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Commercial Real Estate as an Economy Indicator

Ken Morris spoke with Dave Kustin of ContentBacon about the impact of the COVID-19 pandemic on commercial real estate. They talked about what property owners, landlords, and tenants are doing—and may do—during the current crisis, as well as the CRE outlook in the short and longer terms.

Key Takeaways: What You Need to Know About the Current CRE Climate

  • Cashflow is king. Tenants and landlords may work out deals to pay rent.
  • Evaluate the “act of God” clause in business interruption insurance policies.
  • Business survival is the priority, but commerce never stops. Organizations with strong business plans are already preparing for the aftermath.
  • Renegotiations of terms may be possible, based on short-term needs and long-term interests.
  • CRE prices may adjust downward but money has been sitting on the sidelines to take advantage. This adjustment could be offset by low interest rates.
  • Landlords and owners should adopt a cooperative tone—and communicate.

Our team at Morris Southeast Group is here to help support you during this difficult time if you have any commercial real estate questions or concerns. To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Virgin Trains USA’s Impact On SoFlo CRE

Virgin Trains USA’s Impact On SoFlo CRE on morrissegroup.com

For developers, it’s all aboard

When it comes to commercial real estate, railroads have long been considered a development incubator. Capable of moving people and goods across all distances, rail is a big reason why East Coast cities boomed, why the west was won, and why Henry Flagler was able to attract tourists and developers to South Florida. Wherever a station popped up, hotels, restaurants, retail, saloons, and homes were sure to follow.

But somehow, as the rest of the world developed its rail systems, embracing high-speed and efficiency, trains in the United States slowed in favor of an interstate highway system. Our network of highways had incredibly positive impacts on the country. But today, we’ve also seen some of the other consequences of that decision—suburban sprawl, downtowns that have deteriorated, and traffic congestion.

A new look at rail

When Brightline entered the conversation in Florida, it offered a new glimpse into what rail could do for the region. The goal was a high-speed system linking major cities with centrally located stops along a good portion of the Florida peninsula. This grand but controversial plan held the promise of new development opportunities along the route and in a radius surrounding each of the stations.

While there was certainly some development, things seemed to slow as Brightline’s profits also became sluggish. That all changed, however, when the rail company entered into a partnership with Richard Branson and his Virgin Group, a globally recognized brand led by a globally recognized figure.

Virgin Trains USA’s broader vision

As a global travel giant, Virgin has already conquered air and sea and, perhaps someday, it will conquer space. It’s really no surprise then that Branson would turn his attention to rail, especially since his new adults-only cruise line, Virgin Voyages, leaves from Port Miami. By partnering with Brightline, he has expanded his ability to move people to his own products.

Within months after announcing the partnership, new station locations were announced. Joining the current stations—Miami, Fort Lauderdale, and West Palm—are Port Miami, Aventura, and Boca. In addition, tracks have already started to be laid from Orlando International Airport to the West Palm station, ultimately bringing Central Florida tourists and residents to Port Miami. In other words, Virgin Trains USA will become the only intercity rail system to link an international airport with a major cruise port in 2022.

For developers, the partnership may be an exciting one

Cities up and down the corridor are all vying for a piece of the rail pie. In locations where Virgin Trains USA stations already exist, projects are underway and open. Florida East Coast Industries, for example, has already completed two office buildings at Virgin’s Miami Central Station and is building two apartment towers in Miami. That same company also recently opened Park-Line Palm Beaches, adjacent to Virgin USA Train’s West Palm station. The 26-story building has 290 Alexa Smart Home System apartments and 14,000 square feet of ground-floor retail space.

At the same time, there is talk of Tri-Rail operating trains on Virgin’s rails to fill in the station gaps. That, along with a discussion of additional stops, travel hubs, and bus and light-rail linkages, has seen several new trackside plans incorporating space for possible terminals. One such location is University Station in Hollywood, where the city is looking for a mixed-use development on 2.5 acres of city-owned land. Other cities, meanwhile, are creating master plans for additional townhomes, apartments, hotels, and retail spaces.

There’s more rail on the horizon

There has been momentum building with the Virgin Trains USA entry into the Florida rail system. Proposals already on the table include extending the rail link from Orlando to Tampa, as well as a hyperloop, a freight-capable line between Orlando and Miami, traveling down the center of the peninsula along the western edge of Lake Okeechobee.

It will be interesting to see what rail may do for CRE development in South Florida—and the impact could be significant. To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Coronavirus And The Future Of SoFlo CRE

Coronavirus And The Future Of SoFlo CRE on morrissegroup.com

4 things to do now for tomorrow

There’s no easy way to begin. As you all are very much aware, coronavirus is taking an incredible toll on lives and livelihoods. Anxiety is high, nerves are frayed, and because the situation is rapidly changing, there is no way to predict the short- and long-term outcomes accurately.

It wasn’t so long ago, in fact, that investors were excited because the Federal Reserve had decided to keep interest rates steady for 2020. As of this writing, rates have been slashed to near zero in an effort to support the economy.

If the pandemic has taught us anything, it’s that we’re all in this together. Each person has a role to play, from the truck drivers to the grocery store clerks, from the first responders and medical personnel to neighbors checking on neighbors, particularly the elderly, from a safe distance. The same holds true for the CRE sector, where property owners, landlords, and tenants are going to have to find a new way to do business to survive today and prepare for tomorrow.

Things to do now

The economic impact is already being felt in South Florida, with the recreational and tourism industries taking the initial punch. As other industries have moved employees to working from home, shortened hours of operation, or have closed until further notice, it only makes sense that CRE is going to feel—and is already feeling—the impact. Without foot traffic and shoppers with disposable income, for example, retail tenants will feel the pinch and start to fall financially. A mandated lockdown will likely make economic survival impossible for many.

For that reason alone, everyone in the CRE equation needs to be proactive now rather than wait for the day when the dust settles.

1. Review liability coverage

More than likely, your liability insurance does not have a pandemic clause. As a result, an allegation that a person became infected and developed COVID-19 while on your property will most likely fall under bodily injury or gross negligence. In March 2020, for example, a passenger on Princess Cruise Lines claimed the cruise line allowed passengers to board a ship when the company was already aware of other ships having been contaminated. Strongly worded exclusions, contractual terms, and a valid defense can often prevent a lawsuit from moving forward.

2. Practice environmental cleaning

Another way to both help offset the possibility of a liability lawsuit and provide service to tenants and visitors is to practice environmental cleaning of common areas—regardless of whether there has been a confirmed or suspected case of coronavirus in the building. Using CDC guidelines, some areas may need to be cleaned several times a day. Enforcing social distancing rules by limiting occupancy is also a good step, if possible.

In addition, it’s imperative to work with the local health department and gather data to determine where in the building an infected individual may have been, as well as define other person-to-person contacts.

3. Review leases

As the crisis continues, local, state, and federal governments may intercede to protect commercial and residential tenants from the economic fallout, and it may become difficult or impossible for landlords to evict. Landlords and property owners must be sure to understand their rights, some of which may be curtailed by new government rules and social pressures.

Regardless of any executive orders or legislation, it’s a good idea to be lenient and understanding with good tenants if you are in a position to do so. Not only does it provide the opportunity to support businesses and individuals during this trying time, but it also often makes good business sense. Great tenants can be hard to find, and helping people and organizations recover can reap long-term benefits.

4. Be proactive and creative

All of this is unchartered territory, and the only way to successfully navigate it is to be informed, proactive, and creative. In Jonesboro, AR, a property investment company waived April rent for its tenant, explaining that it would rather see that money go to paying the salaries of the tenants’ employees. Similarly, Rosie’s in Wilton Manors, FL, hosted a pop-up drive-thru for free take-out food, only asking hat customers provide a donation to support the bar and grill’s staff.

While this solution may not work for all property owners, it’s imperative to find options that allow the landlord to meet his or her loan obligations while maintaining a strong relationship with a tenant. For example, the landlord may agree to temporarily relax lease enforcement, especially since some of the lease terms may be impossible to satisfy. At the same time, it may be beneficial to enter into short-term agreements that address rent abatement with defined reinstatement dates and methods to recoup losses once the economy returns.

Morris Southeast Group is in this with you

Like you, Morris Southeast Group is concerned about our families, friends, and clients. Part of what keeps us going is being proactive and looking ahead. While things are intense now, coronavirus will abate, and it will eventually be time to heal and rebuild. By taking steps today, we can lay the groundwork for tomorrow—a future that’s based on goodwill and partnership, because we’re all in this together.

If you have questions about the impact of the crisis on CRE or need any of our services, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

A Message on Weathering the Coronavirus Storm

We will get through this. And we are here to support you.

To our friends, clients, and colleagues:

Like you, we are closely watching events unfold surrounding the COVID-19 pandemic and the resulting disruption to the financial markets and our society. This impact will likely continue for several more months as the Coronavirus eventually peaks throughout the United States and the rest of the world.

We remain in regular contact with infectious disease specialists who tell us that the best things you can do right now are wash your hands frequently, avoid touching your face, and try to avoid large groups of people. Elderly individuals and those with preexisting medical conditions such as diabetes and cancer should take extra precautions to avoid crowds. If you can avoid traveling at present, it is the safest course of action.

At Morris Southeast Group, we have been through many shocks to our society and financial systems since our company was formed. These include:

  • 1979: The oil market shock
  • 1987: The stock market crash kicked off by “Black Monday”
  • 1989–1995: The savings and loan crisis
  • 1990–1991: Gulf War I 
  • 2000–2002: The bursting of the dot-com bubble
  • 2001–2002: The 9/11 attacks, the invasion of Afghanistan, and the resulting market correction and change to U.S. and global markets
  • 2003–2011: Gulf War II
  • 2005–2011: The housing bubble, the subprime mortgage crisis, The Great Recession, and their after-effects

Each of these events was incredibly disruptive—and each caused a lot of fear about the future and our personal and collective ability to survive change. But in every case, we not only recovered, but our society and economy grew and became stronger. Stay safe and take appropriate precautions. But please keep this perspective in mind as the media bombardment of minute-by-minute Coronavirus updates continues. And remember that our team at Morris Southeast Group is here to help support you during this difficult time.

If you have any commercial real estate questions or concerns, get in touch with 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.

Connect Capital Miami, Miami’s Affordable Housing Plan, and CRE

The affordable housing crisis hits close to home

Let’s cut right to the chase. Across the country, there is an affordable housing crisis. And in Miami, despite robust development and investment opportunities, the city is a high-rent/low-income region, making it one of the least affordable cities in the country.

One study reports that 71% of the households in the City of Miami are renters. Of those, 61% are considered cost-burdened, with 30% of their income going to rent and very little of it available to spend elsewhere in the community.

In May 2019, the Connect Capital Miami report was released. The effort is the culmination of months of interviews and meetings with primary stakeholders, from city and community leaders to investors and residents. The report not only provides a glimpse into the difficult situation in Miami, but also offers suggestions on how to best address the problem.

A snapshot of Connect Capital Miami

The goal of the study was to discover a way for the City of Miami to create or preserve 12,000 affordable housing units by 2024. To accomplish that, the City would have to tackle the issue using a three-pronged approach:

  • Identify pipelines to potential development. This includes building and preserving multi-family properties, single-family-home ownership, redevelopment of existing affordable housing properties, and creating supportive housing with on-site assistance, such as healthcare and case management services.

  • Establish development criteria. Here, the emphasis is on creating supportive and sustainable communities that are walkable and located near opportunities, basic needs, and public transportation. In addition to affordable rentals and on-site support services, there is an emphasis on mixed-income and mixed-use development.

  • Enabling the environment. This involves …

Enabling the environment is a key takeaway

Perhaps no other segment of the report garnered as much attention as the idea of enabling the environment—that is, clear recommendations that use Miami’s strengths and tools that already exist. Among the recommendations are:

  • Through the use of LAND: Land Access for Neighborhood Development—a map created by the University of Miami’s Office of Civic and Community Engagement—the city can identify publicly owned vacant and under-utilized land.

  • Adjust existing zoning codes to meet the challenges. An example is looking at older properties that have been labeled as out-of-compliance because their densities no longer meet current codes. As a result, it becomes challenging for them to be refinanced or purchased.

  • Coordinate public funding, permits, and application processes to lower development expenses and solve timeline issues.

  • Reduce property taxes on affordable homes.

  • Identify new funding streams and modify existing ones.

The City of Miami releases its strategy

With the release of the final Connect Capital Miami Report in May 2019, the City of Miami took the findings to heart. Working with the Jorge M. Perez Metropolitan Center at Florida International University, the city developed the Miami Affordable Housing Master Plan in January 2020. The effort took into account many of the recommendations from the Connect Capital Report, such as streamlining the permit process and reviewing zoning regulations.

The core of the plan is for small and mid-sized developers and builders to renovate or develop small- and medium-sized lots—“infill” projects. Much of the master plan relies on private enterprise, but the city would create an independent Miami Affordable Finance Corporation for loan coordination. It would also use the Miami Housing Innovation Fund, a pool of funds from public, private, and philanthropic sectors.

Building a future through local partnerships

At Morris Southeast Group, we cannot say enough about the strength of partnerships and the power of community. It’s one of the reasons we’ve been proud to call South Florida home for more than 30 years. In partnering with affordable housing solutions, CRE developers enrich the community by providing jobs, goods and services, and increasing traffic to CRE properties. It’s good sense, all around.

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

The Pop-Up Park Has Arrived

A newer twist on a new idea impacting commercial real estate

In the realm of commercial real estate (CRE), pop-ups are relatively new. What were once considered trendy have proven to be very popular, and there is no denying the positive impact they’ve had on CRE.

Thanks to short-term leases, building owners can generate income from properties that would have otherwise remained vacant. At the same time, these unique leasing opportunities allow a new business to introduce itself to the public and, if successful, become a long-term tenant.

Part of the fun of a pop-up is creating new ways to repurpose space. Pop-up art galleries became pop-up retail shops, which became pop-up museums and libraries. Recently, pop-up attention has been looking at available outdoor areas, from vacant lots to curbside spaces to underutilized properties—and all of this has given rise to the pop-up park.

What is a pop-up park?

Pop-up parks, or PUPs, are a spin-off of Park(ing) Day, a program that began in 2005 in San Francisco, when a design collective rented out a parking space for a few hours and installed a temporary garden. That idea literally and figuratively grew into PARK(ing) Day and is celebrated in countless parking spaces around the world.

The idea evolved at the same time many cities were eager to revitalize downtowns into pedestrian-friendly zones, and city dwellers craved greater contact with nature. Park space seemed like a logical idea, but many of these urban areas were already cramped with pavement and properties—with the exception of available space in curbside parking, vacant lots, and other underutilized areas.

What began as an initiative for local governments and city planners to create green spaces for residents has evolved into a partnership opportunity between municipalities, community groups, and developers.

How pop-up parks benefit CRE

Generally, PUPs are less expensive than traditional park projects and can often be completed more quickly. Rather than removing asphalt, for example, green paint can delineate the park area. The addition of benches, tables and chairs, and potted plants and raised beds make it a hub where people and nature can come together.

While there is little doubt that green spaces have tremendous benefits for the physical and psychological health of people, as well as boosting wildlife and bio-diversity, what are the pluses of PUPs—other than a lower development cost—for CRE?

  • Creating a pedestrian-friendly hub helps generate foot traffic, which, in turn, benefits under-performing or emerging properties. The benefit of transforming a curbside parking space could outweigh the parking convenience of that space.

  • PUPs provide an opportunity to examine how the public will make use of green-space projects, such as plazas, esplanades, and permanent parks that can be included in future projects.

  • It’s a natural area for partnering with community groups and local governments. Through these interactions, developers have an opportunity to build community support for future projects and to gauge the needs of the local community.

Key ingredients for a pop-up park

Although PUPs are designed to be temporary, remember to keep a few key ingredients in mind. In addition to plant material and outdoor seating options, it’s important to include flexibility. While the PUP may serve as an outdoor lunch and meeting space during the workweek, what will it be after hours or on weekends? Can the space become a craft bazaar on a Saturday morning, a small venue for a Saturday afternoon concert, and then an outdoor yoga space on a Sunday morning?

In addition, each locale has its own rules and regulations—so it’s important to work with a team that can help negotiate the permit and zoning processes. At Morris Southeast Group, we are firmly planted in the belief that wonderful transformations occur—whether it’s a pop-up or something permanent—when developers and community work together.

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

Two Sides Of The Eminent Domain Coin

Two Sides Of The Eminent Domain Coin on morrissegroup.com

Heads or tails, there’s an impact on commercial real estate (CRE)

Most people are familiar with the term “eminent domain”—a phrase that can instill fear and panic in residential and commercial property owners. It can also stoke impassioned protests and, naturally, lawsuits in neighborhoods around the country. In the collective mind’s eye, it’s often viewed as a public battle of David and Goliath proportions.

That, however, is only one side of the coin. Flip it over, and eminent domain can easily be something property investors don’t even think about. But if it’s ignored and you’re caught off-guard, it could suddenly place an entire investment at risk.

What is eminent domain?

Also known as condemnation, eminent domain is a process by which the government—from the federal level down to the local level—or its agent can condemn and seize private property for the “public good” in exchange for “just compensation.”

The basis for it is found in the 5th Amendment of the United States Constitution. While condemnation laws have slight variations from state to state, every single piece of property in all 50 states is subject to being completely taken or damaged to support a public project.

While that seems like a very straightforward explanation, it is, in fact, a gray area. Just what is the “public good?” Traditionally, most people think of the public good as big infrastructure improvement projects, such as a runway expansion at the airport, a new highway interchange to ease traffic congestion, or, in the case of Miami, a 10-foot wall to protect the coast from a storm surge.

The ruling that changed “public good”

“Public good” became less clear following a 2005 Supreme Court ruling. In Kelo vs. City of New London, a Connecticut woman sued the city after it deemed her remodeled home as blight in an effort to condemn her property. The city was making way for an expansion of a private company to realize ensuing tax benefits and an economic boom in her neighborhood. The Court ruled (5-4) that economic improvements can be interpreted as being for the “public good.”

The result of this controversial decision was that more county and municipal governments embraced eminent domain and partnered with developers in efforts to ignite economic development. Many of these initiatives were met with legal challenges. The court system examined each case for condemnation with a very fine-toothed comb, often resulting in the gavel falling on the side of the property owners over governments.

The bottom line for CRE developers

Following Kelo, many states re-examined their own eminent domain rules and regulations in an attempt to protect property owners from the government’s potential abuse of condemnation. In Florida, for example, then-Governor Jeb Bush signed off on legislation that gave the state an “A” rating for protecting the rights of Florida property owners.

For developers looking to work with local governments that utilize eminent domain, it’s imperative to know the regulations in a specific state and to ensure that “public good” or “public purpose” is firmly established. Otherwise, the project can quickly become bogged down in lawsuits.

The bottom line for CRE investors

The impact of eminent domain on developers is only one side of the issue. The other side affects anyone who is looking to invest in commercial properties.

The risk of eminent domain must be incorporated into an investor’s due diligence checklist. Very often, this aspect is forgotten, and the consequence is a surprise that reveals itself after the deal is done. For example, consider a buyer who failed to check for any projected public projects in the area of his or her newly purchased strip mall. After the sale is complete and tenants move in, a road-widening project results in the loss of prime parking spaces. There is no “buyer beware” clause.

It’s essential for anyone—developers, investors, and sellers—to work with professionals who are knowledgeable in the processes of eminent domain and condemnation—and the due diligence required to mitigate these risks.

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

The FASB Rule Change And Its Impact On CRE

Understanding the accounting factor in leasing decisions

For nearly 10 years, the Financial Accounting Standards Board (FASB), which regulates accounting standards in the United States, has been in negotiations with its international counterpart to bring a key standard into alignment. The result is ASU 2016-02, which the FASB formally introduced in 2016.

The regulation change is meant to increase transparency through the disclosure of lease assets and lease liabilities on balance sheets. It also satisfied the requirements of the International Accounting Standards Board (IASB), plus gets the FASB and the IASB on the same page.

Public companies implemented the new accounting standard in 2019, and 2020 will see private companies come into compliance. Although the regulation is specifically geared toward the accounting profession, it’s important for real estate investors, tenants, and brokers to understand the changes. These updated regulations directly affect business decisions when leasing or purchasing everything—from equipment to property.

The critical component of ASU 2016-02

Generally speaking, there are two types of leases: capital and operating. Most people are familiar with capital leases. It merely means that to own an asset (such as a building), an individual is taking on debt, like a mortgage. At the end of the mortgage, that individual owns the asset. Capital leases, now referred to as financial leases under the new regulation, always have and will continue to appear on balance sheets.

Operating leases, on the other hand, mean that the individual never owns the asset. Essentially, it’s a rented property. And as such, it was an off-balance-sheet item—until now. The ASU 2016-02 standard requires operating leases with terms longer than 12 months to show an asset or a liability—and this information must be recorded on the balance sheet.   

What does ASU 2016-02 mean for CRE?

The FASB regulation change has had and will to continue to have a lasting effect on the CRE sector. ASU 2016-02 impacts tenant and landlord business decisions, lease agreements, accounting data, and mindsets.

  • In some cases where tenants had lease debt—if they were renting several properties at once, for example—that debt would not appear on their balance sheet. It would, however, be on a financial statement, thereby creating the illusion that the tenant had less debt. The new standard corrects that.

  • The new operating lease regulation applies to leases longer than 12 months. As a result, potential tenants may be reluctant to enter into long-term leases. Instead, they may be more interested in short-term arrangements, and this environment could have significant impacts on the capital markets and the way lenders make CRE loans.

  • In essence, ASU 2016-02 creates a new mindset for tenants. On the one hand, they may be hesitant to enter into too many lease arrangements for fear that their lease debt will be too apparent. But while a long-term lease allowed tenants a sense of stability while they worked on growing their business, short-term leases may interfere with that. As a result, tenants may want to weigh the benefits of a “capital” or “finance” lease (owning their property) over an operating lease (renting).

  • Impacts don’t begin and end with the tenant. Building owners, for example, will also have to adapt to the FASB change. Specifically: how to market their property to make it a more attractive long-term or short-term lease option for potential tenants.

  • For everyone involved in the CRE equation, ASU 2016-02 could mean higher operating and administrative costs. This results in greater scrutiny while making business decisions.

Working with a CRE team to navigate new regulations

Ultimately, the FASB regulation change has made the leasing process more complicated for all parties. Therefore, it’s essential to work with experts who can advise owners and tenants on how best to proceed, no matter if it’s a lease or a purchase.

Morris Southeast Group has a long and successful history of working with investors, owners, and tenants. To learn more about what we can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Will the Fed Cut Interest Rates? The 2020 Commercial Real Estate Outlook

Will the Fed Cut Interest Rates? The 2020 Commercial Real Estate Outlook on morrissegroup.com

We’re in “steady as she goes” territory for rate cuts—what this may mean.

It’s safe to say that when the Federal Reserve chairman talks, investors listen. Consider what happened in July 2019. About an hour after Fed Chair Jerome Powell announced lower interest rates to stimulate an economy made sluggish by a trade war between the US and China and cautious consumers, the S&P lost 15 points, and the Dow dropped 99 points. At the same time, 22 out of 28 real estate stocks saw falling prices.

Of course, the market corrected and rebounded in a big way—but the Fed followed this announcement with a 3rd lowering in October 2019. All of this brings us to 2020, and the Fed’s decision—after a 4th quarter meeting—is that low inflation will mean a “steady as she goes” course. There should be no major actions for the coming year.

What does steady mean for CRE?

Generally speaking, CRE makes excellent use of low interest rates. When the cost of borrowing money is low, investors can take advantage of the savings, and this translates into more opportunities.

The difference, though, between 2019’s lowering of interest rates and 2020’s holding steady is the level of confidence. While the Fed’s actions in 2019 were borne out of economic inconsistencies—such as unemployment rates reaching a 50-year low while business and household spending were below average—remaining steady for 2020 translates into a more predictable market and consistent capitalization rates for CRE investors.

How do interest rates impact cap rates?

The first question in most CRE investment opportunities is the end result. In other words, the “capitalization rate,” or cap rate, which is the expected return on that investment. To achieve an estimated answer, you use a formula that looks like this:

  • Calculate the annual gross income of the investment property.
  • Subtract the operating expenses from the annual gross income to determine the property’s net income.
  • Divide the property’s net income by the current market value or purchase price.
  • That answer is the cap rate.

Generally speaking, a higher interest rate means it costs an investor more to borrow money. And this, in turn, eats into expected profits from the property. Lower interest rates, on the other hand, have a more profitable return—most of the time. The cap rate should never be used as a solitary tool because other variables can play with that number, such as:

  • The age and location of the property
  • The market and available inventory
  • The creditworthiness of the investor or tenants

Also note that this is an election year after a divisive impeachment trial, and disturbing news stories of coronavirus are causing serious concerns, including some about international trade. National and international events could have significant implications for the stock market and economy, and the Fed may feel compelled to respond.

Putting it all together

Whether the conversation is about interest rates or cap rates, at the end of the day, it’s all about finding the best CRE investment opportunity for you. Working with knowledgeable professionals, such as the team at Morris Southeast Group, can help bring all of this analysis together. In addition to knowing the local market, our team can help do the due diligence required to make your money work long term.

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

2019’s Commercial Real Estate Landscape

2019's Commercial Real Estate Landscape on morrissegroup.com

The pulse of commercial real estate in South Florida

Where do you go when you want in-depth information on commercial real estate? Right here to the Morris SE blog, of course. 2019 was an interesting year for CRE, from advances in Proptech and smart retrofitting and future-proofing trends to new uses for retail properties and emerging market opportunities.

 Take a look at the topics Morris SE covered last year:

Going Green

Going Green on Top: Heat-Mitigation Design is an Emerging Climate Solution

Greener CRE Is Good for Business

Multifamily

Is Co-Living the Next Big Thing in South Florida Multi-Family Real Estate?

Condo Sales Slump, Multifamily Rentals Soar in South Florida

Is the Condo-Hotel a Winning Combination?

Technology

The Latest CRE Gadgets & Gizmos in One Word: Proptech

Can Your Old Building Become Smart with a Retrofit?

Dockless Transportation Might Be Your CRE Property’s Next Great Thing

4 Reasons to Future-Proof Your Property

Who’s Bagging Your Groceries? Robots!

Tech-Cities 2.0: South Florida a Rising Tech Star

Looking for a Building? Print It!

Tips and Tactics

CRE Insurance for Owners and Tenants in South Florida

Leasehold, Tenant, and Build-Out Improvements in CRE

The War of the Tenants: How Landlords can Broker Peace

The Importance of Due Diligence in CRE

Preparing for a Gas Leak on Your Commercial Real Estate Property

Filling the Neighborhood Strip Mall Calls for the Proper Mix of Tenants

The Power of Infrastructure to Transform CRE

Ling-Term vs. Short-Term Leases in a CRE Property

What do Office Tenants Want?

Leasing Billboard Space on Your Commercial Property

Is Your Commercial Property Physically Fit?

Opportunity Zones & Commercial Real Estate in Florida: The Potential & Pitfalls

Start Now: Prepare Your CRE Property for Hurricane Season

Using Light to Attract CRE Tenants

Embrace Your Opponents: A Modern Approach to Nimby

5 Ways to Increase the Value of Your Commercial Property in 2019

Alternative Property Investment Opportunities: What Are Some Options?

5 Risks that Keep CRE Investors up at Night

Using Concessions to Lure Tenants to Your CRE Investment

Invest in Your Community, Not Just Your Property

A Property Management Firm Eases South Florida Landlord Headaches

Making First-Rate Investments in Secondary Markets

Trends

Can CRE Developers Solve Miami’s Affordable Housing Crisis

E-Scooters: Boon or Burden to Cities and Commercial Real Estate?

Parking in a Changing CRE Marketplace: Adapting & Futureproofing

Unused Golf Courses Are a South Florida CRE Opportunity

Are Multistory Warehouses on South Florida’s Horizon?

Hipsturbia: CRE’s Vibrant New Home?

Motels are so Cool, They’re Hot

Pedaling vs. Parking: The Impact of Bicycling on CRE

The Power of Pop-Ups on CRE in South Florida

Dementia Care May Be as Close as an Empty Box Store

What the National Climate Assessment Means for South Florida CRE

Is Your new CRE Opportunity in a Shipping Container?

Want a Killer Real Estate Investment? Follow the Art.

Can Tiny CRE be Big in SoFlo?

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