Miami CRE: Hospitality, Retail & COVID-19

Felipe Azenha, Investment Advisor, ONE Commercial Real Estate

As originally published on

June 5, 2020

The last two months have been a roller coaster ride for all of us. It’s probably still too early to say what impact COVID-19 will have on commercial real estate in Miami, however, it seems like hospitality (hotels and short-term rentals) and retail assets will be the most vulnerable of the CRE asset classes. If social distancing continues until the end of the year, or if there is a second wave of infections, hospitality and retail assets could see significant downside repricing in the next 6-24 months.

According to the Greater Miami Convention & Visitors Bureau (GMCVB) in 2018:

• Greater Miami and the Beaches had 16.5 million overnight visitors in, along with 6.8 million “day trippers” for a total visitor number of 23.3 million.

• Visitors had an economic impact of nearly $18 billion, fueled mostly by international visitors.

• The travel and hospitality sector employed a record 142,100 people (11.9% of all employees in Miami-Dade work in hospitality and leisure).

• Greater Miami’s hotel market ranked in the top 10 among the top 25 hotel markets in the U.S. according to STR.

• International visitors comprised 35% of the overnight market, with 5.8 million visitors, and contributed about 54% of the total visitor expenditure because of longer stays in the destination.

• Latin America remained a key feeder market, generating the top three countries of origin for overnight international visitors into Greater Miami: Brazil, Colombia and Argentina. Combined, these three countries delivered more than 20% of the international overnight visitors.

• Latin America as a region represented 45% of the total overnight visitors.

• Domestic overnight visitors (not including Florida Residents) represented 38% of the total overnight visitor market, with 6.2 million traveling to the Greater Miami area and representing 34% of visitor expenditures.

• New York City remained the largest domestic overnight market, contributing more than 1.2 million visitors or 20% of the total domestic overnight market.

• Cruise travel as a reason to visit Greater Miami continues to grow, with more than one in 10 visitors traveling to the destination for a cruise. Miami Dade County had 6 million cruise passengers.

• More than 22 million passengers arrived at MIA.

• Nearly two-thirds of overnight visitors to Greater Miami arrived by air.

• Greater Miami and the Beaches had an ADR (average daily rate) of $199.35 and a Hotel Occupancy rate of 76.7%. Occupancy and ADR resulted in RevPAR (revenue per available room) of $152.81.

• Tourists spent an average of $279.48 a day and stayed an average of 5.86 nights. With total spending averaging $1,637.75 per person per visit, the majority spent on shopping and lodging.

Then came the “The Rona” lockdown…

According to the Miami Herald:

• Among the top 25 tourism markets in the nation, Miami posted the largest decline in ADR for the week ending April 18 — a 56.8 percent drop to $101.51 from the same week last year, according to data from STR, an industry tracking firm.

• In Miami-Dade, occupancy from Apr. 12-18 was 20.3 percent, which is 75.4 percent lower than the same week last year. The RevPAR was at $20.59, an 89.3 percent slide from last April.

• Miami International Airport passenger traffic has dropped 90% since March.

• Around 75% of hotel hourly workers have lost their jobs.


In early May, Warren Buffett, announced that Berkshire Hathaway was selling all of its substantial holdings in the four major U.S. airlines: American, Delta, United, and Southwest. Of all the industries disrupted by the coronavirus pandemic and the lockdown the airlines’ situation is in a sense the worst. Absent a vaccine (which is highly unlikely in the short term) will people feel safe going to an airport or sitting with 150 strangers on a plane? Probably not. Particularly if you are elderly or have a preexisting condition.

According to Bloomberg “the travel industry, which accounts for 10% of the global economy, can ripple to the remotest corners of the world. Each time a person takes a trip, it sets off a domino effect of consumption that directs dollars to airlines, hoteliers, restaurateurs, taxi drivers, artisans, tour guides, and shopkeepers, to name a few.”

In an article published in The Atlantic Last month about the future of air travel the author had this to say:

“Everything will be slower. If you check baggage, the handles may need to be wiped before staff members touch them. If you don’t think you’ll be checking baggage, think again: The airlines will likely crack down further on carry-on items, which potentially come into contact with other passengers. On the bright side, less carry-on baggage will reduce the rugby-scrum nature of the boarding process. It will also diminish impending delays at the TSA checkpoint, where agents may need to stop and wipe down bins after exposure to each passenger’s coat and bags.”

The author goes on to say…

“Everyone I spoke with said that the long-term effects of this public-health crisis are likely to match the “security theater” since the 9/11 attacks—for instance, the requirement that most passengers take off their shoes at TSA checkpoints, now more than 18 years after a man named Richard Reid attempted to blow up a plane by lighting the fuse to some explosives he had packed into the soles of his boots, and the ban on taking more than a few ounces of liquid aboard a flight. For the aviation business, “public-health theater” might include hand-sanitizer dispensers placed throughout airports; or tape markings on the floor indicating ideal separation distances; or other steps that can’t hurt, but also can’t solve the fundamental problem of packing a lot of people into a confined space.”

This all seems a bit draconian, but it’s probably fair to say that traveling by air will become, at the very least, a much slower and unpleasant process than it already was. Last month the TSA began checking passengers’ temperatures at several airports.

Last month Carnival Corp. laid off or furloughed nearly 50% of its local workforce. In mid-April, Royal Caribbean Cruises Ltd., the world’s second largest cruise company, said it would shed 26% of its workforce. In late April, Norwegian Cruise Line Holdings Ltd., announced it was laying off 20% of its staff. All three companies are based in Miami. However, a recent report by Carnival shows that bookings for the first half of 2021 are still rolling in and are “slightly lower” than 2020.

About 35% of all visitors coming to Miami are international visitors. Two-thirds of our visitors arrive by plane and 1 in 10 visitors pass through Miami to get on or off a cruise ship. It’s safe to say that the travel and hospitality industry will be negatively impacted by a Covid-19. In South Florida the hospitality and the retail industries seem to be more intertwined than in most other markets. Latin Americans tend to use their visit to Miami as a shopping opportunity to consume goods that would otherwise be prohibitively expensive to purchase in their home countries due to high import tariffs.


According to this WSJ article “roughly 100,000 stores are expected to close over the next five years—more than triple the number that shut during the previous recession—as e-commerce jumps to 25% of U.S. retail sales from 15% last year, UBS estimates.”

The WSJ goes on to say:

“In the last few weeks luxury retailer Neiman Marcus Group Inc., apparel seller J.Crew Group Inc. and Stage Stores Inc., an operator of rural department stores, have filed for bankruptcy protection. J.C. Penney Co. is teetering on the edge after missing two interest payments. Collectively, they operated roughly 2,500 stores last year and employed nearly 120,000 people.”

“Going back over the last 20 years, the worst year for closures was 2009 when 2% of stores closed,” said UBS apparel and footwear analyst Jay Sole. “Our forecast calls for 2% of stores to close every year into 2025.”

“If this isn’t the retail apocalypse I don’t know what would be,” said Sarah Wyeth, the lead analyst for retail and restaurants at S&P Global Ratings. Ms. Wyeth estimates that there is a 50% chance that 19 retailers tracked by S&P will default on their debt. Five retailers defaulted during the 2008 recession.

What will the future of retail look like? It’s not all doom and gloom.

Malls will likely struggle because being inside in an enclosed building, with recirculated air, will not be the most enticing shopping experience in the near-term. Main Street may become the new retail opportunity again according to Robert Gibbs, author of Principles of Urban Retail Planning and Development:

• Malls depend on department stores to attract almost 50 percent of their shoppers and cannot operate without them, which is problematic for many reasons.

• Many mall retailers have lease options allowing them to break their leases and leave the mall should key department stores close.

• Department stores are losing market share, from a peak of 50 percent of all retail sales in the 1950s to 5 percent today.

• Since the heyday of malls in 1992, department store sales have dropped from $230 billion to $140 billion and many department stores are close to bankruptcy.

• Over 50 percent of regional malls are forecast to close by 2025 (Credit Suisse).

Robert Gibbs believes that national brands will move from malls to Main Street. According to Gibbs “As malls close and online shopping grows, existing mall retailers will seek new locations near their former mall stores. In many instances, these venues include smaller downtown cores, which traditionally offer lower rents and, now, the safety of an open-air shopping experience.”


We will likely see dozens upon dozens of independently owned restaurants go out of business in the coming months. As illiquid “mom & pop” restaurants close, well capitalized restaurants chains will likely replace them in the short-term. The restaurants that do survive will struggle. Social-distancing guidelines will restrict restaurants to 25% to 50% capacity, forcing them to modify operations and cut expenses to stay in business. In many cases expenses will likely go up for restaurant owners. Not only will servers be required to wear masks and gloves, but salt and pepper shakers, condiments and silverware will probably need to be replaced with single-use products for the foreseeable future. Will restaurants be able to pass on these costs to their clients? We will have to wait and see.

Landlords will find themselves in a tight predicament as well. Restaurant capacity will be significantly reduced unless cities start to close streets and allow dining tables and people to replace cars. Initiatives like the City of Miami Beach took this past week to close Ocean Drive to vehicles must happen on a much larger scale. If not, restaurants will be unable to make rent payments. If the landlord is levered she/he now does not have enough income to make the monthly payments on the commercial mortgage because restaurants are no longer operating at full occupancy. It will be interesting to see how many restaurants are able to renegotiate rent reductions. The truth is landlords don’t have very many options.


Hotels which are well capitalized should be able to weather the storm in the long run if they are capable of dealing with the short-to-mid term decline in occupancy and increased costs. To bring back guests, particularly business travelers, hotels will need to convince people that their hotels are Covid-19 free. Operators will have to hire staff to deep clean and disinfect public areas dozens of times a day to make their guests feel comfortable and confident that cleanliness is a top priority. Hand sanitizer dispensers will need to be placed throughout hotels and, wherever possible, hotels will probably have to replace certain items with single-use products.

Lower end hotels and motels are likely to suffer since costs will increase and guests are more price sensitive. Higher end hotels will likely be perceived as cleaner and will be able to pass on some of the new increased operating expenses to their less thrifty guests.

The unlikely winner in the hospitality sector may be the short-term rental. Particularly single-family houses, townhomes and garden-style apartments which don’t share common spaces or have elevators, but have kitchens, since eating at restaurants may not be on everyone’s to-do list. Rather than sharing elevators with other guests and having cleaning crews coming into your hotel room everyday, single-family homes, townhomes and garden-style apartments are a more controlled environment where Covid-19 transmission will be less likely.

It’s all about leverage and balance sheets. Cash is king.

It all comes down to how leveraged owners of hospitality and retail CRE assets are. If rent payments aren’t coming in, owners will be unable to meet their debt payments, taxes and maintenance. Lenders seem to be working with borrowers for the time being, but that likely won’t last much longer. The longer it takes to return to “normal”, the less accommodating borrowers will be. Highly leveraged assets and assets that were underwritten in the last few years which assumed annual rent increases in their proformas will likely find themselves in a tight spot.

For conservative investors that are not highly levered and are liquid, COVID-19 may prove to be an even better buying opportunity than the 2008 financial crisis. This crisis will eventually pass. Humans have been through many pandemics before and we’ve probably come out better on the other side. We will probably not return to the “old normal” in the coming months, but our new normal will eventually come to look much like our old normal.


Us Miamians have an ongoing joke that one is the reasons Miami is so great is because it’s so close to the United States. All cities are unique in their own way, but in the United State there are only a handful of cities that have an international flair to them. Haters can keep on hatin’, but Miami probably has more international flair than even NYC or Los Angeles. Yup, I said it.

The 42% of Americans that hold passports won’t likely travel internationally for vacation in the foreseeable future. COVID-19 along with a looming recession will curb international leisure travel. Miami may prove to be a domestic travel destination of choice because it is so unlike any other city in the United States. Will domestic travel offset Miami’s strong dependency on the international traveler? It remains to be seen.

Miami continues to grow and will continue to be a travel destination of choice both domestically and internationally. Miami’s high quality of life, diversified culture and weather combined with its pro-business attitude and favorable tax climate (no state income tax) are attractive to residents and companies alike. Miami’s real estate boom over the past twenty years has been fueled by a wave of migration and investment from Latin America. Recently, we’ve begun to see more demand coming from New York, the Northeast and the Midwest. Only time will tell, but seems like we shouldn’t bet against the 305.

“Is any man afraid of change? What can take place without change? What then is more pleasing or more suitable to the universal nature? And can you take a hot bath unless the wood for the fire undergoes a change? And can you be nourished unless the food undergoes a change? And can anything else that is useful be accomplished without change? Do you not see then that for yourself also to change is just the same, and equally necessary for the universal nature?” – Marcus Aurelius

Felipe Azenha

Investment Advisor, ONE Commercial Real Estate
Founder, Gridics

South Florida Commercial Real Estate Outlook 2020

Stephen Nostrand, President, ONE Commercial Real Estate

January 2, 2020

Strategic choices are a good theme for 2020. Owners will look carefully at their assets and determine if it is a good time to sell. How deep is the market? Where is pricing? Can the asset continue to perform at peak levels? Should I refinance at these great interest rates? And, what can I do with the sale proceeds?

For investors, it is no longer about picking an asset type and saying yes, I want to own office or retail or multifamily or industrial. It is much more about neighborhoods, paths of growth, mobility, and an outlook that minimizes risk. Interest rates will remain very low on a historical basis. Equity is plentiful and will remain so. In fact, there will be an imbalance with a lot of equity ready to invest but not enough product. That will keep prices high and yields low.

Many of our neighbors to the South want to invest in South Florida. They are seeking 1) preservation of capital investments, 2) diversification opportunities and 3) safe and secure yields that on a risk-adjusted basis that are far better than their homeland. Those are different strategies. But some new players keep the market very active including Australia, The Philippines, northern Africa, South Korea, the Netherlands, UAE and others with “lift”, which is the availability to get here easily from their countries. There are still good investment opportunities in South Florida. Be patient, pick neighborhoods, be overly diligent in your financial modeling and be very careful about trending rents and eternal optimism. That has gotten all of us in trouble in the past.

Changing consumer behaviors are challenging the landscape. Over 9,300 US stores closed in 2019, a new record. Closures may moderate in 2020. The top tier malls are feeling the pain of changing consumer behavior as they are forced to adjust rents for struggling tenants. Nationwide, online sales this holiday season increased by 18 percent. In South Florida, local and neighborhood retail is doing well. Look to those assets for opportunities.

Development requires an equally careful look. Land is precious, scarce, and therefore expensive. There are new opportunities that require a deep dive. Look at workforce housing, look at mixed-use, look at specific industrial development opportunities where the land cost justifies the trending rents. Look at suburban development as affordability continues to be the urban challenge. Pick neighborhoods that might not be very familiar names. Walk those neighborhoods, feel the needs.

Exchange transactions will continue to be very active. Reverse exchanges will pick up since it is harder to find something to buy than to sell your asset in many cases. You can buy first, then sell and qualify.

Opportunity zones should be looked at carefully, especially since one of the tax-saving provisions has now expired. Instead of investors avoiding 15% of previous capital gains invested, now that is only 10% if the investment is held for five years. The deferred tax deadline is December 31, 2026.

Get used to our 2-2-2 world: 2% GDP, 2% inflation and 2% Treasury yields.

Strategic choices will allow owners, developers, and investors to have a very good 2020 in South Florida.

Stephen Nostrand

President/COO, ONE Commercial Real Estate
Professor, University of Miami
Masters in Real Estate Development and Urbanism Program
Performance Life Coach

The Future of Commercial Brokerage Companies – Good Time for an Introspection

Stephen Nostrand, President, ONE Commercial Real Estate

December 19, 2019

Technology advancements in the commercial real estate space have been slower to advance than in residential real estate. The big exception is in Proptech which, over just the past couple of years, has provided a lot of options for property and asset managers. Broader advancements are coming, and coming big. When tokenization takes hold, it will be truly dramatic. Properties will be bought and sold where literally the click of a button will create and close a competitive process for investors to be equity owners in assets worldwide. The equally dramatic changes that predictive analytics will provide are much closer and we are working with a lot of those tools now. So how does that and many more aspects affect what we do in providing commercial real estate services to clients?

It is no longer adequate to provide information to clients. That has become a commodity. Proving the analysis and interpretation of the information, not always something a machine can do, is the value play. Brokerage companies have to recruit and retain brokers who can connect with the assignment and use the best in class support tools to deliver a difference. They must have both the technical approach and the human connection.

We are not psychic. We can’t pretend we know what a client or prospect needs. Nor can we suggest any solutions until we completely understand not just what they say, but more importantly, what they mean. Those are different. When we do all the talking and not all the listening, we fail to serve our clients. It does not matter how much experience we have had or how many deals we have closed. All of that is irrelevant until we connect and summarize what we have heard and have the client say yes, you understand. Brokerage companies need brilliant listeners. A machine cannot do that.

Constant and consistent communication leads to loyalty and success even though the outcome may be different from the expectation. Sharing the bad news, which we all know is difficult, builds character. Clients deserve good character brokers. Commercial brokerage companies need relationship brokers who can prove they really care and are not just transacting business.

Every client relationship is different and one of a kind. If we cherish those relationships and always challenge ourselves to find different ways to get to the finish line, success is sweeter for everyone. What we did last year or even six months ago, doesn’t work anymore. There are new ways, new aspects. Take a football. Hold it in your hand and close one eye. It is still a football, but it looks much different and as you move it around the shapes change. Brokerage companies need to find brokers who want to change the shape of the clients’ solution. They put in a lot of “think time” and test those solutions.

When you do the right thing and commit to finding the treasure for your client, you can define yourself as being capable. But going beyond capable requires something special. It has to come from the heart and the gut. It is hard to describe but those who have it, will feel it and put it to work for their clients. Commercial brokerage companies need more feelers.

As a commercial real estate brokerage company, we look directly at ourselves all the time. We try to find the “true us”. And when we are honest with each other about how we can match the true us and continue to grow our company with those who are committed to be ing better, then we know that the future looks very bright.

Stephen Nostrand

President/COO, ONE Commercial Real Estate
Professor, University of Miami
Masters in Real Estate Development and Urbanism Program
Performance Life Coach

How to Invest in Real Estate in South Florida in 2020

Stephen Nostrand, President, ONE Commercial Real Estate

December 17, 2019

South Florida certainly is a dynamic real estate market. Unlike many other regions, it is the confluence of diverse interests, desires, and understandings. How is all of that going to play out in 2020? First, there are the national influences that shape the groundwork: interest rates, the availability of capital, employment and above all consumer sentiment and confidence. And as an election year, 2020 brings some different influences.

It is too simplistic to say things will be “business as usual” or a repeat of 2019. That would be a cop-out. Investors, owners and developers each have their banners to carry.

If you are an investor, you want to deploy capital to 1) either preserve that capital and achieve a reasonable return after inflation or 2) you are willing to take more risk and sacrifice a shorter term cash on cash return for more upside at the exit. Cap rates will stay compressed in 2020, but the range will likely change a bit. The change will be focused on “cherry picking” where owners need to exit and the gap closes between the bid and the ask. Watchful eyes can find these deals. If your investing patient money, you can achieve an average cash on cash return of 6% (as compared to what will probably be a 1.60-1.80% 10-yr Treasury yield) with an IRR of 11-12% with a 1.75 equity multiple. If you are a value investor with a 5-7 year time horizon, 12-14% IRR’s are possible, but be certain of your cash flow needs the first two years. These opportunities typically have more than 70% of their eventual value come from the exit event. These opportunities are in multifamily, some industrial, retail and some office. Did I actually say “retail”? Yes, look for the neighborhood, recession-proof, online-proof locally reliable retail opportunities. There are actually a lot of them.

There are some very good private funds in South Florida. They come in many varieties. Be sure to understand the fees and net to the investor potential returns. Most importantly, look at the time horizon goal for the fund, is that in line with your investment goals and how is your specific investment to the fund actually deployed? We advise many investors on placing their investments in Florida-based private real estate funds and we invest in those ourselves.

If your strategy is to sell in 2020, the market will be good. Real cap rates based upon real returns will get the most attention as opposed to those always rosy “pro forma” cap rates. Nothing lasts forever, so if you are happy with how your asset(s) has performed and you want to capitalize on your investment, take advantage of good finance rates that your buyers will have which will elevate their willingness to do a deal. And now maybe you are a buyer with a 1031 exchange? If so, be flexible and you will find the right deal.

Our South Florida market is full of inventory for vertical residential product and projects that have been announced to start soon. There are also thousands of new luxury rental units being completed and luxury condominium owners renting their units. The opportunities are strongest in workforce rental housing and affordable rentals too. And of course, land banking or buying covered land is a very sound strategy for the next cycle. Land is scarce, but not impossible to find. Watch for land that becomes available from some developers who are not going ahead with their planned projects.

South Florida will attract more international investors and developers. Cracks have begun again in certain countries in Latin America. Success requires the key set of expectations that can be specifically explained and analyzed in terms of what the market can deliver.

Stephen Nostrand

President/COO, ONE Commercial Real Estate
Professor, University of Miami
Masters in Real Estate Development and Urbanism Program
Performance Life Coach

Is South Florida Commercial Real Estate Overpriced?

Stephen Nostrand, President, ONE Commercial Real Estate

December 13, 2018

I sat with a group from Brazil the other day discussing opportunities they are looking for in commercial real estate in the tri-county area. Like any discussions along these lines there are the typical questions that have to be covered: returns, exit strategy, decision process, asset class, risk profile, etc. We got through all that and agreed on an investment profile. And then they asked that question: is commercial real estate overpriced? But there is a better question: is commercial real estate overvalued?

Large and small investors have different challenges. We have plunging yields-cap rates have fallen for about eight years. There are deals that are trading that are below the buyer’s cost of debt. That means, income has to go up substantially. And, the underwriting has to assume an aggressive cap rate at the exit along with those income increases. Does any of that sound familiar?

No one is predicting a repeat of a decade ago or anything close to that. Capital flows are almost at a record high. The so-called dry powder is mind boggling. One of the major financial advisory firms predicts commercial real estate transactions will jump as much as 10% in the next year and a half.

But there are some troubling signs. If valuations continue to appreciate, how do you push the income to justify price when the “real value” is not there. Traditional lenders are becoming more cautious, and the alternative lending market is alive and well. Debt fund and mortgage REITs’ are super active. That means despite higher interest rates, money keeps flowing. There are the usual number of predictors in the market. They say interest rates are going up, but no one knows at what pace and how high. The economy continues on a path of 2.5 and maybe as high as 3% GDP (but only if you and I continue to spend because over 60% of the GDP is consumer spending).

Yes, there are a lot of markets where commercial real estate is overvalued. South Florida is one of those in particular product types. To be continued.

Stephen Nostrand

President/COO, ONE Commercial Real Estate
Professor, University of Miami
Masters in Real Estate Development and Urbanism Program
Performance Life Coach