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Is South Florida Quickly Becoming a Global Tech Hub?

young executive talking on a cellphone in Miami

The tech industry is rapidly making its presence known in SoFlo, opening new opportunities for investors.

In the 1990s, Miami attempted to establish itself as a tech hub. At that time, the city was home to some of South America’s top online players, including the financial web portal Patagon.com, which eventually sold a 75% stake to global financial firm Santander.

But when the dot-com bubble burst in the early 2000s, the area could not hold onto much of its tech industry presence. Numerous tech companies went out of business, and nothing replaced them.

Things are far different today. Miami is now considered “the second most entrepreneurial city in the country” and features a startup density of 247.6 per 100,000 people. And the broader South Florida area hosts some significant tech companies.

Miami is also experiencing an influx of financial firms. Blackstone Group, Goldman Sachs, and Starwood Capital Group, among others, have relocated some of their operations to the downtown area. Given these factors, it makes sense that the tech industry will return to South Florida. The region is now in the same tier as other hubs like Boulder, CO and Austin, TX, in terms of attracting firms and talent.

Here’s a look at what’s happening in the tech scene and what this expansion could mean for South Florida.

Who’s setting up in South Florida?

The great thing about the area’s ascension in the tech industry is that there’s a nice mix of startups and established firms setting up shop.

For example, the online pet store Chewy Inc. was a startup based in Broward County. This retailer was acquired by PetSmart in 2017 for $3.35 billion and had over $7 billion in sales in 2020, making it a true success story of South Florida’s tech scene.

Another startup with success in the area is REEF Technology Inc., an organization with offices on Brickell Key that turns underused spaces in urban centers into hubs for goods and services. The firm received over $700 million from investors in 2020 and looks primed to experience further growth.

Of course, it isn’t just startups that are transforming the tech industry, as plenty of globally established firms are also setting up in the area.

For example, Microsoft already has a Latin American sales group in Fort Lauderdale, and reports suggest the company is currently searching for more space in Miami’s Brickell neighborhood. In addition, Live Nation leased a 52,000-square-foot office in Wynwood, and Spotify has 20,000 square feet of space in the same neighborhood.

Another bullish sign for the area’s tech industry is that two of the world’s largest tech investment companies, SoftBank and Founders Fund, occupy space in Miami and appear ready to invest heavily in tech. SoftBank already has about 14,000 square feet in the city and could be searching for as much as 100,000 square feet as it expands in South Florida. The firm has also committed $100 million to fund the region’s startups.

What this means for South Florida

As Miami further expands its tech presence, we could also see the city reach new heights as a global financial giant. After all, few locations in the country can compete with the mix of weather, activities, lifestyle, low taxes, and a business-friendly regulatory environment. The result would be an influx of high-paying jobs in Miami and growth for the rest of South Florida, as well.

As office space in downtown Miami rebounds and begins leasing or selling for a premium, cities and suburbs outside of the downtown core could also become more attractive to startups. Since employees work remotely at higher levels than ever before, there isn’t much reason for smaller firms to lease in a central area.

Much like Silicon Valley became an industry hub just outside of San Francisco, communities all over South Florida will benefit from this momentum.

CRE implications

From a commercial real estate standpoint, more tech and financial firms looking for space in Miami and the surrounding communities directly affects the demand for office space in downtown areas. An influx of startups could also mean more demand for smaller offices in outlying areas.

And the indirect growth in jobs—and the need for consumer goods and services—will impact the rest of the economy and demand for other types of CRE. As a CRE investor, it’s essential to keep an eye on these trends—especially if you own or are evaluating property classes that may benefit. 

Nevertheless, our CRE advice remains consistent: trends can be valuable, but due diligence is king. Each potential investment must be judged on its fundamentals, including solid financial, contractual, and geographic analyses. 

Morris Southeast Group works with CRE investors as they look for value and expand their investment portfolios. Give us a call at 954.474.1776 to discuss the current commercial real estate climate in South Florida. Ken Morris is also available directly at 954.240.4400 or kenmorris@morrissegroup.com.

The Downturn in the Restaurant Industry and Its Impact on CRE

a vacant restaurant with a for lease sign

Thousands of restaurants have closed their doors for good, but there may be CRE opportunity

Restrictions during the COVID-19 pandemic, especially bans on indoor dining, severely impacted the U.S. restaurant industry. Even areas with loose or no restrictions, like Florida, are experiencing slowdowns because of consumer hesitancy.

The result is hundreds of thousands of restaurants throughout the country permanently closing their doors. In addition, many eateries that have managed to stay in business are struggling through significant financial issues. While these closures signal trouble for the industry overall, there could be opportunities for savvy investors to capitalize on the widespread return of in-person dining.

Here’s a look at what’s happening in the restaurant industry and what we might expect to happen in the coming months.

What the numbers say

On the surface, the numbers associated with the restaurant industry might be described as “cataclysmic.” 

By early December, over 110,000 of the 778,807 restaurants in the United States had permanently shut down because of pandemic-related financial losses. That number has undoubtedly grown this year, too, with some estimates suggesting that nearly half of the country’s restaurants might never recover. In addition, the industry’s sales decreased by $240 billion from the expected levels of $899 billion in 2020.

Typically, any industry with over 14% of businesses failing in less than a year and a sales decrease of $240 billion would be a no-go for investors. However, COVID-19 has created an atypical scenario.

Recovery is coming

Of course, we all know that people all over the country didn’t just suddenly decide to stop eating at restaurants. COVID restrictions and virus-related consumer cautiousness are driving the slowdown in the industry.

However, there is light at the end of the tunnel thanks to national vaccination efforts. Nationwide, over 40% of the population had at least one vaccine dose by the end of April 2021, with about 30% of people already receiving two doses. 

Florida’s numbers are very similar to the national ones, with over 40% receiving at least one dose and 28% getting two doses already. COVID numbers are dropping with the increase in vaccine doses, too. Despite lifting its restrictions, Florida is seeing a steady decrease in positive tests as we move deeper into the spring. 

As more people get vaccinated, the populace will likely revert to normal as quickly as possible, with dining out at restaurants rapidly returning toward pre-pandemic levels.

How recovery could influence restaurants and CRE

Assuming we see vaccination rates continue to increase and the virus retreat to endemic levels, the restaurant industry should see a significant boom. But will that boom hit pre-pandemic levels? And if it does, will there be enough supply to keep up with demand?

The country has lost at least 14% of its restaurants. One might argue that there were too many dining options to begin with, but entrepreneurs could see line-ups outside of popular eateries, and new investors may look to get involved in the industry. Complicating a renewed surge in demand is an inability for many restaurant owners to find employees as government unemployment benefits continue.

Nevertheless, a restaurant rebound will increase demand for restaurant space, and there are plenty of CRE investment opportunities due to restaurant closures and empty properties. These buildings already have kitchens and are set up to accommodate indoor dining, of course. 

But CRE investors and possible restaurateurs must continue to weigh specific risks in the face of continued uncertainty:

  • Dining traffic is bouncing back rapidly, but will it match pre-pandemic levels? Or will some hesitance remain among former in-person patrons?
  • Could new variants of the virus outpace vaccination, causing some form of COVID to stick around permanently?
  • Restaurant owners are having trouble finding workers, which represents an operational and financial risk. These risks, of course, are passed on to landlords.

In the end, the wise path on restaurants mirrors the smart play on any CRE investment: pay attention to trends but conduct thorough due diligence on every deal. 

For those thinking of purchasing a property, evaluate the area, its foot traffic, a property’s proximity to other in-person retail and service businesses, and more. And current landlords should closely assess a potential tenant’s business case, including the length of the lease terms, the lessee’s track record in the industry, and other factors.

If a deal makes sense, it’s likely to make sense regardless of broader trends.

Preparing for the end of COVID

Of course, COVID-19 will remain a big part of our lives for the near future, and there’s a lot of work to be done before things become “normal.” It’s essential to keep an eye on the economic recovery in South Florida and throughout the country to ensure you’re making wise investments.

Morris Southeast Group works with commercial real estate investors and can assist as you look for value in the South Florida market. Whether it’s empty restaurant space or other commercial property types, we’ll provide advice and local market knowledge as you look to expand or manage a portfolio. 

Give us a call at 954.474.1776 to learn more. You can also reach Ken Morris directly by calling 954.240.4400 or via email at kenmorris@morrissegroup.com.

Can CRE Investors Easily Borrow Money in a Post-COVID Economy?

cre lenders approving a loan

Although many banks and other lenders are cautious about lending money, there is still significant capital available for CRE investors.

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.

Uncertainty about the new normal

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. 

How lenders react to unpredictability

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.

Hope for the future

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 kenmorris@morrissegroup.com.

Is South Florida Destined to Become the Center of the Financial Universe?

a view of office buildings in downtown Miami

Numerous financial institutions are setting up shop in South Florida in search of warmer weather, cheaper real estate, and lower taxes. But how significant and lasting is the trend?

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.

What’s happening in South Florida?

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:

  • Investment management company Blackstone has already decided to relocate some of its team to Miami after purchasing two office buildings at MiamiCentral for about $230 million.
  • Hedge fund Elliott Management is taking things a step further by moving its headquarters out of New York City and into Palm Beach County.

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.

Is the trend durable?

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

What the future could hold for South Florida CRE

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.

Staying up to date on changes in South Florida and CRE 

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 kenmorris@morrissegroup.com.

Why Perception Creates a Disconnect Between Price and Value in CRE

scale showing the difference between price and real value

In the end, what something is truly worth is what people are willing to pay for it.

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.

From where does value emanate?

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.

The role of perception

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.

Commercial real estate value

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.

Finding value in CRE

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 kenmorris@morrissegroup.com.

Beyond the Pandemic: Climate Change is a Significant Issue For CRE

downtown miami

With COVID-19’s impact winding down, CRE investors should be aware of another challenge that never left.

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.

Florida’s climate-change problem

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. 

The cost of climate change

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.

Proactive measures CRE investors can take

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.

The South Florida outlook is concerning but mixed

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 kenmorris@morrissegroup.com.

The Impact of COVID-19 on Existing Commercial Real Estate Trends

suburban office park

The pandemic and the economic downtown impacted—and accelerated—some CRE trends significantly. 

Although COVID-19 led to a global economic downturn, it hasn’t ended up as severe as some early projections estimated. In June 2020, the World Bank reported that the pandemic could plunge the world into a recession not seen since World War II, but it hasn’t reached that level and seems unlikely to do so. 

By many metrics, the recession hasn’t been as bad as the one in 2008, especially because some industries exceeded expectations during the pandemic. Commercial real estate, in particular, hasn’t experienced the widepread, cataclysmic downturns seen in some sectors—at least on the surface. And many analysts believe we are on the cusp of a rapid economic recovery.

Nevertheless, some types of CRE were hit far harder than others. Overall, the industry is likely still in for some turbulence, given the delay in foreclosures and evictions due to moratoriums. And CRE is going through a transitional period because of how the recession hits different aspects of the economy—and influenced some trends that were already in motion.

Here’s a look at a few of the trends impacted by COVID-19 and what they could mean for the future of commercial real estate. 

Multifamily properties in the suburbs

The move to the suburbs is nothing new. And for all the criticism their generation receives, Millennials know what they want and don’t seem afraid to get it. 

In this case, fewer Millennials are looking for apartments in downtown urban centers, instead opting for property in the suburbs. The reasons: they can buy or rent a large home with more land, the cost of living tends to be lower, and they aren’t necessarily worried about a commute if it means more comfort at home. 

This generational move to the suburbs was already underway before the pandemic. Still, the fear of getting sick and the shift to remote work, among other factors, have accelerated things. And this may spur persistent demand for suburban multifamily properties in the coming years, including more construction

This trend’s scope will depend on whether the claims heralding “the death of big cities” are overstated and how quickly those urban centers rebound after the pandemic.

Suburban offices

Hand-in-hand with people moving away from major cities are offices setting up in suburban areas. This trend has been gaining momentum for some time, with COVID-19 again accelerating it.

Companies are adjusting, with many opening suburban offices to attract talent. The Millennial generation will dominate the workforce for the foreseeable future. And if they want to work and live in the suburbs, companies and properties will have to accommodate them.

Much like suburban multifamily CRE, these offices gained appeal because their location made it easier for employees to avoid clusters of people during COVID-19. This shift may continue, but it must be assessed in tandem with the move toward remote work, given the huge number of companies adopting some form of that model permanently. The overall demand for office square footage may lower along with a change in location.

Amenities in the office

There was some pre-pandemic movement toward the hotelization of the office. The idea is that the workplace contains many at-home amenities, like a kitchen, fitness center, comfortable furniture, and private spaces. Much of this trend—along with the customization that tenants routinely expected in large office leases—came to a virtual standstill last year.

In essence, it made little sense for businesses or property owners to make significant investments in a climate of extreme uncertainty. And because the pandemic spurred tenants to sign shorter leases, the numbers became questionable, and lenders were understandably hesitant to back such projects.

However, the return to the office following COVID-19 and a corresponding economic boom may put customized offices with enhanced amenities back on the table. Analysts from major financial institutions are projecting 6-7 % growth in gross domestic output this year, along with a hiring spree that may result in near-record employment.

As economic confidence increases along with the competition for talent, employers could take another look at customizing offices. And they may start signing the longer-term leases that make doing so possible.

Will a vaccine change things?

As we get closer to mass vaccinations and, eventually, herd immunity from the coronavirus pandemic, there will be questions about these trends’ durability. 

However, we don’t yet know if the vaccines will completely work against the virus’s emerging variants. And analysts are uncertain of the extent to which behavior will change after herd immunity is achieved—specifically, how much and how quickly individuals will return to pre-pandemic norms. 

It’s essential to keep a close eye on evolving trends, tactics, and considerations—but assess all of them carefully 

COVID-19 sped up certain changes, but some of them aren’t a big surprise to many investors. For example, the move to the suburbs has been happening for years, despite its new momentum. In every case, investors, developers, tenants, and other stakeholders should avoid putting complete faith in any trend and continue to pay close attention to local economic, broad-CRE, and sector-specific outlooks.

Whether you are a tenant, property owner, or potential investor, Morris Southeast Group can help as you assess the best way to proceed. Give us a call at 954.474.1776 for commercial property advice you can trust. You can also speak with Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

Inflation or Deflation: What Will We See in the Post-COVID World?

post covid economic recovery

Many analysts believe we will enter an inflationary period, but some predict the inverse

A return to normalcy is drawing closer with news that the United States could distribute up to 500 million vaccine doses by the end of June. This number would mean there’s enough product on the market to vaccinate the country’s entire adult population, potentially ending the pandemic.

From there, pockets of virus infections could pop up in schools or within the unvaccinated population. Still, the numbers would be far lower, and hospitals would certainly have the capacity to handle these patients. 

The result should be a significant reopening of businesses around the country—and a potential boom. But public debt is at record levels, and low interest rates may rise. What could all this mean for the economy?

There are arguments suggesting that we could experience a period of inflation, while a few analysts posit we might even be in store for deflation. Here’s a look at both of these possibilities, along with what they might mean for the commercial real estate industry.

Why we could see inflation

The main argument in favor of inflation in the near future involves the influence of debt and quantitative easing (QE) on the economy. This process injects money into the marketplace to stimulate spending. Those who believe inflation is on the horizon suggest that QE almost certainly leads to inflation, particularly affecting the stock and real estate markets. 

Another reason for potential inflation is lower interest rates. Money is incredibly inexpensive to borrow right now, typically leading to more of it making its way into the economy. However, as businesses spend more of this borrowed money, it creates a tower of debt. (The same, of course, is true for the federal government.)

If repaying this debt becomes too much of a burden, the system may be severely strained. At this point, inflation is likely to follow because the only thing that reduces the debt burden at the government level is the decreasing value of money.

This theory on inflation may take years to manifest. But there is also a possibility we could see it starting to take hold in the early days of the post-pandemic world

Will people be so happy to return to normal that they frequent restaurants and buy items they can’t afford?

How quickly can businesses return to normal, and can they repay the loans they’ve received?

Will the government debt spiral have premature consequences?

The argument for deflation

Despite many concerns about inflation, other economists feel that the COVID recovery process won’t increase inflationary pressures for a couple of reasons. 

First, there could be lower consumer demand for goods and services than expected because people simply don’t have the money due to unemployment. Some individuals could be reluctant to return to normal, too, until there’s more data supporting the vaccine’s efficacy. 

In this situation, lower consumer demand would offset the inflationary boost of an increased money supply. As a result, dollars won’t change hands at extreme accelerating rates, and there might not be significant inflation. There could even be deflation if spending drops far below expectations as we move into the summer months.

Second, even if the economy does recover rapidly and consumer spending increases right away, a good proportion of businesses will remain in a recovery period for the remainder of the year. These entities may not have to borrow as much, limiting their new debt while using the influx of consumer cash to pay down their existing debt. 

These arguments suggest an increase in available cash will go toward recovery rather than factors that drive inflation. An increase in consumer spending may also decrease the reliance on borrowed money moving forward.

What this might mean for CRE investment

Commercial real estate investors will want to keep a keen eye on this situation. Lower than average interest rates can create prime borrowing opportunities on available properties, but they’re only worth an investment if economic recovery leads to demand for the specific spaces.

Questions about whether businesses will recover rapidly and expand or stay in a holding pattern for the rest of 2021 remain, so monitoring developments is essential.

It’s also worth noting that income-generating CRE is a reliable hedge against inflation because rental prices increase with inflation. As a result, investors don’t necessarily have to worry about the devaluation of money outpacing their returns.

Monitoring or expanding your real estate portfolio during this recovery period calls for significant due diligence, as recovery will likely be different all over the country. Morris Southeast Group can help you keep an eye on the post-COVID environment and determine whether a specific investment makes sense.

To learn more, contact Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

What Can We Expect From Retail in 2021?

sign showing store reopening

Retail had a turbulent and uneven ride during the COVID-19 pandemic, but a broad recovery should follow once most Americans receive a vaccination.

It goes without saying that 2020 was an incredibly challenging year for many brick-and-mortar retailers as pandemic-related restrictions made turning a profit an uphill battle.

Although recovery likely won’t be linear, and some sectors will get back to pre-COVID levels faster than others, 2021 should see cities all over the country lift these restrictions and allow businesses to operate at normal levels.

The commercial real estate industry could see vacancies fall as a result. Nevertheless, some of the economic pain was delayed as businesses struggled to get to the other side of the pandemic—so additional foreclosures are in the cards. And some risk factors remain, including coronavirus variants extending lockdowns and online shopping becoming an even more common replacement for brick-and-mortar options.

Here’s a look at what we might expect from the retail industry in 2021:

An economic recovery 

It’s reasonable (though not certain or specific) to expect a broad economic recovery in 2021, as more people will return to work, more businesses will reopen, and more money is pushed into the economy.

Naturally, this bounce-back will rely on a successful vaccine rollout and these shots working to control emerging COVID variants. There is a reason for optimism, though, as President Joe Biden believes there will be enough doses for every adult in the country by the end of May. Nevertheless, as with the recession, a recovery could be incredibly uneven depending on the industry. 

Overall, retail sales recovered adequately after the initial lockdowns in April 2020, with spending exceeding pre-pandemic peaks in July and August. These numbers happened even with restrictions in place in much of the country, so high retail sales numbers should be expected this year.

At the same time, not every retail sector did well. For example, clothing store sales were over 21% lower than their pre-pandemic levels. In contrast, home improvement shops, grocery stores, and sporting goods retailers had higher-than-average sales last summer. Of course, e-commerce took off during the pandemic, securing a larger piece of the retail pie than ever before. And it’s a safe bet that online shopping will continue to grow because more people are comfortable with it, accelerating this fundamental shift. 

A closer look at online shopping

It should come as no surprise that online purchases increased by over 30 percentage points at the height of COVID, as many consumers had no choice but to buy their goods digitally.

What’s noteworthy about these numbers is that some of the most significant gains were in the personal care, pharmaceutical, home furniture, and electronics industries, so people were buying everything from essential goods to luxury items online.

Jessica Liu, co-president at the e-commerce multinational Lazada Group, projects not only will more people shop online in 2021 than ever before, but local small and medium-sized businesses will have to get in on the action to stay afloat. The trend will create an even more robust online shopping environment where consumers don’t necessarily have to rely on Amazon and other e-commerce giants.

How commercial real estate investors can adapt

As it stands, there could be tremendous upside in commercial real estate investment in 2021, particularly in the latter half of the year. However, it could take some creativity to determine how to leverage the recovery—and where it will occur—when shopping returns to stores.

If online shopping remains as popular as it has been during the pandemic, warehouses and fulfillment centers will continue to be a good investment as more stores—both e-commerce and newly hybrid retailers—will need these spaces. 

Likewise, there is a strong assumption that consumers have been missing the in-person shopping experience. So the broader brick-and-mortar retail environment may return to pre-pandemic levels, even in hard-hit sectors like clothing. Investors will want to keep tabs on the latest trends, as we’re entering a once-in-a-generation recovery period that could go a number of ways.

Getting CRE perspective and assistance 

Since so much will likely change in the retail environment in 2021, flexibility likely remains paramount—and due diligence certainly will. Consumers have never had as many choices when seeking goods, and the entire globe is now a marketplace that can serve buyers anywhere. Commercial real estate investors must carefully evaluate individual investment opportunities and assess how consumers want to do their shopping if they consider retail-related properties.

Morris Southeast Group has the insight, market knowledge, and resources to guide you through the real estate decision-making process. Call us at 954.474.1776 to inquire about the current trends in South Florida CRE. You can also contact Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

Social Distancing Layout Tips For the Office

Social distancing could remain necessary for a period, even after the COVID-19 vaccine rollout

Although it appears as though most of the American population will have access to a COVID-19 vaccine by the summer, many questions remain.

First, the vaccines might not work as well on some of the virus’s emerging variants, particularly if it mutates further in the coming months. Second, the vaccines might not prevent the virus from spreading, making it essential to protect those who have not received their doses. Finally, it could take the public some time to return to normal psychologically—individuals may not feel completely safe while gathering.

In the workplace, this means social distancing practices could remain necessary in the coming months and beyond. Property managers should be aware that many companies will want to put social distancing protocols in place as employees return to the office. Businesses looking to lease offices may need to evaluate spaces with these considerations in mind. 

Here’s a look at some layout tips for organizations looking to socially distance while keeping the workplace attractive and productive:

The six-foot rule

One of the most important protocols to follow in a socially distanced office is the six-foot rule, where all workspaces are at least six feet apart. It’s goal, of course, is to keep employees away from each other physically, minimizing direct person-to-person transmission.

When designing a socially distanced office, the main thing to remember is that there must be space between desks and workspaces. However, the design can maintain a sense of community within the office by offering larger communal areas where it remains possible to have a socially distanced conversation.

Open-concept offices may have lost favor in the past decade, but many are paying dividends now because they tend to be adaptable. The floorplan allows companies to space people out while erecting temporary barriers. Adding closed offices and creating meeting spaces with six feet between seats are also options. 

Physical barriers

It isn’t always possible to stay six feet apart, particularly in a busy or small office space. As a result, installing the aforementioned physical barriers could become necessary for some companies. The type of physical barrier depends on how the business operates. 

For example, in an open-style office, installing plexiglass barriers between workspaces that are facing each other is one way to keep some collaboration while mitigating the spread of virus particles. Other companies might opt for cubicles or closed offices. 

Of course, constructing closed offices is a significant renovation when done on a large area. However, adding a few semi-closed spaces may create the best of both worlds for certain buildings and tenants. 

Identify high-traffic areas

Every office has high-traffic areas that act as a gathering space or bottleneck. These locations could be hallways, elevators, specific desks, or the breakroom. Large lines of desks can also turn into high-traffic areas where workers are always passing each other as they attempt to reach their workspaces. 

By eliminating some of these high-traffic areas, designers can reduce employees’ chances of getting too close and spreading COVID. But a more practical option is often setting and enforcing social-distancing rules for employees who use these spaces.

When re-configuring an office, look for locations with worn carpet or floors. This damage indicates that the area is a high-traffic spot that should adapt to prevent too many people from passing each other or gathering. Removing desks or chairs from these locations may be a good start, as it eliminates reasons for people to stop and linger.

Small meeting spaces

Meeting spaces will be necessary to make in-person collaboration possible, of course. Again, procedures and adaptations are called for.

As a rule, meetings must be small enough to socially distance in a given space. And instead of putting numerous employees in a single room for large-scale meetings, spreading everyone out and augmenting the audience with technology makes a lot of sense.

Finally, many companies are leveraging outdoor meeting spaces because of the virus’s spread via circulating indoor air. Properties with appropriate outdoor areas—roof decks, large patios, etc.—could be a valuable amenity with added seating. This may be less practical in South Florida as we hit our brutal summer, but it is an option well into spring in most areas of the country.

Offer additional space

As more employees return, businesses may be looking for additional space to keep their workers distanced. While some companies opt to let a percentage of staff work from home, others will seek larger offices or flexible space in the same building.

Having flexible office layouts allows property owners to rent out space as a service. In this set-up, a business may lease temporary space in the building for meetings, collaborative projects, or overflow offices. Such flexible spaces could remain in demand as companies look for creative ways to keep their employees separated, while providing alternative revenue streams for property owners.

Hope and herd immunity are on the horizon. But we must stay adaptable in 2021

Companies’ wants and needs are continually evolving, and the next few months will undoubtedly see many things change. 

Will corporations let the majority of employees stay home?

Is flexible office space a durable trend or will the pandemic’s end put highly customized offices back in vogue?

Is some form of COVID-19 here to stay?

There’s still a lot to be determined, but Morris Southeast Group is monitoring the situation and works to provide the insights you need to create attractive spaces for tenants. For more information, reach out to us at 954.474.1776. You can also contact Ken Morris directly at 954.240.4400 or kenmorris@morrissegroup.com.

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