Monday, February 10, 2014

REPORT: Investors Looking To Create Value, Not Buy Into Unsustainably Inflated Developments

BONITA SPRINGS, Fla. -- If research coming out of southwest Florida is any indicator, and I am hoping it is, the resurging commercial real estate sector is finally jolting back to "reality."

Panelists last week at the Urban Land Institute's 2014 Market Outlook Program unanimously concluded that investors are looking for improvements in fundamentals and operations to drive returns.

Said Dean Schwanke, ULI senior vice president, "Capital will be going wide into more markets, taking on more risk and looking for yield." Further, he noted that the southwest Florida marketplace is appealing because investors are turning away from buying big buildings in primary markets. Instead they are looking for new opportunities in secondary markets.

"Money will be put into creating things instead of buying existing things at ridiculously high prices," he said. Which means all eyes will be on real estate, Schwanke said, because it is a stable investment compared to the volatile stock market, and currently has better yields than the bond market. Multifamily rents are expected to rise over the next five years while vacancy rates decline.

Those last couple of statistics are unique to the region, as many projects were finished or near completion, leaving a huge number of completed -- but empty -- multifamily housing projects, or projects that ranged from unfinished holes in the ground, to a few foundation walls up, to walls, roof and shell complete, but unfinished interiors. All of which sat for years as capital left the region, and developers scraped by to hang on, or went out of business.

The best news from the outlook meeting bear repeating -- and I hope this applies not only here but in other markets as well. That investors are looking to create value, rather than buy existing projects at inflated prices.

Many sellers now with unrealistic values/prices placed on their properties are going to be disappointed. Not all, but many of those properties now for sale just don't make sense when you perform even a rudimentary analysis. When our group looks at any property, whether because we have been asked by a potential buyer, or even when we are asked to list a commercial/investment opportunity for sale, the same analyses are conducted. And appropriate recommendations given to the seller.

I don't like dealing in smoke and mirrors. Must of CRE a decade ago, particularly in this region was just that.

Another interesting note coming out of the panel discussion is a problem facing southwest Forida. Many construction workers have moved to booming energy-producing states like Texas and North Dakota, and so have little incentive to return. That translates to higher construction costs, which -- along with higher land costs -- will raise the cost of new housing.

Further, industrial spaces are likely to be redone to serve the demands of online retailers, while offices may shrink and be reconfigured to allow for more collaboration among workers. And while multifamily projects have been eclipsing other commercial sectors, industrial, hotel and retail space should be improving, but in untraditional ways.

Finally, finding land is a challenge in southwest Florida because many of the most desireable parcels have already been tied up by national homebuilders. Infill assemblages will become more common, the panelists agreed.

The most surprising comment I heard? One panelist who said a new mixed-use community in downtown Naples was expected to draw the usual community opposition. It never came. The reason? A belief that the public, across the U.S., is more open to development now after what everyone's been through with the Great Recession.

Here's to realistic, and economically positive, improvements in 2014.

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