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