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Commercial Real Estate Trends

What Florida’s Population Boom Could Mean for the Economy

a moving truck outside a home in Florida

As more people relocate to Florida, the state is poised to experience significant economic growth in the coming years.

Florida’s population is expanding rapidly, and the underlying reasons make a lot of sense.

Sure, the state will always draw people because of its warm weather, the abundance of activities, and altogether attractive lifestyle. But Florida’s low tax rates, favorable business regulatory environment, and healthy economy also drive its current boom.

In fact, Florida is the largest recipient of out-of-state movers in the country. This trend should continue, especially if specific provisions from the Tax Cuts and Jobs Act remain in effect. 

Here’s a look at how Florida’s population is growing and what this will mean for the state moving forward.

What the numbers say

The Tax Cuts and Jobs Act brought many changes to the U.S. tax code, including a $10,000 cap on state and local tax deductions that makes living in a low-tax state like Florida even more attractive. So, while Florida was always a draw because of its lack of state income tax, this benefit has gained appeal for those living in high-tax states.

How many people could end up moving to Florida?

From 2015 to 2020, Florida had between 307,814 and 387,479 net arrivals yearly. The number of new residents has grown significantly, even during the pandemic-ravaged 2020. In contrast, California had a net loss in population “the first time in more than a century,” a statistical event that followed “a decades-long pattern of slow growth.”

Estimates suggest that Florida could see a net of more than 300,000 new residents arriving every year until 2024, when the number could drop to about 297,000. Still, it’s expected that these new inhabitants will remain over the 200,000 mark every year until 2030. 

Overall, this could lead to nearly five million new Florida residents arriving from other states between 2015 and 2030.

The effect on the state’s economy

Although Florida’s tax rates are far lower than in many states, the influx of residents, particularly the wealthy, is helping increase tax revenue and driving new business activity. In 2016, Florida was the single largest beneficiary from relocations out of all 50 states—and it really wasn’t even close. 

That year saw Florida draw a net influx of nearly $18 billion in gross income, while the 19 other states with a positive net inflow of gross income combined for just over $19 billion. By comparison, migration cost New York nearly $9 billion in adjusted gross income, while Connecticut, New Jersey, Illinois, and Pennsylvania all saw significant losses, as well.

It’s also worth noting that in 2016 alone, 63,772 people moved from New York to Florida, primarily because of the tax savings.

Florida’s job market

Of course, one concern with a growing population is whether there are enough jobs to keep everyone employed. A failure to provide employment puts additional strain on the state’s resources, but that doesn’t seem to be a problem in Florida—yet.

Before the COVID-related shutdowns across the country, Florida had one of the nation’s lowest unemployment rates at 3.3%. The jobs were spread through multiple sectors and cities, too, a sign of a healthy economy. In addition, Florida added jobs every month between 2011 and 2019 except for September 2017, when Hurricane Irma caused a state-wide economic shutdown.

Post-COVID, the numbers aren’t quite as strong, but Florida still sees its employment numbers rebounding fast compared to other parts of the country. While the unemployment rate jumped to 7.7% in 2020, it’s back down to just 4.7% as of March 2021, compared to the national unemployment rate of 6%. And starting in late May 2021, those receiving unemployment benefits have to prove they’re searching for work, which should cause unemployment to drop even further.

Another factor that could cause an uptick in Florida’s economy is the growing number of financial institutions and tech companies moving their headquarters to the state, particularly South Florida. Companies like Blackstone, Goldman Sachs, Deutsche Bank, and Microsoft have offices in Florida, bringing high-paying jobs and attracting talent.

Investing in Florida’s future

Florida’s population boom could mean many different things for commercial real estate investors. 

As more businesses establish themselves throughout the state to keep up with demand, there should be plenty of investment opportunities in the buildings these companies require.

At the same time, it’s crucial to weigh the risks because we don’t know how employment will shake out in a post-COVID world, especially since many businesses in the state’s huge service economy can’t find workers right now. In addition, Florida was graded as a “C” for its infrastructure by the American Society of Civil Engineers (ASCE) in 2017. This assessment beats the national “D+” average, but rapid population growth will stress this infrastructure—and roads, bridges, public transit, water supplies, and other elements play a role in successful CRE.

Overall, Florida’s significant population growth is good news for the economy and CRE. As with all trends, we’ll be keeping an eye on it and the implications.

For more information or help with CRE investing, property management, or leasing, give Morris Southeast Group a call at 954.474.1776. You can also call 954.240.4400 or email kenmorris@morrissegroup.com to speak with Ken Morris directly.

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.

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.

Is the Open Office Concept a Thing of the Past?

employees in open office

The need for social distancing is sure to amplify many pre-pandemic questions about the efficiency of open offices.

The open-concept office is widespread in corporate America, though it has taken some hits in recent years. The movement first gained traction in the 1970s and remains a go-to setup for many businesses around the country.

The reason behind this popularity is that these layouts maximize the use of space and can save on costs, plus spur collaboration. The idea is that workers can’t hide in their offices all day and must interact with colleagues, improving teamwork and productivity.

But research suggests that these setups sometimes do the exact opposite, as employees learn new ways of avoiding each other and the distractions that come with an open office. COVID-19 is also creating fundamental issues for the concept, given that physical barriers are crucial for maintaining social distancing.

Here’s a look at the present and future of the open office—and how commercial real estate owners can adapt to businesses’ ever-changing needs.

Despite their promise, open offices might not drive interaction

Even before the pandemic, there were growing questions about the viability of the open-concept office. Managers noted that employees could deflect interaction in an open setting just as quickly as they could in a cubicle or closed office by using headphones, pretending to be busy, and avoiding eye contact.

In fact, the Harvard Business Review reports that some firms have witnessed face-to-face interactions drop by 70% after switching to open offices, suggesting that this type of space isn’t meeting its objective. Employees make up for the decrease in face-to-face interaction through electronic communication, despite having the ability to speak in-person.

Keep in mind that these numbers are from before COVID-19. Living through a pandemic has changed office interaction even further or eliminated it altogether, at least in the short term.

The impact of COVID-19

Of course, we live in a different world than we did a year ago. And it doesn’t look like we’ll return to normal for some time. Even after a successful COVID-19 vaccine rollout, we could see new strains of the virus make the office a stressful place to be. 

There are currently social distancing protocols in most offices that make collaboration more challenging. Physical barriers are necessary to stop the spread of the virus within the workplace, further reducing the viability of open offices. For example, many desks or workspaces now have plexiglass barriers between them. Employees can see each other but not interact closely, defeating an open office’s intended purpose.

There’s also the possibility of many employees demanding a closed-off work environment as they return to the office. Workers want to stay healthy, which means limiting the extent to which they physically interact with others.

What these changes mean for CRE

From a commercial real estate perspective, adaptability is essential. We can no longer assume that companies will want open-concept offices because they may be an outdated or even dangerous format as workplaces reopen.

CRE owners should be aware that organizations will want different things from their office space and maintain the flexibility to adapt. This could include renovating space to allow for more room between employees or, in more extreme cases, building out exclusively closed offices.

Organizations that continue to use open concepts need physical barriers in place, at least near-term. Plexiglass might work in some situations, while other offices might want cubicles or other barriers to further separate their staff. Then there are cleaning protocols, foot-traffic procedures, and growing demand for HVAC improvements. Since the virus primarily spreads through airborne transmission, a new focus has been placed on buildings’ air quality. For a thorough rundown of these safety issues and potential property improvements, read our previous blog.

We’re going through an unprecedented period of change in the traditional office setting. Keeping up to date on the trends could be the difference between renting a space and having it sit empty.

What the future holds

We’re not exactly sure how office space will evolve nor how durable specific trends will be. Much depends on the vaccines’ efficacy at fighting new variants of the virus and what particular companies and their employees prefer. If workers remain uncomfortable returning to open-concept offices, organizations and building owners will have little choice but to rework the spaces.

Commercial real estate owners should be aware that businesses could be looking for different things in the coming months and years and stay willing to adapt. More flexible setups — or owners who are willing and able to renovate to meet individual preferences — will attract new tenants faster. But certain offices in select areas may struggle to attract renters, regardless of the setup.

One thing is for sure: 2021 will be a pivotal year that will continue to introduce novel challenges in the commercial real estate landscape. And the ability to adapt will remain essential.

Morris Southeast Group has its eyes on these CRE trends and is dedicated to keeping our readers, clients, and colleagues informed. For more information on trends in office space or to lease or to find a property that is right for you, contact us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or by email at kenmorris@morrissegroup.com

Is the COVID-19 Move to the Suburbs a Durable Trend?

Is the COVID-19 Move to the Suburbs a Durable Trend?

Many Millennials no longer want to live and work in urban centers—but how much of the shift is driven by the pandemic or whether it’s a lasting trend is unclear.

As Millennials start having children and wanting different things out of life, many find suburban living more appealing. This trend started before the global pandemic forced everyone to distance from one another, but there’s no denying that COVID has considerably sped up the process. 

Today, many Millennials want to live away from the city’s bustle, in places they’re more likely to have a yard, access to parks, and good schools nearby. They’re also finding suburban properties more affordable. 

At the same time, this generation wants shops, restaurants, and other essential services within an accessible distance. And soon, employers who set up offices in suburban neighborhoods could become more appealing, especially when people return to the office after the release of a successful vaccine. 

The challenge is determining whether this movement from the cities is transitory or marks a lasting decentralization of the workforce. If it’s the latter, moving to a hub-and-spoke living and working environment could make suburban offices a far more valuable commodity.

Factors driving this trend

Many factors are coming together and encouraging people to leave cities. 

First, there’s the cost, as an apartment within the downtown area of a market like New York or Miami is prohibitively expensive. When buyers and renters can get far more living space at a lower price, suburban living becomes very appealing. 

Living in the city is also a challenge because you’re unlikely to have any private outdoor areas. COVID has made this lack of space almost unbearable, forcing city-dwellers to either spend their time indoors or head to public outdoor areas and risk infection. The suburbs have yards and quiet streets, both of which are advantageous during a pandemic. 

Buying in an urban area also involves far higher property taxes, despite owning less space. Millennials aren’t seeing value living in the city and are looking to stretch their real estate dollar a little further.

Of course, the current work-from-home opportunities are partially driving this trend. Those moving to the suburbs don’t have to worry about commuting because they’re working from home. However, we don’t know if these people will want to stay in the suburbs once they fight traffic on their way to a downtown office. 

How companies are reacting

COVID-19 has brought numerous challenges for businesses of all sizes, not the least of which is keeping employees safe. For many companies, this means allowing workers to stay home. 

Some companies, such as Microsoft, are turning work-from-home into a permanent solution. The company will allow most of its employees to stay home about 50% of the time post-COVID, with some individuals being eligible for full-time remote work with manager approval. 

Microsoft’s headquarters are in Redmond, Washington, a suburb of Seattle, with other offices in smaller cities like Albany, New York, Bellevue, Washington, and Alpharetta, Georgia. The company also has a location in a suburban section of Austin, Texas, with its lone big-city urban office sitting in downtown Atlanta. 

If the movement away from the cities continues, we could see more companies following Microsoft’s lead. More businesses may set up shop in less-populated cities and suburbs, allowing employees to work-from-home at least part-time.

Will it last?

If the workforce wants to remain in the suburbs, there’s a good chance commercial real estate values will follow the same trend. After all, the whole reason why many headquarters relocated to the cities in the first place was to attract Millennial talent that lived and played in those urban centers. 

With a large percentage of the workforce now looking to escape the cities, it makes sense that companies would relocate again to give employees a shorter commute, which could potentially attract talent to their organizations. 

There’s no telling if the move away from the metropolis is permanent. Once we have a safe and efficacious vaccine, individuals could realize that they miss the city and migrate back to the high-rises they abandoned in 2020. But they also may like the re-imagined suburbs, and permanent part-time-remote arrangements will mitigate the inconvenience of a long commute.

This trend creates an interesting CRE opportunity. A fundamental shift in the location and type of office space companies are looking for will, of course, impact the values of specific properties—and smart investors will be watching.

For more information on current CRE trends and the ever-changing market, call Morris Southeast Group at 954.474.1776. Ken Morris is also available directly at 954.240.4400 or by email at kenmorris@morrissegroup.com

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

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

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

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

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

Struggling industries

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

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

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

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

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

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

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

Businesses benefiting from the shift

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

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

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

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

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

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

Somewhere in between

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

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

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

A vaccine and the return to normalcy

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

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

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

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

When To Use —and Not Use—Leverage In CRE

Positives, negatives, and the COVID effect

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

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

What is positive leverage?

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

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

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

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

Using leverage wisely

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

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

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

Leverage and COVID

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

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

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

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

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

For help in exploring your options, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Outdoor Space as a Solution to Maximize Building Use During COVID

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

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

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

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

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

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

Examples from dining and retail

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

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

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

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

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

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

Using outdoor office space

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

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

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

Making indoor spaces safer

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

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

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

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

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

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