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