Capital Markets Weathering Rapid Inflation In South Florida, Thanks To Influx Of Capital, Experts Say

Dark clouds are forming over the global economy, and while South Florida isn't immune to the effects of rapid inflation and interest rate hikes, the capital that continues to pour into the region is providing it protection from the storm.

“I think everybody here understands and recognizes we are in a recession,” Franklin Street Senior Director Javier Herrera said at Bisnow’s Money Conference held at The Current in Westchester, Miami. “I say that and people cringe, they're like, 'No, no, we're not.' No, we are.”

“Doesn't necessarily mean we're going into a depression, right? It's not all doom and gloom, or particularly for us down here in South Florida, I think there's still growth to be had.”

Deals are still closing. In Q3, over $355M in office property sales transacted in Miami, per Avison Young's latest report. This brings Miami's year-to-date total to $1.1B — a statistic that already outperforms the full-year sums of eight of the past 12 years — and the average asking price to a near-record $380 per SF. 

Miami’s appeal to foreign investors, particularly from Latin America, is expected to buoy it through hard times. In Colombia, the recent presidential election signaled a transition in economic policy. Newly elected President Gustavo Petro is particularly set on putting new oil exploration on hold, placing more taxes on the wealthy and expanding social programs.

Shake-ups like these often send money in the direction of Miami property, as it is seen as a more stable investment. 

“We keep hearing time after time that when things are bad in South America, it's great in Miami; when things are great in the U.S., it's great in Miami, so Miami is always sort of shielded, right?” Integra Investments principal Nelson Stabile said. “There's going to be a lot of activity as a consequence of everything that's going on in Latin America and macroeconomics.”

But it isn’t all rosy in Miami, and it can’t entirely avoid the pain of the rest of the U.S. The Federal Reserve's continued increase in interest rates to bring inflation down from its 40-year high is rapidly changing the business model of investment, CRE experts said.

That can include a longer hold time on investments to make deals pencil.

“The projections need to have a longer runway,” Herrera said.

The industry is being forced to face negative leverage, or property owners making less money than the sum of their debt payments. While in the past, South Florida investors in particular may have been comfortable making that bet and counting on future growth, that is changing.

“In a very low interest rate environment, we got so spoiled with the rent growth that folks were very comfortable making an investment on negative leverage knowing that the rents were going to catch them into positive territory over the course of 12, 18, 24 months,” Stabile said.

But he said problems may loom as rents level off across the board.

That is leading to “a tremendous amount of deal destruction,” said Avi Glikman, vice president of the investor relation division at Bushburg Properties.

“What we're seeing on our end is that deals that made sense one week don't make sense the next week,” Glikman said. 

Still, that isn't stopping deal activity, and there will be sellers hungry to offload assets.

“If you're willing to think out of the box and fill a capital stack and do things in very interesting ways, I think there's going to be tremendous opportunity and tremendous value that's going to be created,” Glikman said. “If you're diligent in what you are and how you're underwriting, I think that there's going to be tremendous opportunity coming out of this.”

And the Federal Reserve is signaling there may be interest rate relief on the horizon, according to Brian Bailey, the event’s keynote speaker and CRE subject matter expert for the Federal Reserve Bank in Atlanta.

Federal Reserve Vice Chair Lael Brainard, one of the major contributors to interest rate policy, indicated the economy has seen sufficient improvement that the Fed may soon consider slowing the pace of interest rate increases.

“So I think, you know, some continued good news from folks in the debt market,” Bailey said. “Not that our work is done — we still have work to do.”