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December 13

Is South Florida Commercial Real Estate Overpriced?

ONE Commercial

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ONE Commercial

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

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