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FLORIDA, SAFE HOME IN THE SUN

Kamil Homsi, President of Global Realty Capital,* shares an insight into the real estate dynamics of the U.S.’ ‘Sunshine State.’

November 2015

One of the greatest American hockey players of all time, Wayne Gretzky, is credited with saying, “A good hockey player knows where the puck is, a great hockey player knows where the puck is going to be.”  This sentiment has long been shared by visionary investors determined to find ambitious returns and the next big thing in real estate.  For the most part, post-2008 economic chaos, consumers who gambled on Florida’s future via investment in its properties have been rewarded handsomely.

The tide has turned

The economic turmoil of the past decade derailed much of Florida’s housing market, leaving the area with thousands of stalled projects and unprecedented stock of housing units. Thankfully, at the time, the Federal Reserve wisely intervened with loose monetary policy in efforts to prevent the financial system’s collapse, thereby minimising its harsh impact on the consumers. In the meantime, foreign and institutional investors swooped in to acquire Florida’s real estate at bargain prices.

Today things have changed around dramatically in Florida, and the once battered and fledgling industry has been nursed back to health thanks to a positive fundamental outlook for economic activity, population growth, improving labour markets and a generally favourable business climate which captured the interest of traditional and non-traditional real estate patrons.

To date, enamoured investors from all over the world continue to flock to Florida, mesmerised not just by its breath-taking beauty, sandy beaches and crystalline waters, but by the opportunistic real estate markets of the emerging regions as well as the mature and well-established areas throughout the state.

Currently, the city of Miami overwhelmingly dominates the attention of the U.S. and multinational investors in Florida markets. In fact, Miami is in the same league as the usual contenders of distinguished cities like New York, Los Angeles and Washington DC, which hold top positions in U.S. elite real estate markets.

The city is a global business and entertainment hub with an unmatched variety of deluxe oceanfront hotels, residences and shopping centres, as well as a colourful mélange of neighbourhoods that make it the international magnet and cosmopolitan playground that it is.

Real estate tourism is growing here, as the local markets continue to attract cash-ready global investors seeking to partake of the city’s offerings of casual culture and the lure of gleaming vertical towers that proffer increasingly outlandish amenities such as sky garages and infinity pools, in addition to the customary spectacular views.

From the statistics point of view, the latest regional market research analysis indicates that the average asking rate for Class A properties in Miami had a 10.6% increase over year, and Class B properties recorded a 4.4% increase over year.  Real estate sales volume in the city has reached 1.6 billion as of second quarter of 2015, which is 13% greater that the figures posted during the same period in 2014.

The office leasing sector on the other hand has exhibited only modest growth and hasn’t quite piggybacked on the boom of the residential, retail and hospitality sectors.  Some see this as an opportunistic sector, while others point out that expensive land values, high cost to build office spaces and difficulties in obtaining financing, seem to point that Miami isn’t quite ripe for a large number of speculative office buildings just yet.

Current market dynamics

In the next 2 to 3 years, Miami is slated for numerous megaprojects like the American Dream Miami megamall which is being developed by the same company that owns and operates America’s current largest mall The Mall of America in Minnesota.  This project will spread over 200 acres and is expected to bring in 10,000 jobs to the region by its completion.  In addition, David Beckham’s Major League Soccer expansion team is expected to announce shortly the location of its world-class stadium which will house the team.  As both of these proposed landmarks move closer to realisation, investment activity in the immediately surrounding areas is likely to pick up sharply, and retail and hospitality asset classes are expected to benefit most from such expansions.

Pent up demand for Miami properties and a significant rise in land prices have forced many developers to turn elsewhere in secondary areas where land prices still remain ideal for development. Miami’s centre of gravity is spreading northward towards the state’s Atlantic coast passageway and interior markets of Central Florida, Jacksonville, Tallahassee and Tampa Bay regions.

The Fort Lauderdale area offers proximity to central Miami, the same sandy beaches and yet a more spread-out environment. A daily passenger train service is coming to the area in 2017.  The service that will extend from Miami to Orlando is expected to revitalise the corridor and its nearby regions. In addition, thousands of acres near its busy airport are poised for revamping as well. This is a prime area that offers attractive opportunities and great development potential.

Other old and gritty neighbourhoods in the state are also getting heavy-duty makeovers, subsequently new neighbourhoods are emerging.  As Florida’s population grows, the housing needs should be able to keep pace with that growth, but the state is clearly behind on that front.  With moderately overheating Miami property markets, other major cities in the state are beginning to experience declining vacancy rates and are facing tremendous pressures for increasing rents and ensuing justification for new construction.

Demand for affordable housing is becoming a priority for local governments in secondary markets.  According to the latest estimates, Florida still needs more than 200,000 units to meet the severe shortage and demand for affordable rental housing.  Drawn by generous incentives and less astronomical land prices, developers are aggressively pursuing multifamily housing opportunities within northern Florida cities and particularly Jacksonville and Tampa Bay areas.

Investor incentives

But, investors should not be fooled by the low or moderate income labels.  Many developments in these areas still contain the traditional amenities that deluxe properties usually offer.  Cheaper land values allow developments to include beautiful landscaping, swimming pools, gyms and clubhouses designed for community use.

Additionally, to spur construction in the secondary markets, federal and state guidelines are encouraging real estate investors to tap into many popular tax incentive programs that include but are not limited to Capital Investment Tax Credits, State Housing Tax Credits and Enterprise Zone Property Tax Credits.

Many of the available incentive programs allow developers to raise cash through the sale of accumulated tax credits, thus enabling them to finance up to 45% of the project’s hard construction costs with tax credits allowed by the federal and state guidelines.

Furthermore, the state is actively resorting to private-public partnerships, where the local governments grant rezoning bonuses allowing higher residential density in exchange for developer’s creation and rehabilitation of public parks and transit projects, which end up pleasing city planners and urban enthusiasts alike.  Real estate is all about understanding the local areas and this is precisely where astute investors are finding extraordinary cash flow opportunities with steady income streams.

Buyer types

In general, institutional and sovereign wealth funds are deploying their wealth reserves to Florida in droves.  Middle Eastern and Russian investors are ploughing money into high-end, one-of-a-kind trophy style properties, but by volume the purchases are led by multinational buyers from Latin American countries of Columbia, Brazil, Argentina and Venezuela.  Most are seeking a safe haven for their wealth given the financial and political instability back home.  Another large pool of foreign investment is coming from America’s neighbours to the north. Canadians are deeply vested in this state. Recently, Asian and particularly Chinese buyers have become more notable in the market. For many of these investors, limited investment options domestically are expected to contribute to a lasting trend in overseas build-up and diversification of their real estate portfolios.

Advantage Florida

The state’s strategic geographic location has always been a rather versatile asset for its general economy.  The state has long been known as a centre for consumer goods trade with Caribbean territories and Latin American countries, while the region is further expected to become a useful staging point for newly-initiated commerce with Cuba.

Through a proactive approach in the promotion of trade ties, and engagement in joint ventures and tourism with other countries, the state is on pace for continued penetration and increased intensity of foreign investment in the entire region and not just any particular market.

Favourable exchange rates, low mortgage rates, uncertainties of the fiscal crisis within the European Union and persistent instability in world stock markets, will likely continue to be economic drivers for the sustained growth of the region and willingness of foreign investors to commit significant amounts of capital to real estate markets in Florida.

 

Headquartered in New York, Global Realty Capital offers its clients of international investors, family offices, and financial institutions opportunities to acquire and co-invest in all types of commercial real estate and other types of alternative investments. Kamil Homsi can be reached on kamil@globalrealtycapital.com