2016 CRE Report Card: 10 Take-Aways

I attended the CRE Report Card event today, a moderated panel discussion hosted by the Central Florida NAIOP Chapter. Spirits were high, and the event was very well attended. The use of polling software enabled the audience to get a sense of the collective enthusiasm for the activity in the market. Attendees described the local commercial real estate (CRE) market as ‘strong, growing, robust, busy, exciting, compelling…and smokin’.’ 70% of the audience believes that the 2017 market will outperform the 2016 edition.

As additional perspective on the broad optimism, though, I found several panelist comments to be extremely interesting. (All of them were offered by the dozen panelists; I’ve only added a brief reaction to some of them.)

1.      The number of transactions and the value of those transactions are up over previous years, but the time it takes to complete a deal is significantly longer than in the past – indicating that buyers are willing to pay but want to move cautiously.

2.      Sales of existing office buildings and retail centers are still at prices below replacement cost – discouraging developers from building new structures.

3.      Conversely, sales of multifamily and industrial properties are at prices above replacement costs – which encourages more development.

4.      The industrial market is strong but in equilibrium – demand is approximately equal to supply, so leasing activity is steady.

5.      Sales of industrial properties are occurring because the exit cap rates are now lower than the original acquisition cap rates. Even if the owner did not experience much rent growth over the holding period, there is profit to be harvested due merely to the favorable fluctuation of the pricing standard.

6.      Industrial is the new multifamily – after record performance (demand, construction, pricing, rent growth) in the multifamily arena over the past few years, large scale investors are now attracted by the record absorption in the industrial arena. E-commerce is the single biggest user of industrial (logistical) space.

7.      71% of the audience thought that President-Elect Trump will have a positive effect on CRE. One panelist, though, noted that the foreign investors are uncertain about all of his potential actions. Because, by his estimate, foreign capital is involved in about 40% of the transactions in central Florida, Mr. Trump's influence bears watching.

8.      Similarly, another panelist noted that although counter-intuitive, foreign capital seems to flow in more aggressively when the dollar strengthens. These investors want safety evidenced by the higher priced US currency.

9.      Most of the foreign capital currently flowing into central Florida is from China, Canada and Germany. One panelist noted that the cap rate on an office building in western Europe is around 3%, but is closer to 8% here, suggesting that this is not “flight capital” but yield driven investing instead.

10.  People are more fearful than the fundamentals suggest – meaning that the irrational exuberance that always leads to a bursting of the bubble does not currently exist. Apparently the last recession was so painful that CRE players are happy with slow growth and moderate gains.

A bonus take-away is that we might have found an heir to Bill Moss, our longstanding, highly regarded, supremely gifted moderator – in Mike Fess, an irreverent comic disguised as a real estate developer. Mike entertained us throughout and moved the event along – keeping the high spirits high.