South Florida commercial real estate will keep feeling the impact of the coronavirus pandemic next year, and the U.S. Senate races in Georgia could add changes depending on the outcome of the runoff elections.
So says Ed Easton.
Easton founded The Easton Group real estate company in 1974 in Miami and serves as its chairman and CEO. The company is a developer, investor, manager and broker.
Easton Group has built or managed the development of major South Florida projects including the 300-acre master-planned International Corporate Park with retail, office and industrial space near Miami International Airport and the 35-acre Lakes Corporate Park office-industrial complex in north Miami-Dade County. The company also is working on a 266,000-square-foot warehouse in Hialeah Gardens.
Asked how he expects assets classes to fare, Easton, a South Florida real estate leader, outlines his 2021 projections for the market. For starters, he expects multifamily and industrial to avoid serious impacts from the pandemic.
“Industrial is the poster child. It should do well again in 2021,” Easton said.
E-commerce is a major driver for industrial demand, which is increasing as the region’s population grows. At the same time, the building pipeline can’t keep up because of land constraints and rising construction prices, Easton said. This makes for a tight market with high rents. He expects the 4% industrial vacancy rate will stay steady for another year.
Although multifamily will be OK, rents will go up, and the asset class will lose residents who would prefer to purchase homes. Developers won’t build as much — again because of the high land and construction prices, which would push up monthly rents to as much as $2.50 per square foot for owners to break even, Easton said.
“Which means a 1,000-foot unit will have to rent for $2,500,” he said. “I think that is going to push more renters to be buyers because you can buy for a few hundred dollars cheaper than you can rent now.”
Both the luxury market and homes priced below $500,000 will see higher demand, but condominium units won’t be as strong. Residents working from home increasingly are opting for more space in a single-family house with a yard and would rather avoid densely populated condo high-rises.
“Condo sales will be OK, not super strong because there is a move from urban to suburban and from condos to houses,” Easton said.
Retail is one of the hardest-hit asset classes, and Easton isn’t seeing much improvement.
If a COVID-19 vaccine becomes available, people will be more willing to return to shopping malls and restaurants, but he’s afraid retail vacancies still could climb.
Funds from the Paycheck Protection Program and local government loan programs that kept some owners and businesses afloat will dry up by next year, and he sees an end to eviction moratoriums.
“The tenants are going to go through this eviction process,” Easton said. “They have been through a very tough time.”
The office market, which has fared better than retail despite the work-from-home switch, should slightly weaken next year, he said, projecting a rise in South Florida vacancies from the current 12% to 15%.
The sector so far hasn’t reflected major changes in vacancies mainly because leases are long term, but the coronavirus impact will become clearer as companies decide whether to renew expiring leases.
Companies are evaluating their workspace needs and could take different approaches in the distant future. Easton said they might keep their offices but bring in workers on a rotating schedule for public health safety reasons, or downsize and open satellite offices.
“That needs to play itself out, and lenders are very nervous about office right now,” Easton said.
Capital markets
“They will remain strong,” Easton said. “There is plenty of equity and plenty of debt. I think it’s going to be more restrictive in 2021 than it was in the beginning of 2020.”
Overall, lenders will stay away from hospitality, retail and office and will focus on industrial and multifamily.
But industrial and multifamily owners and developers won’t be in a hurry to take out loans unless they can charge rents high enough to cover the spike in construction and land costs, Easton said.
“It’s going to be hard to make the economics work. But if the economics work, the money is available,” he said.
Election impact
“It depends on what happens in the Senate race,” Easton said. “But if there are changes in the capital-gains rates, I think you will see owners turn into sellers to avoid paying the higher taxes.”
There could be a flurry of real estate sales if the U.S. Senate swings Democratic with runoffs for both Georgia seats. Owners would quickly sell to avoid higher capital-gain taxes that are expected if Democrats take over the Senate.
Currently, they are more keep inclined to borrow against their properties, which gets them the same amount of money as selling but without the capital-gains tax.
Easton added real estate remains a stronger investment vehicle than others. Even with the existing problems, “people like to own real estate.”
