We just spent a fantastic 30 minutes getting economic and commercial real estate market insights from one of the leading minds on the subjects – and he was kind enough to do it in the middle of his vacation.
KC Conway, MAI, CRE, Chief Economist – USA at Colliers International in Atlanta, speaks everywhere and is frequently quoted in the national media. His areas of specialized real estate research include the North American ports, industrial real estate, office real estate, land, multifamily, student housing, and valuation.
As a friend of mine says, “Nobody connects the dots better than KC.”
And KC says there is some good news for Florida in the expansion of the Panama Canal to accommodate larger container ships. Miami will have the only port in Florida able to handle the so-called “Post-Panamax” class container ships. It’ll be the first time since World War II that the Gulf Coast and East Coast ports can compete with the West Coast for this level of cargo activity. This should be a great demand driver for industrial and manufacturing space.
I agree, but I’m also concerned that upcoming federal financial regulations will put a damper on the party.
KC said he agrees. The regulations are becoming burdensome to banks of all sizes, and the annual “stress tests” now force banks to assume a 35 percent drop in the value of their real estate holdings.
“I think the results will be quite punitive on the banks, meaning they may have to cool it on their commercial real estate lending. And then when you look at what the Consumer Finance Protection Bureau is doing, they’re doing more about protecting us from getting any debt than actually having good debt. I’m very concerned about the regulatory burden,” he said.
KC said there are some unhealthy developments in the national GDP, including a build-up in inventories that points to a coming slowdown in manufacturing. But Florida has a number of healthy trends including South Florida’s Latin American trade connection and Tampa’s focus on moving agricultural imports by rail.
Regarding specific commercial real estate product types, multifamily is near and dear to my heart, so I was interested in KC’s opinion. He said builders and buyers should lock in cheap money as low as they can for as long as they can because 2014 will definitely see movement in interest rates. The 10-year could end 2014 at 4 percent to 4.5 percent.
The fundamentals of multifamily are very good, KC said. We need about eight jobs per unit to justify starting a multifamily project, and in Florida job creation is coming in closer to nine jobs per unit. Demographics are also favoring multifamily as young workers become more willing to move around for better opportunities, but look for cap rates to soften and rental rate growth to slow down, he said.
In retail, urban, high-demographic areas will continue to do fine, but suburban retail is “under-demolished,” KC said. (Wish I’d said it first!) Service-oriented businesses are now backfilling abandoned retail space.
In office, KC agreed with me that occupancy is up in higher quality space, but rental rates are down due to a glut of low-end, Class C space on the market. But there’s also a trend toward densification – or the use of less space per worker, he said. Older buildings are becoming more expensive to retrofit as a result.
I asked KC to clue me in on his big takeaway for 2014, and he said the cost of capital will be THE story by far. If the economy really takes off, the Fed will have to raise interest rates more quickly than anyone anticipates, he said. Getting debt capital will be a challenge.
Click here to listen to the full interview with KC Conway of Colliers International.
