the interest rate of the loan. These other debts include loan points and pre-payment penalties. Typically, pre-payment penalties occur before year 10 of the loan. If you’re planning on selling the property before that 10-year mark, this is a debt that must be considered before choosing the leverage route.
  
• Investors need to have a firm understanding of both short- and long-term plans for their personal financial goals and how those match the best predictions for the economy and the property. For example, can the investor manage the debt stress if the market should turn south, vacancies increase, or the property needs significant repairs or upgrades? Build toward a payment that you can live with should times get difficult in the future.
  
• When determining appreciation expectations on the property, lean toward the conservative side. Security is found in a lower expectation and leaves room for good news if the appreciation is higher than anticipated.

Leverage and COVID

Not surprisingly, COVID has left its imprint on leverage. And for guidance, many experts look to the Great Recession. Prior to 2008, a large number of loans were issued at peak property values and with high leverage amounts in the 85% and 90% range. When the bubble burst, investors found themselves in dire straits, with outstanding debt more elevated than the properties’ value. The solution for investors was to de-leverage, look for new, smaller mortgages, or default.

COVID is this and so much more—the fallout from the pandemic has been swift for specific sectors, and the overall impacts for CRE are still accruing and yet to come due. While interest rates are extraordinarily low, investors are also looking at a market that has resulted in higher-than-normal vacancies and tenants re-thinking space needs. And many tenants may not be able to return as Federal-relief loans are expiring in the face of surging cases. Nevertheless, there are two key developments:

• Leverage can only happen if there are lenders. At the moment, lenders that are currently managing COVID-related defaults aren’t so eager to take risks. And many who anticipate defaults or maintain significant uncertainty about the pandemic are also carefully scrutinizing applications. Thus, leverage financing may be more challenging to acquire, particularly as many of the COVID-relief programs expire.
  
• If there’s a clear exception, though, it’s in the warehouse sector—particularly those properties connected to e-commerce, which has grown tremendously during the pandemic. Read this blog on the COVID K-shaped economic recovery and which sectors may be winners and losers in the new normal.

To leverage or not to leverage? Get some CRE assistance in SoFlo

The biggest takeaway is that any decision to use leverage can only be made on a case-by-case basis. Excellent financing, for example, can easily become undone with the purchase of the wrong property or by overlooking current and expected trends and comparable properties. Using leverage properly can only be achieved with sufficient due diligence. 

For help in exploring your options, 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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2555 Kuser Road in Hamilton, New Jersey

Sunrise, FL; November 30, 2020 – Following a record third quarter in leasing and sales activity for his firm, President Ken Morris, SIOR, RPA, of Morris Southeast Group announced a recently completed lease transaction on behalf of his longtime client—The Legacy Companies—for 78,585 square feet at 2555 Kuser Road in Hamilton, New Jersey.

About Morris Southeast Group

For more than 35 years, Morris Southeast Group has been recognized as one of South Florida’s leading providers of commercial real estate services. Located in Sunrise, FL, Morris Southeast Group is a full-service firm specializing in owner and tenant representation, multi-market services, and investment sales in the office, industrial, and retail sectors throughout Miami-Dade, Broward, and Palm Beach Counties. Further, the firm serves corporations, private investors, and entrepreneurs in various U.S. markets through its membership in the Society of Industrial and Office Realtors® and other professional real estate relationships developed over years of industry networking. For more information, contact President Ken Morris at (954) 474-1776 or visit www.morrissegroup.com.

Taking advantage of available outdoor spaces can make businesses safer for customers and employees while navigating the global pandemic.

We’re learning more every day about the novel coronavirus that’s wreaking havoc on our society, giving us additional insight on how to protect ourselves. 

For example, it’s now common knowledge that the virus spreads person-to-person through close contact, but evidence also suggests that COVID-19 can remain airborne for hours in indoor spaces. It can even travel through HVAC systems. As a result, the longer people stay in an enclosed environment, the greater the potential transmission risk. 

Indoor airborne transmission is causing problems in a variety of industries. Bars, restaurants, and retail establishments are riskier environments for staff and customers, while some office workers also feel unsafe returning to the job site. 

For example, it’s now common knowledge that the virus spreads person-to-person through close contact, but evidence also suggests that COVID-19 can remain airborne for hours in indoor spaces. It can even travel through HVAC systems. As a result, the longer people stay in an enclosed environment, the greater the potential transmission risk. 

Indoor airborne transmission is causing problems in a variety of industries. Bars, restaurants, and retail establishments are riskier environments for staff and customers, while some office workers also feel unsafe returning to the job site. 

The good news in South Florida is that we’re well-positioned to take advantage of the mild winter weather and can make better use of outdoor spaces than pretty much any other location in the country. 

A vaccine is on the way, but it’ll still be many months before immunity is widespread. Until then, here’s a look at how some businesses and property owners are maximizing their use of outdoor space.

Examples from dining and retail

The restaurant industry is an excellent example of how to use outdoor space to keep a business open. The more fortunate restaurants have patios, and others are developing them, allowing patrons to stay outdoors while enjoying food and drinks. 

One drawback is that patios can get crowded, with tables next to each other allowing for transmission to occur between diners. 

We’re seeing some businesses create proactive solutions to this issue by expanding their outdoor dining spaces. While extending a patio often relies on cities making exceptions or changing their laws, municipalities worldwide are doing just that to encourage a safer environment for restaurant-goers. 

Open-air shopping centers also allow for a safer experience for consumers with fewer restrictions on the number of people who can be in an area at one time. This additional flexibility assists businesses as they attempt to stay afloat during this difficult time. 

New York City is taking the outdoor shopping experience to a new level by allowing retail shops to extend into outdoor spaces. As the holidays approach, as many as 40,000 small businesses could begin using nearby outdoor areas. 

The weather in South Florida is clearly better than winter in New York, so it makes sense for businesses and commercial property owners to begin exploring the concept of open storefronts to allow shoppers to socially distance. 

Using outdoor office space

It isn’t just retail spaces that can use the outdoors to their advantage in South Florida, as offices can also shift certain meetings and tasks outside. 

The easiest way to accomplish this is by using courtyards and nearby parks when face-to-face interaction is necessary. This trend isn’t new, either, as 79% of new construction in Manhattan since 2010 features outdoor space. 

If your building has some outdoor space, like a usable rooftop or a place to build a terrace, property owners can consider renovating to create a brand-new amenity for tenants. Even though COVID-19 likely won’t last forever, the addition of outdoor space can attract renters well into the future.

Making indoor spaces safer

Staying outdoors isn’t always feasible, as there are situations where the weather won’t cooperate or people have sensitive information that they aren’t comfortable discussing in a public setting. There’s also the fact that businesses are paying for these buildings, so they’ll want to use them. 

That’s fair, and there are ways to make interior offices, stores, and restaurants safer for all who visit. Of course, cleaning and sanitizing help reduce the spread of the virus, but what about the air?

Encouraging employees and customers to maintain distance and using physical shields are part of the equation. However, as mentioned earlier, aerosols can linger in the air for hours and spread through HVAC systems.

One solution is to add ultraviolet lights to the interior of the building’s ductwork. In doing so, 99.9% of seasonal viruses will die before circulating through the building, keeping people safer from this type of transmission.  

Morris Southeast Group is on top of the newest retail, dining, and office space trends, ensuring that you can make the necessary adjustments to thrive in the current business landscape. A little flexibility can go a long way, and maximizing outdoor space usage, can be a novel way to attract consumers and tenants while keeping them safer. 
Call us at 954.474.1776 to learn how Morris Southeast Group can assist you. You can also reach out to Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

More people are working from home than ever before, but the trend won’t make office space obsolete

COVID-19 is causing challenges in all walks of life, as everything from going to the grocery store to interacting with friends is different than it was this time last year. And as coronavirus cases increase across the country in a winter wave, we could see even more employees avoiding the commute and working from home.

But how long will it last?

There are some promising vaccines in the works. A collaborative effort between Pfizer and BioNTech and a shot produced by Moderna show excellent preliminary results, and the vaccines could start to be available before the end of the year.

However, there are significant supply limitations and logistical hurdles to overcome before seeing a roll-out to the masses. The pandemic is spiking again, and it’s going to get worse before it gets better. Still, we could see a return to “normalcy” as soon as the second quarter of 2021, with many people returning to the office before then.

Many workers want to return to the office, and offices will once again become a more in-demand commodity, albeit in a slightly different form.

Here’s one look at what we might expect regarding remote work, in-person work, and office space in the coming months.

The current work-from-home landscape

<>Far more people are working from home than in pre-pandemic days, of course. A report by the Federal Reserve Bank of Dallas suggests that close to 50% of employees were working from home at least part of the time by August 2020.

The number of daily commuters has been increasing monthly since the first lockdowns, as we get more used to the new normal. However, it’s still nowhere near February’s numbers, when over 73% of employees commuted daily.

The average U.S. worker is now staying home 5.8 days per month, up from 2.4 before the pandemic. And those who occasionally telecommuted before COVID-19 are working from home for about 11.9 days each month.

What do these numbers mean?

In short, more people are working from home, and there is reason to believe that the trend will continue into 2021. There’s also a chance that the remote work revolution lasts—in part—indefinitely.

According to Gallup’s research, those who work from home for between one and four days each week are the most engaged and produce the best results.

Will managers notice this data and make changes to meet employee expectations? Maybe, which will lead to a durable shift in the way we use office space.

What the future holds

Those who own commercial property might see these numbers and worry about the future of their investments. Still, there will always be a need for office space, although we will likely see many companies seeking different things.

For example, many businesses may continue to allow employees to work from home on projects that don’t require collaboration. If a worker would otherwise be sitting in a cubicle or personal office without meeting with anyone, that’s a job that the individual could probably do remotely.

At the same time, there are many situations where face-to-face collaboration makes the process much easier. Some companies could begin looking for offices with large floor plans that make working together while socially distancing more accessible.

Class A office space will also focus more on specific amenities. KBS CEO Chuck Schreiber described these new demands well:

Now, we have the added element of preventing viral transmission, which is being achieved through changing office layouts; increased sanitation; installing barriers like plexiglass between workstations; adding antibacterial surfaces, like copper; erecting signage aimed at reducing crowding; and installing touchless technology to operate equipment in common areas, like elevators and appliances. This additional layer is expected to be a part of office development and operation for the foreseeable future.

Overall, companies will be looking to reduce the chance of airborne and surface COVID transmission in their office spaces in the immediate future. But we could see that trend continue to future-proof structures against novel illnesses in the coming years.

Office space will adapt—and demand should increase overall

Companies will return to the offices, but they’ll want different things from landlords than before COVID-19. This pandemic has made it evident that we have to work to curb the spread of illness inside the workforce, and businesses will want to keep these practices up to reduce employee sick days and promote good health.

It’ll be up to property owners to adapt to the changing workspace by providing these organizations with the new elements they look for in class A office space.

Morris Southeast Group can assist as you evaluate adapting your office buildings to the new normal. We’ll provide solid advice to lower vacancy rates and attract businesses to your facilities while keeping in mind the capital availability to execute changes and the potential ROI. And if you are looking to lease space, we can find facilities that meet your workforce’s safety and volume needs—remote, in-person, or a likely mix of both.

Call us at 954.474.1776. You can also reach out directly to Ken Morris by phone at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Disruption comes to the South Florida supermarket

Automation is the new black when it comes to speed and cost efficiency. Miami’s own Sedano’s grocery outlets, in partnership with Massachusetts-based Takeoff Technologies, is wearing this new style proudly as they deploy what is being called the world’s first “robotic grocery store.”

If successful, this new model will offer other retailers a brave new world of online growth at a fraction of the current cost of doing business. They will roll out the technology in 14 of Sedano’s 34 locations, and Takeoff plans to launch similar programs at five additional regional and national U.S. retail chains.

The process is fairly simple: customers order groceries from their phone or laptop, artificial intelligence-enabled robots at Takeoff’s automated fulfillment centers fetch the items, and Sedano’s staff helps sort and get them ready for in-store pickup or out the door for delivery. Takeoff’s system then automatically restocks inventory as needed, filters customer service requests, and provides reporting and analytics.

Cheaper, faster service

The grocery business can be cutthroat. Its low margins and high volume have companies always on the lookout for an edge. Robots bring a new opportunity to simplify processes and cut down on labor expenses. And the sector is growing, expected to reach $100 billion by 2022, with the overall warehouse robotics market expected to increase at a compound annual growth rate (CAGR) of 11.8 percent between 2017 and 2022, putting it at $4.44 billion in value.

These automated shoppers can yank 60 items off the shelf in a manner of minutes; 900 per hour. By contrast, living, breathing shoppers can only grab 60 per hour. Every week, the system processes as many as 3,500 online orders per location, with promises of delivery within two hours. These numbers dwarf those seen by traditional stores that rely almost exclusively on manual processes.

Automation means fewer square feet

These automated micro-fulfillment centers offer efficient service and significant cost savings because, among other reasons, they don’t take up as much room. They each need only 8,000-10,000 square feet, sometimes installed in the grocery store itself, which greatly shortens the distance between supplier and retailer and saves a boatload of cash, since they don’t have to build a physically separate distribution center.

It also shortens the distance between warehouse and customer, with orders able to be picked up mere steps away from where they are stored and delivery options being that much faster.

More examples of grocery automation

While a pioneer in many respects, Sedano’s is not the only grocer to dip their toe in automation.

• Ahold Delhaize, the world’s eighth-largest grocery retailer, plans to speed up orders and trim delivery times with their own automated warehouses.
• Albertsons hopes to establish a more efficient way to put together bags for delivery using automated packing solutions.
• Walmart, the 900-pound gorilla in the room and the main competition for Amazon, will capture approximately 1.8 percent of U.S. consumer grocery spending this year (up from 0.8 last year) and is in the process of testing whether robots can give them an edge in fulfillment times.
• Ocado, a U.K. online supermarket management firm that plans to enter the U.S. market via Kroger. They plan to pack 65,000 orders per week and boast battery powered units with charging stations.

In its quest to solve the conundrum facing all modern supermarkets – offer a robust and changing selection of products at a reasonable cost and still bring in enough profit to pay the bills – South Florida’s own Sedano’s has embraced disruption and is charting an exciting course towards the future. The impact on CRE will be interesting, especially if automation moves grocers toward finding smaller spaces in strategic locations – not to mention the impact the technology will have on other retail businesses.Morris Southeast Group keeps abreast of innovation and trends in South Florida business and their potential impact on CRE, and we’d be happy to help you find your next investment opportunity. For a free consultation, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Miramar, FL; January 29, 2019 – President Ken Morris, SIOR, RPA, of Morris Southeast Group announced that he has represented the worldwide leader in marine propulsion systems, ZF Marine Propulsion Systems Miramar, LLC in a 62,552-square-foot industrial warehouse lease in Miramar, a southern Broward County community near Hollywood and Pembroke Pines.

The 10-year lease, at 15351 SW 29^th St. – Bldg. C, in Miramar Centre Business Park, which has a total of 125,104 square feet and was built in 2008. The rental rate was not disclosed. Mercury Marine-Miramar and Aero Accessories are the other tenants in the building.

International property investor and asset management firm, Heitman, owns the property. Larry Dinner with CBRE represented Heitman in the transaction.

“After evaluating 17 peer locations in the southwest Broward County submarket, and factoring in where employees live and related considerations, the Heitman property was clearly the best choice for our client,” said Ken Morris.

ZF Marine manufactures a complete line of propulsion systems for commercial boats and pleasure-craft boats, including transmissions, propellers, shift and control systems, surface drives and thrusters for numerous applications. In the commercial field, ZF Marine products can be found on tugboats, inland river-tow boats, passenger ferries, fire/police and naval patrol boats. Its pleasure-craft components are suitable for speedboats, yachts, sail, sport fishing and related watercraft. ZF Marine serves customers throughout the U.S., Canada, Mexico and the Caribbean from its Miramar headquarters.  https://www.zfmarinepropulsion.com/

About Morris Southeast Group

For more than 35 years, Morris Southeast Group has been recognized as one of South Florida’s leading providers of commercial real estate services. Located in Weston FL, Morris Southeast Group is a full-service firm specializing in owner and tenant representation, corporate services and investment sales in the office, industrial and retail sectors throughout Miami-Dade, Broward and Palm Beach Counties. For more information contact President Ken Morris at (954) 474-1776 or visit www.morrissegroup.com.

The View from 50,000 Feet

The U.S. economy remains on solid footing and by summer this year is expected to surpass the longest economic expansion in history, and the 120-month mark set from March of 1991 to March of 2001. Even so, it seems we are trying to talk ourselves into a recession, with frequent media reports variously titled “The recession, when will it strike?” Yet no one bothers to remind us that Australia is entering its 29^th consecutive year without two consecutive quarters of negative economic growth, otherwise known as a recession. Economic expansions don’t stop from fatigue – something must cause them.

The Nasdaq Composite Index inched toward exiting the bear market in entered on Christmas Eve, rebounding nearly 20 percent to a Feb. 8 close of 7288.24. It would have to reach 7431.50 to make it official, and if it does, it would be its second-fastest exit from bear marketing territory in history. The rally was led by the FAANG stocks of Facebook, Apple, Amazon, Netflix and Google.

Turning to the property markets, strong Q4 activity pushed 2018 above 2017 for investment volume in the U.S.

• Commercial real estate investment volume rose 20.6% year-over-year in Q4 to $152.4 billion. Including entity-level transactions, total investment for the year was $534.8 billion, a sizable increase of 14.8% from 2017. Excluding entity-level transactions, which are highly volatile from year to year and can skew annual comparisons, 2018 investment volume was still up by a healthy 4.9%, according to Real Capital Analytics.
• Greater New York, Greater Los Angeles and the San Francisco Bay Area attracted the most investment in Q4, accounting for 27.7% of all acquisitions. The top-15 markets accounted for 64.4% of total Q4 investment volume.
• The only sector with cap rate compression in 2018 was industrial, according to the latest CBRE North America Cap Rate Survey. CBD/infill cap rates increased more than suburban for office, multifamily and hotel.
• Pricing for office, multifamily and industrial properties reached new highs. Increases in multifamily and industrial pricing led the national index, though the pace of growth for multifamily decelerated in 2018.

The View from 20,000 Feet

Broward County added 15,800 net-new jobs during 2018, bringing the Ft. Lauderdale-Pompano Beach-Deerfield Beach MSA to an employment base of 866,300, and with a jobless rate 3.3 percent. Trade, transportation, utilities and professional services led job growth, according to Florida’s Department of Economic Opportunity, Bureau of Labor Market Statistics. Construction (3,300), education and health services (2,100), leisure and hospitality (1,500) were other job sectors that posted gains. However, the county lost 600 financial services jobs and 500 government jobs in 2018.

South Florida should receive increased flows of investment capital into commercial real estate as a result of the Tax Cuts and Jobs Act of 2018, according to Miami law firm Berger Singerman and the firm’s fifth annual survey of over 2,000 local real estate professionals and property investors. Indeed, the Miami condo market was recently featured in national news as the most likely relocation target for New Yorkers and people from Connecticut.

This is the first year that people will be filing tax returns under the new law, and with new limit for SALT deductions (State and Local Taxes) set at $10,000, high-income earners and families with large mortgages are expected to flee high-cost states, including California, where it is not uncommon to pay property taxes of $20,000, $30,000 and even more annually – 100 percent of which was deductible under the old tax rules but won’t be starting this year.

Recent transaction feature

Morris Southeast Group represented the worldwide leader in marine propulsion systems, ZF Marine Propulsion Systems Miramar, LLC in a 62,552-square-foot industrial warehouse lease in Miramar.

The View with Boots on the Ground

The industrial market led other South Florida property sectors in 2018 (again) by posting 5,149,470 square feet of positive net absorption for the year. The overall vacancy rate stood at an historic low of 3.8 percent at year end, with the average quoted asking rental rate for available space at $10.33 per-square-foot at the end of the fourth quarter. Total industrial inventory in the South Florida market amounted to nearly 439 million square feet, or about the same size at Boston’s industrial market.

Total industrial building sales declined on a year-over-year basis and through the first three quarters of 2018, with 167 buildings of 15,000 square feet or larger traded hands, for a total volume of $1,051,381,525, according to CoStar. That compares with 171 building sales in the first three quarters of 2017 with a total volume in excess of $1.3 billion. Cap rates compressed during the year, falling from 7.18 percent in 2017 to 6.59 percent in 2018. At the close of the year, over 7.4 million square feet of industrial property was under construction, led by North Miami Beach industrial submarket (1.75 million square feet), Miami Airport (1.09 million square feet) and Southwest Broward County (1.07 million square feet). 

The South Florida office market was stable during 2018 and ended the year with an overall vacancy rate of 9.1 percent on tepid positive net absorption for the year of 115,133 square feet. The overall office vacancy rate was 8.9 percent at the beginning of last year. Two of the quarters posted negative net absorption last year while two quarters were positive. At the end of the fourth quarter, 3,522,479 square feet of new office space was under construction.

The average quoted asking rental rate for all classes of office product was $32.86 per-square-foot at the close of the fourth quarter. Class A space averaged $39.71, while Class B space was $27.76 and Class C space was $14.87 per foot. Total office inventory at year end was 233,380,457 square feet.

Total office building sales of 15,000 square feet or larger increased in 2018, when 87 office transactions closed in the first three months last year, with total volume exceeding $1.5 billion,

compared with 2017 when 107 office buildings sold, also with total volume greater than $1.5 billion. The average price-per-foot was $215.43 in 2018, versus $213.15 in 2017. Cap rates changed little, averaging 6.81 percent last year compared with 6.72 percent during the same period of 2017, according to CoStar.

Retail real estate in South Florida finished 2018 with a slightly higher vacancy rate then where it started, moving from 3.7 percent to 4.1 percent, yet overall the property sector had a good year, given the onslaught of ecommerce and its affects in other U.S. markets. For the year, 735,202 square feet of retail space was positively net-absorbed, and rental rates increased 3.05 percent from a year earlier, finishing 2018 at an average of $28.16 per-square-foot.

During the four quarters last year, nearly 2.6 million square feet of new retail space was delivered to the market. At the close of 2018, approximately 5.3 million square feet of retail product was under construction, reported CoStar. Retail real estate encompasses Shopping Centers – including community centers, neighborhood centers and strip centers), Power Centers, General Retail Properties, Malls and Specialty Centers, such as outlet malls, airport retail and Theme/Festival Centers.

During the first nine months of 2018, 92 retail properties were sold with a total sales volume of $1.03 billion, compared with the same period in 2017, when 80 retail properties sold for a total sales volume of $1.08 billion. Cap rates came down for retail real estate in 2018, moving from 7.07 percent in 2017 to 6.48 percent last year.

Ken Morris attended the Society of Industrial and Office Realtors (SIOR) Fall World Conference in Denver, CO this past fall. With nearly 1,000 fellow SIORs and sponsors in attendance, it was excellent networking with Thought Leader breakout sessions, panels and brilliant speakers. One of the best speakers at an SIOR event in years – Four-Star Admiral and Navy SEAL William McRaven, presented the keynote address during the Friday session.

Click here for the story “You Just Don’t Quit” Says SEAL Team Six Boss McRaven

Sponsored by Prologis, Four-Star Admiral and Navy SEAL William McRaven was a special speaker for a number of reasons, among them, SIOR has been trying to get him as a keynote speaker for four years but his schedule did not allow it until the Denver conference.

McRaven shared SEAL training stories, stories from his 37 years in the military and of course, the story about the raid on Osama Bin Laden’s compound. He said he was always impressed how people stood up in their darkest moments. “That’s when you have to be your very best – in dark, dark moments when everything is on the line.” He also pointed out that “risk is only relative to you – if someone else is taking a risk, it’s not relative to you.”

Operation Neptune Spear

McRaven is credited for organizing and overseeing the execution of Operation Neptune Spear, the special ops raid that led to the death of Osama Bin Laden on May 2, 2011. CIA Director Leon Panetta delegated the raid to McRaven, who had worked almost exclusively on counter-terrorism operations and strategy since 2001.

According to The New York Times, “In February, Mr. Panetta called then-Vice Adm. William H. McRaven, commander of the Pentagon’s Joint Special Operations Command, to CIA headquarters in Langley, Virginia, to give him details about the compound and to begin planning a military strike. Admiral McRaven, a veteran of the covert world who had written a book on American Special Operations, spent weeks working with the CIA on the operation, and came up with three options: a helicopter assault using U.S. Navy SEALs, a strike with B-2 bombers that would obliterate the compound, or a joint raid with Pakistani intelligence operatives who would be told about the mission hours before the launch.”

Of course the SEALs opted for the helicopter assault and SEAL Team Six executed the raid on Osama Bin Laden’s Pakistan compound, accomplishing their mission.

President Obama, Vice President Biden, Secretary Clinton, Secretary of Defense Robert Gates, Chief Counter-terrorism advisor to President Obama John Brennan (he later became CIA Director) and others tracked the progress of Operation Neptune Spear with impassioned interest and concern. Most people believe this photo was taken in the Situation Room, but McRaven said it was not; rather, it was taken in an adjacent room of the White House.

McRaven’s greatest point during his talk was on toughness, saying “training brings out the toughness in people” yet mostly, “you just don’t quit,” whether it is as a special operations warrior, or in life, sports, and business, if what you want is worth fighting for.

During the Q&A with McRaven, he was asked about Millennials and the generation behind them, or young people just entering and graduating from college. He was very optimistic about this generation and expressed “great confidence in young kids today.” He reminded us that earlier generations of Americans had little faith in what the Baby Boomer generation might accomplish, and it turns out that we have done okay.

Buying, selling, leasing space or do you own commercial property that requires third-party management to take care of the asset? Call Ken Morris at 954.240.4400 or email him at ken@morrissegroup.com.

Learn how commercial real estate brokers are leveraging the power of technology to better serve their clients

In a recent blog post, we showcased five smartphone and tablet apps that have drastically changed the commercial real estate industry. But those are by no means all of the technological innovations geared toward CRE; here are 5 additional apps that are also making an impact:

Apps that are changing the way that commercial real estate is done

1. CoStarGo – This tool is a free iPad and iPhone app, but requires a CoStar subscription. Users are able to easily search nearby listings and have results shown on a dynamically updated Google map. CoStarGo also includes handy features such as local market data and even a financial calculator to help investors and agents understand the true cost of a certain property.

2. RCA Commercial Property Search – Real Capital Analytics is a global provider of commercial real estate data. This iPhone and iPad app offers subscribers of RCAnalytics.com data access to commercial property transactions from around the world. Easily analyze comparables across the following property types: Office, Industrial, Retail, Multifamily, Hotels, Senior Living Properties, and sites that are under development.

3. Catylist – With Catylist, commercial agents gain access to a large database of sale/lease listings as well as interactive tools for listing syndication, email communication, reporting, and much more. Catylist PropFeed allows agents to create a private database for listings and completed transactions which can all be easily accessed from a mobile device.

4. 10bii Financial Calculator – In today’s fast-paced industry, the last thing that commercial agents want to tote around is a dedicated calculator. Most agents already have their smartphone, possibly a tablet and a slew of other tools to make their clients’ job easier. The 10bii Financial Calculator, which is available for both Android and iOS devices, allows agents to use an app that has a close resemblance to the HP 10BII, which is used in most CCIM courses. This includes all of the familiar calculations that are necessary to run a successful commercial real estate business.

5. TAS Mobile – If you’re in the retail space, TAS Mobile should likely be high on your list of apps to download. Currently available for iOS devices, it allows agents to quickly access retail data to assess the viability of certain locations based on the competitive landscape of the area. This tool offers a free version that offers access to some local data, but the premium version is much more robust and requires a subscription.

Mobile apps are changing the commercial real estate industry

There’s little doubt that mobile apps have allowed commercial real estate agents to be much more efficient and accurate when providing information to their clients. What once took hours to compile can now all be done out in the field, in a matter of minutes. At Morris Southeast Group, we’re constantly looking at the latest commercial real estate innovations to ensure we’re providing optimum service for our clients.

If you’re looking for your next commercial real estate investment or hunting for the perfect office space in South Florida, reach out to our team today. We’d be happy to sit down with you to assess your needs, plus show you how mobile tools can cut a lot of the guess work out of choosing your next space.

To set up an appointment for a free consultation, reach out to our team at 954-474-1776 or email Ken Morris at kenmorris@morrissegroup.com.

A look at the potential impact of disruptive technology and service

There’s a revolution on the road ahead and it’s picking up speed. Just a few years ago, order-by-phone car services like Uber and Lyft were a novelty. Today, they’re more like a necessity – so much so, that along with technological advances, the idea of driverless cars is no longer the stuff of science fiction. In fact, they’re coming.

With changes in the road ahead, it’s only natural for them to have an impact on nearly every industry, including the commercial real estate market.

More car services, less need for garages

First and foremost, with an increase of car services – either with a driver or without one – there will be less of a need for building tenants to lease parking spaces in garages, no matter if that garage is beneath an office building or in a nearby location.

As a result, revenue garnered from parking spaces will decrease for the landlord. Rather than paying a monthly fee for a space, commuters and tenants will likely direct their money toward affordable transportation plans.

In addition, developers will have a chance to redirect their commercial investment funds. Instead of budgeting for garage space, dollars could be spent in other areas of the building, such as an enhanced lobby, security systems, or expanded office space.

The shift in commuter behavior and the lobby

When more commuters arrive to work via Uber, Lyft, or a driverless car, the question for developers is what to do with the front of the building. Fewer tenants will enter the building from the garage. Instead, the front of the building will become even more of a hotspot.

Landlords and developers will have to address morning traffic flow so there isn’t a jam at the start of the workday.

Similarly, at the end of the workday, building lobbies will become a hive of activity as tenants and commuters congregate to catch their waiting car. The front area of buildings may have to feature a holding pen for arriving vehicles, while the lobby may have to look more like an airport terminal with shops, cafes, lounges, bars, and charging stations to keep commuters occupied and entertained until their ride home pulls up. In addition, these areas could generate additional revenue.

What to do with all that space?

Inevitably, there will still be diehard drivers who will need a place to park – but what about all of the additional square feet now available for something else? According to Commercial Tenant Resource, today’s ratio of 3-4 spaces per 1,000 square feet of office space could potentially drop to 0.01 spaces per thousand. This is where creativity and ingenuity will have to take the wheel.

For starters, on-premises garages could be designated as holding pens for car service vehicles, or something more. Retail space? Gyms? And let’s not forget about parking garages, very often located in prime locations. They – or the property on which they stand – can be repurposed, perhaps as a combination of commercial and residential real estate.

Navigating the road ahead

Morris Southeast Group is excited about the road ahead and the changes and challenges it will bring to the commercial real estate marketplace. For a free consultation on how you and your current or future properties can keep up with the changing times, you can reach our team at 954.474.1776, or call Ken Morris directly at 954.240.4400 or via his email, kenmorris@morrissegroup.com.