Commercial Real Estate – Florida Gets “Credit” Where None is Due

Howard Freedland, one of our high-powered agents, has focus, aptitude and is excellent in Commercial Real Estate.  I asked him to write about the state of the commercial market in Florida and across the county.  Some of what he wrote can best be explained from a recent trip to my hometown in Highland Park, Illinois, we passed by the old Toys R Us. It was still boarded up since it closed in 2018 (Toys R Us closed nationwide in 2018).  In Palm Beach Gardens, the Toys R Us was snatched up right away and a PGA Tour Superstore retail store took over at light speed.  I saw lots of office vacancies in Chicagoland.  Here in downtown West Palm Beach, the movie theatre at Rosemary Square and office space is supposedly coming in for all the hedge fund and investment players relocating.  It’s a really a prelude to Howard’s article.

• You can read about the state of the Commercial Market here.
• Search the Commercial MLS here.
• Look at our New Commercial website including searching by category here.

Commercial Real Estate is kinda the exact opposite of residential Real Estate.  Residential is for living-in while commercial is more for working-in or making money.  Buying, selling, and leasing office space, medical space, warehouse, industrial, retail, income producing properties and much more. Searching for properties and how the commercial Real Estate world works verses how residential searches operate can best be described by my kid’s personalities. Opposites!

College is out this week and across all of America, the “Summer Interns” will be out and about next week. Like most of you, if you have kids, they get summer jobs.  I was no different. One year I was a Popcorn Vendor at Ravinia Festival in Highland Park.  I had to finish popping the popcorn by the time the Chicago Symphony started or else!!!!  The last time I was there, Gordon Lightfoot sang.  Unfortunately, for old Gordo, the church bell chimed this week, and he joined the Edmund Fitzgerald crew in the big lake they call Gitchee Gumee.  For you youngsters who don’t know the true tale….

I looped like in Caddie Shack and then worked summers for my Dad’s business.  One summer in the warehouse lugging fabric over the shoulder, another keeping track of inventory (I wasn’t very good at it), customer service, and finally sales.  I took a trip by myself selling fabric to Milwaukee and Minneapolis St. Paul.

Went back to school and realized after the selling summer, I learned a lot more as an intern than in college. Simon & Garfunkel had some of it right in the song Kodachrome, “When I think back on all the crap I learned in high school
It’s a wonder I can think at all.”

Fortunately, Paul & Artie are still with us.

Sam and Jade like lots of our kids are polar opposites.  Sam hates pizza.  Jade loves it.  Sam is a film major at UCF and very into animation, moviemaking, and all things computers. Jade is an entrepreneurship major at FSU, loves the beach and is an early riser.

Which brings me back to the commercial market. There is no one way to search for commercial listings. More like 3 ways…

Residential puts everything online.  Commercial does not. So, to properly search for commercial, keep in mind the following……

1. You need to search the Commercial MLS (you can do that here and by category)
2. You have to have a commercial agent check Co-Star which the public does not have access to.  A portion of what is available is on Loop Net but around half is not.  So, this is very much like old time Real Estate.  Only the commercial agents have access to what really is available.  Commercial,  is also vastly different with completely dissimilar sets of negotiations and terminology. In essence, you need a commercial specialist.
3. Your commercial agent has to dial – as in dialing around and networking to see what else is out there (if anything).

The Commercial website we just launched will have lots of tips and tricks that we will post and provide links to, which will explain the commercial world better in case you ever are in the need for such space.  Below is the first update on the state of the Commercial Market.

Commercial Real Estate – Florida Gets “Credit” Where None is Due

–Howard Freedland

During the past three years, we have seen a constriction of supply in the commercial real estate market (CRE). In South Florida, there is a serious shortage of cost-effective, quality industrial, retail and agricultural properties available. The fact that we have become a destination state in the past few years, sporting tax and development incentives that many other states do not, keeps our demand much higher than national averages.  However, we may be in a position where that is going to change rapidly. Credit cost and availability may cause many to reconsider their holdings, thereby creating an opportunity to buy more reasonably than in the recent past, or in some negative cases, seeing a rise in defaults.

The premise is that the Federal Reserve has raised the discount rate from near zero to over 5% in less than a year and a half, which has caused revolving credit to become very expensive compared to the time that it was acquired. Furthermore, both large and small banks are seeking inflow rather than outflow (again, the Fed’s idea that taking money out of the system will help wrangle inflation) credit is getting harder to get.

Andrew Nelson, real estate economist with deep experience in the property sector, offers that Vornado Real Estate Trust, a large REIT that focuses on properties in New York, Chicago and San Francisco, reports on their April K-8 filing that they are being cut off from credit.  “There is no new debt available…when a loan comes due, the only refinance available (and that is with a fight) is from the existing lender.” They are referring specifically to office structures specifically, but the problem is permeating other sectors of CRE as well. Nelson Economics analysis of Federal Reserve Bank of Dallas survey offers sees lenders becoming more risk averse, seeing tightening credit standards rise 10-15% from 2022 which correlates to a similar drop in credit volume.

Banks saw deposit outflows in March reach $250 Billion from small banks and $150 Billion from large banks. $400 Billion in withdrawals has increased the concerns that banks need to pay immediate attention to deposits. April has been flat, but stopping the bleeding is not correcting the problem.  Catherine Rampell of FloridaRealtors.org reports that the Federal Reserve reported that commercial bank lending fell by over $100 Billion in the two weeks ending March 29^th. This is the largest cutback in bank lending in dollar terms going back over 50 years.

The Mortgage Bankers Association (MBA) estimates that “of approximately $4.4 trillion of outstanding commercial and multi-family mortgages, $728 Billion (16%) matures in 2023, with another $659 Billion (15%) maturing in 2024.  25% approximately of this is in the office sector.  When these come due, the refinancing will be at a significantly higher rate than what the holders are paying, and decisions will have to be made.

Nationally, property values are falling.  After peaking in 2022, estimates are showing CRE down 15%, led by 25% declines in office and 21% in apartments.  Cap rates are rising, which signifies more risk overall in the market.  All of this supports lower debt levels on the horizon.

Again, South Florida has been a unique entity for the past few years. We have lured hedge funds that have moved their base of operations to the Palm Beaches and have a healthy number of new restaurant groups that are opening successful eateries all over the area. Population continues to grow every year, and where there are people, there are opportunities for growth.

Goldman Sachs offers a potential silver lining to the debt shortage:  Private investors are stepping in to lend to CRE as smaller banks may be forced to step back. There will be capital available to those that can afford it. The caveat is knowing what one can afford. In South Florida, with demand holding tight and supply remaining low, it will be interesting to see if this banking cloud dissipates or turns into a named hurricane.

Jeff Lichtenstein, originally from Chicago, got his start in the home furnishings textile business where he traveled over 35 weeks a year selling fabrics. After the family business was sold, Jeff moved to Florida and became a real estate agent. Today he is the owner and broker of Echo Fine Properties, a luxury residential brokerage voted best brokerage of the year. Jeff manages a non-traditional model of real estate that mimics a traditional business model. Echo has 80 agents, an average of one million dollars per transaction and over 500 million in annual sales. Between traveling for work and annual family trips to national parks with his wife and 2 now adult children, Jeff has visited 49 states. He is also one of the few Chicago White Sox fans you’ll ever meet.  Some publications he has been quoted in.

Feel free to ask him a question directly at [email protected] including a complementary  valuation of your home.