When I think about the commercial real estate business cycle – and where we are in it today – the words “zero gravity” come to mind. Everything seems to be levitating – investor interest, prices, financing, you name it.
Now, I’m not sure if we’re at the top of this cycle or not, but “zero gravity” is giving way to “escape velocity” as South Florida matures into something akin to New York City.
The Miami of today is not the Miami you’ll see tomorrow, and that’s showing up in the commercial real estate market here and across Florida.
Condos
What’s different in the condo market this time is that international buyers are taking the lead from Northeasterners, although they’re still active, too.
There aren’t many good development sites left in South Florida, and when the new waterfront projects are done, that’s it. There won’t be any more until redevelopment is necessary – many years from now.
So, are we overbuilding? Not really. People are still coming to South Florida, and the unit deposits are still there. I predict that as the top-of-the-line sites get built out, the condo market will move into new submarkets.
Apartments
The condo guys have bid up all of the land, and that’s putting some pressure on the apartment developers. They still need their numbers to work, but it’s clear that rental rates are rising.
The apartment developers will be taking the secondary and tertiary locations in the prime markets, and their rents will be well above current levels. They’ll build just outside of the places where people want to work and play. The apartment will become a place to eat and sleep, but you’ll “live” everywhere else.
Office
As the development trend gradually forces people out of their cars and into mass transit, apartment residents will want their offices much closer. That will provide an opportunity for some urban infill work in their sector.
Retail
The biggest buyer of shopping centers is Publix. They’re getting a much better return on their real estate portfolio than just about anything else.
That means there are fewer grocery-anchored centers to buy, which means that cap rates will remain low even as interest rates rise.
Now, retail in much of the state means ground-floor units in urban high-rises. Here’s a tip for investors. Instead of buying a big box, why not get better rent from a few small boxes in these locations and lower your tenant risk at the same time?
Hospitality
We love hospitality. At least, our brand of hospitality. Mayan Properties owns about 25 select service hotels (125-135 rooms) near office centers, health centers and universities. This helps us avoid seasonality in the business.
And we’re building more. Hotels have an advantage because they can reset their pricing every night, so the right project can be an excellent inflation hedge.
1031’s
Real estate is so hot right now that some clients are talking to me about their options for 1031 exchanges. We’re working on some possibilities because people are having trouble finding replacement properties for their 1031 deals. More on that later.
A word of wisdom
In this commercial real estate market, you must exercise discipline. Don’t overpay for what you’re buying. Diversify. Maybe even take some chips off the table when appropriate.
Make sure you’re ready for the inflation that’s coming next year.
Click here to listen to my perspective on the current commercial real estate business cycle and the South Florida real estate market.
