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Commercial Real Estate Trends

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

Filling The Neighborhood Strip Mall Calls for the Proper Mix of Tenants on morrissegroup.com

Success with South Florida strip malls requires a carefully selected blend

With the growth of the suburbs in the 1950s, strip malls often became a vital part of the landscape. Sometimes called village greens, they were the new downtowns for bedroom communities that didn’t necessarily have an actual downtown.

Over the decades, though, the strip mall’s reputation has waxed and waned. Sometimes seen as essential—but often seen as a necessary evil or even a symptom of suburban sprawl—there is no escaping the fact that strip malls provide two key necessities for consumers: convenience and service.

With this in mind, it’s no small wonder that strip malls can arguably still claim a role as the town square. And boy, are they common in Florida; big and small cities alike.

What makes a strip mall?

Generally speaking, strip malls come in three sizes, each based on square footage and occupants:

  • Community centers range from 125,000 square feet to 400,000 square feet, and usually contain supermarkets, box stores, and large discount stores.
  • Neighborhood centers range from 30,000 to 125,000 square feet and may contain one supermarket and a mix of convenience stores (defined broadly as anything that provides a convenient service).
  • Strip centers are less than 30,000 square feet and contain convenience stores.

Attracting lucrative tenants to these centers is not always an easy task, especially since it’s often impossible to accommodate large, nationally known anchor stores. That being said, there are numerous prospective tenants. And creating the perfect blend of them requires flexibility and creativity, all while keeping a constant eye on convenience.

How to create the right mix in a strip mall

Unlike larger shopping malls, which are buckling under the strain of e-commerce competition, smaller shopping centers are able to provide a niche market for tenants who may be Internet-resistant or just service-oriented. These two traits are why consumers continue to need in-person shopping experiences—and strip malls.

Depending on space, the ideal combination of strip-mall tenants includes a mix of the following:

  • Health and beauty (hair and nail salons, day spas, barbershops)
  • Restaurants (it’s not so much about fast food, but more about casual and affordable dining)
  • Fitness (yoga studio, circuit training)
  • Service (dry cleaners, smartphone stores; medical and dental services are also a growing trend in smaller shopping centers)
  • Entertainment (like an indoor children’s playground)
  • A blend of the bargain and upscale boutiques

What do tenants want?

When considering the proper mix for a strip mall, it’s also important to understand what small-shopping-center tenants require. While some of these businesses may be part of a franchise, chances are that most will be privately owned. As such, they have a great interest in ease of access for potential customers to reach them, adequate and convenient parking, and good visibility.

Because strip-mall tenants are smaller operations, there’s also a strong need for high foot traffic, and a proper mix of tenants can help boost that number. One technique is to consider “co-tenancy,” understanding that certain businesses have specific peak times. By creating a balance, it’s possible to keep the parking lot full all day long so each of the businesses can flourish based on patronage patterns.

What can the owners provide?

In many ways, owners of strip malls need to be hands-on. A specific set of skills not only keeps each storefront occupied, but they also help to keep the shopping center relevant.

  • When it comes to rental agreements, don’t be afraid to be flexible and creative. Getting a strong tenant in could mean tenant-improvement allowances, early occupancy, a graduated rent structure, and free or reduced rent. It’s important to learn what works best for the tenant and for the owner.
  • It’s all about the details. Paying attention to landscaping, litter, signage, parking lot upkeep, night lighting, and other aesthetics can make current tenants happy and sway the decision of a brand-new tenant or one relocating from another strip mall.
  • Speaking of current tenants, potential tenants will definitely speak to them. A satisfied tenant can be a tremendous asset to an owner.
  • Consider upgrades. Perhaps there is an outparcel on the property that can be developed to house a single tenant with a drive-thru window.
  • As always, owners should never neglect their due diligence. It’s important to know and understand the credit and financial stability of a tenant, as well as their operating history and experience. If a tenant is a relocation from another strip mall, it’s a good idea to get a better grasp on their reasons for relocating.

Working with a strong team

To help the process go more smoothly, owners and tenants should work with a skilled commercial real estate partner. Not only can professionals help find the perfect location for a particular business, they can also assist in putting together a winning combination of them for a particular shopping center.

Morris Southeast Group has a highly skilled and knowledgeable team of pros for all of your real estate needs, either as an owner or a tenant.

To learn more about our services including property management and investment opportunities, 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.

Can CRE Developers Solve Miami’s Affordable Housing Crisis?

Can CRE Developers Solve Miami’s Affordable Housing Crisis? on morrissegroup.com

New ideas are working to save an affordable city

Don’t be fooled by the number of cranes rising above the skylines of many South Florida cities. While their presence certainly indicates a building boom in the region, it also highlights a problem that is hiding in plain sight—an affordable housing crisis.

According to a recent report from the Miami Urban Future Initiative, a joint project of Creative Class Group and FIU’s College of Communications, Architecture, and The Arts, Miami and much of South Florida’s tri-county area are facing a severe problem: the lack of housing affordability brought on by high housing costs and low wages.

A closer look at the affordable housing crisis in Miami

Miami certainly isn’t alone in having to deal with an affordable housing crisis; cities across the nation are also facing the same dilemma, to varying degrees. But all too often, the topic is the pink elephant in the room. We know it exists and we know it’s bad, but a discussion of low-income housing can ignite a NIMBY (“not in my backyard) debate involving neighborhoods that don’t want solutions in their area.

Not talking about it, though, not only perpetuates the problem—it makes it worse. That’s a big reason discussing “Miami’s Housing Affordability Crisis” is important. It gets the dialogue started. Although the picture it paints of the South Florida community isn’t always pretty, it is certainly significant:

  • On a global ranking of least affordable large metro areas, Miami ranks 7th.
  • While housing prices have rebounded since the Great Recession, wages and income have not kept up.
  • Six in 10 employed adults are considered housing burdened, spending more than 30% of their income on housing. This statistic places Miami in the top spot on a national list of metro areas. Further complicating this issue is that more than half of the area’s workforce are low-income service workers, and therefore face the greatest challenge.
  • The crisis is both geographically and racially concentrated, with minority populations having little income remaining after paying for housing.
  • Housing in the region is expensive, putting Miami on a par with Washington, DC. Salaries in the two cities, though, are not the same—which the places Miami 2nd on a national list of cost-burdened homeowners and 1st on a national list of cost-burdened renters.
  • More than in other cities in the nation, climate change and sea-level rise have the potential to only make the crisis worse.

CRE investors and developers can make a difference

Nevertheless, things aren’t all gloomy. In fact, the affordable housing crisis is creating a challenge and CRE developers and investors are working to meet it head-on. In recent years, more investors have expressed an interest in purchasing buildings that are part of an affordable housing program or are at a market-based low-value rather than starting such a project from scratch. Original development projects are simply too expensive.

While some of these for-profit investors are interested in raising rents, a majority is content to keep the rents relatively low. “Affordable” can also be a smart business practice. Generally speaking, affordable housing properties tend to be fully occupied and provide a dependable, consistent, and steady income. For many investors, low-income and affordable housing can even be a safer bet than a class A apartment building—as demand is continually strong.

Local solutions making a difference

For a better look at what’s happening on a local level, consider the 16 Corner Project in Miami’s Overtown community. There, a joint effort between a private real estate developer and the city’s Omni Community Redevelopment Agency resulted in the successful rehab of a 1950s apartment building.

The partnership was a cost-sharing marriage that combined development skill with agency financing, which resulted in high-standard, low-income housing—and the developer is still able to see a profit.

Additionally, the University of Miami’s Office of Civic and Community Engagement developed an online mapping tool that has identified more than 500 million square feet of vacant, unused, and under-utilized land across Miami-Dade. Much of the land is located along transportation hubs and is ideally suited for low- and middle-income projects. The tool, known as Land Access for Neighborhood Development (LAND), is easy to navigate, free, and updated every two weeks.

Looking for South Florida possibilities

When it comes to CRE investments, a lot of time is spent talking about and searching for those big-ticket items—pristine properties and big returns. The truth, though, is that all properties and all housing needs have value. Because, when done correctly, they provide for all members of the community.

The pros at Morris Southeast Group believe in the South Florida community. It’s why we live, work, and play here. It’s why we love it here.

To learn more about affordable housing property investment and development, property management services, or other investment opportunities, 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.

Parking in a Changing CRE Marketplace: Adapting & Futureproofing

Steps to take today and for tomorrow

When it comes to parking, people generally have a lot to say—and when asked to comment on the state of it, they usually turn to words like “headache,” “necessary evil,” or some words this blog can’t repeat. Let’s just say that it’s safe to say that most people loathe parking, especially in crowded cities. Along with traffic in South Florida, it’s very often a big downside of time spent behind the wheel.

And that’s actually a little disappointing (bear with us). Because in today’s rapidly changing CRE landscape, parking is actually kind of an exciting topic, with new challenges leading to some cool new ideas.

Why parking is changing

A combination of increased residential and commercial properties in congested downtown areas, a changing demographic that telecommutes and sees little need for car ownership, shared workspaces, advanced automotive technologies, and ride-sharing options are all coming together to change parking needs.

The result is parking garages that are strangely both over-crowded and under-used, depending on the hour and/or the day of the week. Further complicating matters are future predictions that parking garages will become very close to obsolete. To meet the challenge, there are two general courses of action: meeting today’s needs and future-proofing for tomorrow.

Solutions for parking today

All too often, parking garages are somewhat of an afterthought in CRE—which is odd, since in many cases, they are actually the first impression many visitors have of a building. They are, in a sense, the true lobby. And as such, they often need to step up their game.

To help make parking more convenient and personal, some garages have created reception areas, valet services, parking assistance technology (such as LED lights for drivers to easily locate available and handicap spaces, and digital signage of available parking on each level), automotive detailing services, designated areas for taxis and ride-sharing vehicles, and improved lighting and security.

In addition, many garages have established shared parking arrangements with neighboring businesses. The needs of the businesses involved help to determine how best to establish this parking partnership. For example, a commercial business may need parking spaces during the workday, while another—a restaurant, perhaps—needs those spaces in the evening. Sensors, counters, and other technologies can help negotiate overlap times.

Solutions for parking tomorrow

Developers and architects now sit at a crossroads when it comes to parking garage design. Municipalities want either a minimum or a maximum number of spaces, while many predictions point to a future in which parking will be a thing of the past. One report, for example, projects that those five years old and under will not get a driver’s license.

To meet this challenge, more and more garages are being designed with an eye toward futureproofing so they can be easily converted into other uses. This means level rather than graded floors, ceiling heights that meet office and residential standards, openings that can be easily fitted for future window placement, and open shafts that can someday house ductwork and wiring.

Around the world, the future is here. The repurposing of parking garages is already happening, from Wichita, KS, where a parking garage was converted into an apartment building, to London, where one became a hub for small businesses. Making preparations now not only helps a building project stay relevant for a longer period of time. It’s also cost-efficient in the long term, as it costs far less to repurpose than it does to demolish and start from scratch.

Paying attention to parking is critical

While parking may not become completely obsolete anytime soon, predictions indicate it could significantly diminish in relevance. For developers, investors, and owners, it’s a smart idea to keep an eye on parking trends. In the present, adequate and convenient parking keeps visitors and tenants satisfied. For the future, it keeps the CRE property relevant and profitable if one plans to hold the property for many years.

The Morris Southeast Group team has already seen the struggles malls have had in meeting the challenges created by e-commerce. When it comes to the future of parking garages, it makes sense to prepare today so they remain adaptable.

To learn more about parking solutions and requirements, property management services, investment opportunities, and/or other services, 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.

The Power of Infrastructure to Transform CRE

Roads, bridges, jobs, and commercial real estate values all benefit

Infrastructure forms the fabric of our daily lives and powers our economic prosperity. Buildings, roads, bridges, and communication networks are just a few examples of the vast web of systems that give us space to work, play, and learn. When these systems are maintained and functioning well, they enhance the value of a region’s commercial real estate, leading to increased occupancy and higher rents.

Room to grow

The U.S. has long struggled to properly fund and develop its infrastructure, which has resulted in traffic congestion, blackouts, and worrisome conditions for many bridges and roads. In 2017, the American Society of Civil Engineers gave the country a grade of D+, saying that $3.6 trillion would be needed by 2020 to get to an “adequate” level of infrastructure. This shortfall has a significant cost attached to it—every year, we spend 5.5 billion hours sitting in traffic, at a loss of $120 billion in time and fuel. Miami knows this problem firsthand, as it ranked as the 10th most traffic-clogged city in 2018, with the average local driver in the car 64 hours a year.

But there is hope on the horizon. Politicians of all stripes agree on infrastructure as a basic good, as do 75 percent of Americans as a whole. An increase of $18 billion a year would create 200,000 jobs and add $11 billion to the U.S. economy. CRE investors know this all too well—infrastructure is one of the top reasons people choose to purchase or develop a property. When roads, power grids, and sea-ports are running smoothly, the value of nearby CRE improves dramatically.

Lifts all boats

The benefits of an improved infrastructure across many categories that have great importance to CRE investors.

  • Access. If your building is easily accessible by well-paved roads, subways, and buses, or walk/bike paths, it will be easier to visit and to do business there. The tenants of this building, therefore, will be much more inclined to pay top dollar for rent.
  • Jobs. 14 million people work in positions connected to infrastructure, making up 11 percent of the U.S. workforce. These include truck drivers, train engineers, power grid technicians, and pilots.
  • Transit. Businesses located near public transit can charge 80 percent more rent than their more distant counterparts. In addition, the rise of rideshare and driverless automobiles demonstrates the need for thoughtful urban planning and well-paved roads. Case-in-point, the new Brightline train, which connects Miami to West Palm Beach (and, eventually, Orlando) is a hopeful counterpoint to the city’s traffic woes.
  • Energy. As renewable sources of energy grow and become more widely adopted, there are dozens of positions that come with them, such as those who install solar panels, and natural gas workers who need trucks, rails, and pipeline.

Major projects on the horizon

Many urban areas have heard this call to action and have projects already in the works:

  • Miami’s “signature bridge” will connect historic Overtown with neighborhoods that sit along Biscayne Bay, reversing an urban planning decision in the 60s that forced many families out of their homes to make room for I-95, and cut them off from the rest of the city.
  • Houston’s 180-mile beltway called the Grand Parkway will connect major employment centers and ease congestion in the notoriously car-heavy town.
  • Los Angeles’ public transit system is in for a major makeover, extending it’s Gold, Expo, and Purple Metro lines to the city’s west side and beyond.

Although the country as a whole still has a long way to go towards systemic infrastructure improvements, these initiatives show how individual communities can take steps to smartly overhaul their roads, bridges, and railways. CRE will be a chief beneficiary of this work.

Morris Southeast Group stands ready to help you take full advantage of this trend, with CRE expertise born from years of experience. For a free consultation on our commercial real estate investment or property management 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.

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

Which is best for you?

A lot has been written lately about thinking outside of the lease box, including exploring the possibility of short-term leases. One big reason for this conversation is the rise of pop-up businesses, and the short-term lease is a way of filling space that would otherwise remain empty.

Before jumping into the short-term lease market, however, there are a few things for both landlords and tenants to consider. In many cases, a long-term agreement may be a far better leasing option. As with most things in life, there are pros and cons to both types of leases—and here is the long and short of it.

The power of the short-term lease

Generally speaking, short-term leases can stretch from one to 12 months. Anything longer than 12 months starts to creep into the long-term territory. A short-term lease is a more viable option in markets where there are tough eviction laws and where the demand for space is greater than availability, which means landlords have a larger pool of tenants from which to choose. This, in turn, means a property is more likely to remain occupied each time a short-term tenant leaves.

For the landlord and tenant, a short-term lease has several benefits. The greatest of these is flexibility. Because leases are short (and often have higher rents than similar long-term properties), the landlord is able to change terms and conditions, as well as the rental price, more often to meet his or her changing needs. At the same time, a short-term lease may make sense for a tenant who is—for whatever reason—unable to make a long-term commitment. This, of course, widens the pool of prospects for the landlord.

Short-term isn’t always a good thing

Of course, all of this doesn’t go to say that short-term leases are always an ideal solution. There are some key concerns that both landlords and tenants need to consider:

  • For the tenant, a short-term lease can be a little iffy, especially if they like the space and want to continue renting it, but the landlord finds a long-term tenant (to replace them) in the meantime. And tenants can expect to pay more with a short-term contract.
  • For the landlord, there are issues that need to be addressed each time a tenant leaves, such as advertising for a new tenant, checking references, and preparing the space for the new occupants. Because the old tenants often only have to give short-term notice, landlords—especially those who are not working with a CRE brokerage or property management firm—may find their time to accomplish these tasks flying by. The result may be a property that sits vacant.
  • Landlords will also find that ultra-short-term leases are not valued as high to lenders or potential purchasers of the asset; long-term leases are what provide stability for an asset, which usually translates to a higher value. This depends on the type of investment, however. For example, industrial vs. multi-family: in the latter case, a short-term lease is normal for apartment tenants.

The stability and challenges of long-term leases

By its name alone, the long-term lease indicates that both parties are willing to make a commitment for longer than one year, if not longer. For tenants, long-term-lease properties are less expensive than comparable short-term leases and are also easier to find. Landlords, particularly in markets where rents are falling, will want to offer long-term leases for stability and relatively assured income.

Commitment, though, comes with challenges. Once locked into a long-term agreement, tenants will have to stay or face significant consequences if they attempt to break the lease. Similarly, landlords may feel as if their hands are tied if they’re faced with a problem tenant, or changing market conditions mean they could be charging far more rent.

Finding the perfect lease

One way to help navigate leasing options is to work with skilled professionals who are adept at understanding the unique needs of landlords and tenants. Morris Southeast Group is that team. Additionally, we also provide property management services to help landlords and owners keep more of their time while keeping their properties occupied and tenants happy. To learn more about owner and tenant representation, leasing options, property management services, investment opportunities, and/or other services, 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.

Greener CRE Is Good For Business

Greener CRE Is Good For Business on morrissegroup.com

Sustainability is now a driving force in business and commercial real estate

It seems not a day goes by without a reference to climate change and the push for more sustainable efforts. While the idea of sustainability isn’t new, it has often been seen as a vague concept that’s simply “the right thing to do.”

According to a recent study by ING, though, sustainability appears to have moved up in priorities for the corporate boardroom. More and more companies, for the first time ever, now view sustainability as a growth engine and even a necessity. And in order to remain competitive and viable, CRE needs to take notice.

Key findings of the sustainability study

For the purpose of its 2018 report, ING interviewed 210 US-based finance executives, representing a broad spectrum of industries. Among the key findings:

  • Corporations with the most comprehensive sustainability framework saw increased revenue and better borrowing and credit-rating outcomes.
  • Companies using a sustainability framework were often the most engaged in meeting the needs of the 21st-century consumer, thereby ensuring survival and growth.
  • Despite these positives, more than half of the financial executives interviewed for the study reported difficulty in identifying sustainability-led business opportunities. Additionally, there is a definite need to better understand how sustainability can be applied to different types of businesses.

Translating the sustainability study to CRE

Although the ING study focused on sustainability and the corporate business model, many of the findings can easily be applied to CRE. In fact, all players in the CRE equation—from borrowers and lenders to owners and tenants—can benefit from adopting sustainable strategies for commercial, multi-family, and industrial properties.

  • The decision to have a property go green appears to have a positive impact on revenue, as well as a potential reduction in operating costs—and this translates into higher property values.
  • After the collateral property becomes LEED-certified or Energy Star labeled, CMBS (commercial mortgage-backed securities) loans can have a more than 30% reduction in default risk, as well as better loan terms.
  • Building characteristics and operational practices that impact the intensity of the property’s energy usage can also impact the risk of default. In other words, energy efficiency may start to play a more important role in the risk assessment process for new mortgages. This is similar to green tagging, a practice that is taking its place in European banks.
  • A changing demographic also means a changing attitude among potential tenants, many of whom place sustainable options at the top of their priority list. These generally fall into four categories: space design and integration (think co-work spaces and flexible design), wellness (natural lighting, proper ventilation, and environmentally safe products), resilience (a property’s ability to bounce back after a disaster), and solar energy.

Building a sustainable framework

The goal of sustainability is all about growth and longevity. That’s why there is an ever-increasing pool of green consultants to help bring businesses of all sizes. It only makes sense, then, that those sustainable goals—growth and longevity—can also be applied to CRE.

The professionals at Morris Southeast Group understand the importance of sustainability. As a staple of the South Florida community for 30 years, we have witnessed and experienced environmental changes, and stay abreast of those the future holds. We recognize the critical importance for owners and tenants to successfully prepare for and meet eco-challenges. To learn more about sustainability options, property management services, investment opportunities, and/or other services, 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.

Condo Sales Slump, Multifamily Rentals Soar in South Florida

The trend is in full force in luxury, workforce, and shadow markets

For years, condo has been king in South Florida’s real estate market. That title may now be in question, as multifamily apartments are rising in popularity, with more than 51,000 units under construction, in the planning stage, or proposed for development. With home sales continuing to slip and interest rates continuing to rise, many buyers are opting to rent rather than buy.

This shift may signal a major shakeup in the business, and CRE developers should be mindful of its potential consequences.

Multifamily rentals soar

In the first quarter of 2019, Florida had four markets, the most of any state, in the nation’s top 15 for multifamily rent growth:

  • Tampa/St. Petersburg (#5), with average year-over-year rent growth of 6.8 percent and 95.3 percent occupancy
  • Orlando (#9), with average year-over-year rent growth of 5.5 percent and 96 percent occupancy
  • Jacksonville (#12), with average year-over-year rent growth of 5.3 percent and 95 percent occupancy
  • South Florida (#14), with average year-over-year rent growth of 5.1 percent and 95.5 percent occupancy

And the local South Florida market as a whole is seeing high demand and low vacancies.

Why rentals?

Short-term rentals appeal to developers because they introduce a new kind of tenant who can broaden their potential market and bring down the possibility of vacancies. Thus, many condo owners have teamed up with short-term rental operators to attract renters and manage leases.

One flavor of new tenant is the tourist or business traveler, who, in cities like Nashville, encounter a dearth of traditional hotel rooms and a surplus of residential properties—hotel-style accommodations in a condo-size setting. In the Airbnb era, these travelers represent an essential market that is driving the multifamily rental boom and opening up a long-term solution for developers.

Traditionally, hotels want to provide amenities that compel their guests to stick around—health clubs, spas, coffee shops, restaurants—in order to maximize revenue. Short-term rentals have the opposite value proposition—residential properties are situated in real communities and encourage guests to venture out and support the local economy.

Multiple markets

There are several markets at work in this transition to multifamily developments that include rentals.

  • The luxury market. Rents are sky-high in much of South Florida’s wealthiest communities—over $3,000 in some areas. And many have raised concerns that luxury complexes like Florida East Coast Realty’s Panorama Tower have saturated the market and only contribute to the slide in condo sales.
  • Workforce housing. Many of these high-rent communities struggle to provide affordable housing to those who earn middle- and lower-level salaries in industries such as food service, education, health care, and the not-for-profit sector.

    Palm Beach County requires developers to portion a certain number of units as affordable housing. Fort Lauderdale partnered with European property investor Round Hill Capital to create The SIX13, a workforce multifamily housing project with rents far lower than average in the popular downtown area.
  • The shadow market. When condos don’t sell, they end up here. In 2018, Miami-Dade County alone saw over 2,200 shadow market leases, a fifth of all available units.

Morris Southeast Group closely monitors these and other multifamily housing trends and their effect on South Florida’s market—and we will continue to do so. As one sector rises, another often dips, and things could turn around for the condo market as they did well after the “glut” of condos that preceded the real estate crash in 2006-2007.

For a free consultation on our commercial real estate investment or property management 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.

5 Risks That Keep CRE Investors Up at Night

From volatile markets to rising sea levels, the risks (and rewards) are real

Whether you buy a condo in a prime downtown neighborhood, makeover a house in a growing suburb, or sink your money into a commercial office space or apartment complex, real estate can be an essential part of an investment strategy. There are, of course, risks, and any smart investor does his or her homework before signing on the dotted line. But after some initial financial outlay, real estate can be a great way to generate passive income plus remain connected to the larger community.

Below are just a few examples of risks that any new or seasoned CRE investor should keep in mind, whether it’s their first purchase or their thirtieth.

Unpredictable markets

All markets have their boom and bust cycles, and real estate is no exception. Inflation, interest rates, and the economy at large all have a significant impact on a property’s value and prospects. While no one is immune to these ups and downs, the savvy investor keeps tabs on the markets and adjusts accordingly.

Buy when demand is hot and you risk selling when things have cooled down, and a similar cycle applies to varying interest rates. Likewise, purchase during a bear economy may allow you to sell high when the bull returns, but also risks that property remaining on your books and generating little-to-no income if a downturn persists.

The wrong type of property

Not all CRE assets are created equal. Each type of property has its own strengths and weaknesses, complicated further by your local geography. A few tips to keep in mind:

  • Apartments tend to have high demand, no matter the economic cycle, which makes them low-risk. But as a result, they can provide a lower return depending on how hot that specific market may be.
  • Hotels rely heavily on tourists and business clients and therefore may claim higher rates but also more risk, given the cyclical nature of the hospitality industry.
  • An office complex generally (though certainly not always) has less reliance on consumer demand and tends to rely more on keeping current tenants satisfied, but the ongoing cost of tenant improvements creates downward pressure on overall rates of return.
  • Industrial buildings are in high demand by tenants and investors in most major markets around the country, and as a result, the yields for this sought-after product type is generally lower as the pricing is pushed higher by competition. Industrial properties generally require less maintenance, management, and improvements but careful consideration should be given to the location and specific attributes—clear height, power, cross-docking, access, distance to major interchanges, and the major drivers of occupancy in that specific market area.

Whatever corner of the CRE market you occupy, knowing the risks of your particular specialty will manage performance expectations.

Risky locations

The old saying is true—when it comes to real estate, the key to success is location, location, location. It’s first and foremost in your mind when investing in CRE, whether you’re riding the wave of a white-hot neighborhood or placing a pioneer’s stake down on an as-of-yet-undiscovered block.

Both scenarios carry risk. Join the popular crowd at the right time and you’ll see many tenants and high rents; join at the wrong time and it may be too expensive and saturated. An up-and-coming neighborhood has lower costs and more space but also the potential for higher crime rates and less foot traffic.

A location’s rosy prospects can change in a heartbeat. For example, businesses near Chicago’s historic Wrigley Field learned this the hard way in 2015, when the venue mounted a new scoreboard that cut off their once fantastic view of the historic ballpark.

Unreliable tenants

For all income-property owners, tenants are necessary, if complex, part of a CRE investment. The risks here are fairly clear—late or unpaid rent, property damage, and rude or obnoxious behavior that drives current and prospective tenants away. Owners always have eviction as an option, but it takes time and money that has a negative effect on overall yields. Comprehensive tenant screenings are an effective way to mitigate this risk, and far cheaper than having to force out a tenant. A competent property management firm will help you manage the risks.

Foreclosures

It happens to even the most experienced CRE investors—expenses grow beyond expectations and/or vacancies are higher than you could have predicted, all resulting in an inability to meet your commitments. Foreclosure is a real risk in this scenario and the consequences reach far beyond one property. It will certainly impair your ability to get financing down the road.

Due diligence such as a thorough real estate market analysis can prevent such a drastic turn of events. Once you’re up and running, work to pay down the mortgage as quickly as possible—within the framework of the interest rate you are paying—and have a reserve fund at the ready to cover the slow periods and also unexpected tenant or common-area improvements.

Bonus risk (South Florida edition): climate change

Many areas of the country—South Florida chief among them—have begun to factor climate change into their risk assessments for new and existing CRE properties. While this risk is real, local governments in Miami, Miami Beach, and elsewhere, have been working on these issues for some time and are taking active steps to reduce risk and encourage investment.

Morris Southeast Group is confident that Florida will remain a vibrant CRE market, but risks are always a part of commercial real estate investing’s reward. For a free consultation on our commercial real estate investment or property management 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.

Using Concessions to Lure Tenants to Your CRE Investment

A few carrots are healthy for your CRE property

When it comes to commercial real estate, there are a few key issues that are of great importance to potential tenants: location, foot traffic, competitor tenants, rents, accessibility, and space size. Many tenants, though, may find several properties all ticking off the right amount of checks—and their decision may come down to exploring which landlord is willing to make some concessions.

At the same time, landlords and owners may be frustrated at not being able to attract any tenant to a vacant space that has been available for some time. Again, the answer may be to look at concessions that can suddenly make a property more desirable.

What is a concession?

In the most basic of terms, a concession is a compromise between the landlord and tenant, one that usually involves the landlord offering something as a “giveback” to get the tenant to sign the lease. Normally, concessions make sense in order to quickly fill a vacancy, at lease-renewal time, during a slow market, or when a property is first entering the market.

While a concession is often viewed as a cost to the landlord, that cost can be offset over the duration of the lease. In addition, before offering anything or everything, it’s imperative to research competitive properties, concessions that are working in similar properties, concessions that make sense for specific businesses, and ones that make sense in a changing marketplace.

What are some of the most common concessions?

Concessions come in all shapes and sizes, and many are changing with the times. Regardless of the concession(s) offered, though, it’s important to spell out the details in a strong lease document. Let’s look at some examples:

  • By far, the most common is to offer some sort of rent deal, such as first month free. This can either be negotiated as an actual first month free or by applying the discount over the course of a 12-month period. Similarly, rent discounts can also be offered to a strong tenant at the time of lease renewal. While some may interpret this as a huge giveaway, collecting a discounted rent is far more profitable than collecting no rent at all.
  • Available space may not be exactly perfect for a potential tenant. Shelving, tables, interior traffic flow may need to be adjusted—and some landlords are willing to increase the Tenant Improvement Allowance to between $20 and $50 per square foot.
  • Start-up and pop-up businesses are always looking for ways to get their feet in the door, but long-term leases often either don’t work or are too much of a commitment. Offering short-term lease options can help sway their decision.
  • Relocating a business to a new space can be an expensive undertaking—and for some ideal tenants, landlords have found it worthwhile to help offset those costs with a negotiated Move-In Allowance.
  • Amenities go a long way in the residential market, so it makes sense that they can go just as far in the commercial arena. Upgrades and services can include Internet access and speed, adopting green measures, designated parking spaces, security measures, landscaping, excellent maintenance and cleanliness of common areas, and even services for employees who bike to work.

Which concessions work for you?

Of course, each concession has its share of pros and cons for landlords and tenants. That’s why it’s important to work with a skilled team that not only knows the market but also knows the concessions that make sense—so both parties can lease happily. The professionals at Morris Southeast Group are that team, and have a winning record of representing owners and tenants in property searches and lease negotiations. To learn more about owner and tenant representation, property investment opportunities, and/or other services, 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.

What Do Office Tenants Want?

5 ways to evolve your available space

When “Mad Men” first aired, many viewers looked at it with an eye toward the nostalgia of office design. The show had cubicles and corner offices, executive bathrooms and gobs of square footage to fill. But modern office design and open plans happened, and—well – this isn’t Don Draper’s office anymore.

And while some people find it easy to blame Millennials for practically everything, there is plenty for which to thank them. Their place in the workforce and in executive and decision-making positions is certainly keeping the current office marketplace interesting. As work has often changed from a destination to an experience, property managers, owners, and developers are coming up with more and more creative ways to keep office space current and competitive.

1. Flexibility is at the forefront

The office space pendulum appears to be swinging toward a happy balance of open space and cubicles. One way to avoid expensive overhauls and re-dos that change with the design trend of the moment is to provide and market flexibility. Some properties have started to provide space-planning services to help potential tenants envision a floor plan that works and to help successful tenants adapt the space rather than seek a lease somewhere else.

2. Consolidate some areas

Part of that flexibility is reconfiguring floor plans to create common spaces. Because of technology and working remotely, many potential tenants do not require an abundance of square footage of their own, but they are willing to share space and services with other tenants.

3. Provide services and amenities

Many people wonder what happened to the 40-hour workweek. As a result, basics to everyday living—from picking up dry-cleaning to scheduling some gym time—often get squeezed out. That’s why some landlords are now offering a wide assortment of amenities, including concierge-type services, food options in the lobby, bike racks, rooms with showers and lockers, weekly or on-premises health and wellness experiences, and shuttle services to help bring tenants to public transportation centers. Creativity mixed with a tenant-interest inventory can go a long way.

4. Keeping people and place connected

It goes without saying—and yet, must be said over and over again—tenants require greater connectivity, especially as their dependence on technology grows, both in-house and remotely. Beyond speed and secure connections, connectivity also requires owners, managers, and developers to move the property toward smart technologies, and often green technology is part of this overall trend.

5. Maintaining a secure, safe, and clean environment

These basic items made the list because they’re the things few people ever mention on an office-space wish list—but they can be the first ones noticed when not done well. Common areas, including restrooms and stairwells, should be well maintained. At the same time, we also live in a time of workplace shootings, so steps can be made to ensure tenants and their employees are safe without feeling as if they’re imprisoned. This means lobby security and visitor protocols, as well as employee key card entrance for parking and building access.

The strength of working relationships

When it comes to marketing your building in order to attract a new and dynamic pool of tenants, a lot more can be said—such as the importance of a property’s first impression, as well as the availability and transparency of the landlord/owner. Because at the end of the day, tenant satisfaction comes down to strong relationships and the quality of the product.

The Morris Southeast Group team knows a lot about those things, because it’s how we conduct business. Our professionals can help you evolve your property to meet the challenges of a changing workforce.

To learn more about property investment opportunities, property management, and/or other services, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

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