Even In South Florida's Booming Market, CRE Investors Smell 'Blood in The Water'

A wave of new arrivals helped insulate South Florida from much of the pressures facing the commercial real estate sector, but an influx of wealth and people to the region hasn’t been enough to overcome the weight of interest rates. 

The high cost of debt resulting from 11 Federal Reserve interest rate hikes has stalled sales and sapped construction financing. Deal activity is at a logjam, as sellers clinging to relatively strong market fundamentals are misaligned with buyers who would have to service debt on acquisitions, leaving equity on the sidelines waiting for either prices or interest rates to come down.  

“Over the long term, we’ll be fine, but it might get a little worse before it gets better,” Anthony Candela, vice president at Slate Asset Management, said at Bisnow’s South Florida CRE Finance conference on Thursday. “We’ve basically stopped looking at new acquisitions and have shifted focus to distressed.” 

There are $100B in multifamily loans maturing across the country next year, Candela said, with many of those loans underwritten in 2021 on properties that have seen capitalization rates nearly double. 

“We expect there to be a lot of blood in the water,” he said. “I think the market just needs a reset.” 

South Florida has around $5.5B in loans expected to mature in 2024, according to CoStar. While the region represents only around 5% of all maturing loans next year, lenders and buyers are holding back from acquisitions and waiting for owners facing refinancing to have no choice but to sell, speakers said at the event, held at the Loews Coral Gables Hotel.  

Sales of apartment buildings in Miami with more than 30 units totaled $840M through August, a steep decline from the $3.6B in acquisitions in 2022 and the $5.3B worth of transactions in 2021. While the price per unit fell $95K from year-end 2022 to $278K, prices are still slightly higher than 2021 and $83K ahead of 2019.

With the Fed’s benchmark interest rate now between 5.25% and 5.5%, the highest in more than two decades, many deals don’t make financial sense. 

“For a lot of the buyers right now, that four-cap or five-cap deal just no longer makes sense, versus 18 or 24 months ago when people were fighting for those deals,” said Tomas Sulichin, president of the commercial real estate division at Related ISG Realty.

Another factor putting a crimp in deal-making is insurance rates. Despite a slow hurricane season bringing hopes for a stabilization in the marketplace, the cost of coverage is still seen as a major impediment to closing deals. Sulichin called insurance “a deal killer” onstage.

“I've seen two deals in the last six months die because of the insurance,” Bilzin Sumberg partner Joe Hernandez said.

Treasury yields, priced at their highest level in more than 15 years, have also diminished investors’ appetite for risk, said Maggie Burke, senior vice president at Capital One Commercial Real Estate. For deals that do transact, investors are looking for lower-leveraged risk and often turning to preferred equity. 

“The days of a lot of our clients taking that high-octane, 85% bridge loan on a floating-rate basis, the need or the desire for that has come down because of the economic environment,” she said. 

With fewer prospects, the only owners selling into this market are those that have no choice, whether because they can’t afford to service debt on a refinanced loan or are institutional funds at the end of a hold period, speakers said. 

The lack of liquidity in the market is leading some creditors to offload debt, said Ben Jacobson, partner at Boynton Beach-based Forman Capital. His firm has been starting to get calls from small banks and credit unions looking to trade debt “so they don’t get in trouble with regulators,” he said, adding that he expected 2024 to be a more significant year in the credit space than in the underlying real estate sector.      

“What we keep saying internally is that you have to keep your head on right. The opportunities are coming. Now is not the time to stretch,” he said. “It does not make sense, at least for us, to be the equity right now.” 

Ray Cleeman, principal and head of capital markets at Miami-based Pensam Capital, has also been fielding calls from debt funds looking for cash to help carry them through. Many are seeking to prop up their collateralized loan obligations to keep the debt from coming back onto their books, curtailing their ability to transact, he said.

“We’ve seen cracks in the dam, but we haven’t yet seen the water coming through,” he said. “Over the next six, nine, 12 months, the dam will break and we will see real estate trade, because it has to trade.”

The limited available equity for both new and existing projects has boosted interest for alternative investment strategies like crowdfunding, said Ian Rosa, vice president of the online investment platform RealtyMogul. 

The crowdfunding structure is attractive in South Florida, where Latin American investors are increasingly looking to fund projects because of political and economic turmoil in places like Colombia, Chile, Brazil and Argentina, panelists at the event said. 

“People are constantly on edge about what to do with their capital,” Rosa said. “There’s horror stories about the Cubas of the world that take all your property, and Miami is kind of that sacred place for them to invest.” 

Foreign capital is also flowing to more traditional investment vehicles. A third of the equity raised by Washington, D.C.-based development and investment firm Poverni Sheikh Group is from outside the U.S., CEO Eugene Poverni said. 

Many of those investors are attracted to South Florida’s market dynamics, including strong net migration, the arrival of high-profile firms like Ken Griffin’s Citadel, and a resilient office market. Developers are more willing to explore alternative paths to raising funds because of an expectation that projects that make financial sense in today’s rate environment will only become more attractive assets when rates eventually retreat. 

“A number of our clients that have development sites want to get shovels in the ground, because they’re hoping that in two to three years, as they deliver, we’re going to be in a different economic environment,” Burke said.