With investment dollars pouring into South Florida real estate from all over the country, new entrants and prospective investors are often wondering what trends are emerging from this exciting boom. In this interview, David Resnick, a Partner in Bilzin Sumberg’s Corporate & Finance Group, and Daniel Matz, Senior Managing Director at Newmark, discuss the growing opportunities for capital deployment in the region. Together, they use their respective business and financial insights to shed light on the rise of new asset classes, the transformation of specific neighborhoods, and the diversification of financiers entering the market. For more thought-provoking interviews on Florida’s rapid growth, please visit Florida Is The Future.
RESNICK: I'm David Resnick, partner in Bilzin Sumberg's corporate and finance group. I'm excited to welcome you to a timely discussion on investing in South Florida's booming real estate market. Over the past several years there's been a surge of out-of-state investors, looking for different ways to deploy their funds in South Florida. This has resulted in an increase in ground up developments, as well as an increase in the acquisition of value-add properties. But as many out-of-state investors are learning, sometimes the hard way, South Florida is unique. It has its own challenges and opportunities. Today I'm joined by Danny Matz, senior managing director at Newmark, a global commercial real estate services and advisory firm with approximately 2.5 billion market cap.
Danny Matz is well-positioned to provide to us his insights on the ever-changing market in South Florida. Danny, thank you for joining me. Let's dive right in. It's no secret that There has been a boom in Florida's real estate industry, and it's touching multiple different types of asset classes. Have you noticed any trends in certain asset classes dominating different neighborhoods?
MATZ: Great question. First, thanks for having me here David, I'd like to touch on kind of two things. One, the new asset classes or the hot asset classes, and you know, it's pretty obvious that multi-family is kind of dominating South Florida and that can kind of be broken up into kind of a couple of different ways.
One like for rent multi-family apartments and for sale condos. I mean, Miami is a developer's town. There are cranes everywhere, you know, not just in Miami, but all of South Florida, the particular neighborhoods that are really booming - if you talk about Wynwood, Downtown, Brickell, you know, those are three adjacent neighborhoods. In addition, Edgewater is also booming when it comes to multi-family and for-sale condos just in Edgewater alone, at one intersection on the corner of 26th and Biscayne, are 3,000 units under construction. And that's already after, you know, several thousand units have been delivered over the past few years.
On the luxury condo side, developers keep building as if nothing's happening and the market's not ever going to slow down. You've got the Baccarat residences, you know, Related is converting Reservations soon. Aston Martin is going to be delivering soon. LSA and Edgewater just TCO'd and residents are moving in. It's unbelievable the pace at which developers are building luxury condos. In regards to different neighborhoods, as Miami has been more built out, looking at what's happening in Broward County is really interesting. Take Pompano, for example, there are several multi-family and condo projects under construction with blue chip developers like Related. Five years ago, seven years ago, that would have been unheard of. The rents that they're getting, the condo prices they're getting there are really remarkable. I think, you know, as investors are looking for opportunity for sites, for waterfront sites, also looking at the affordability gap, Fort Lauderdale, Pompano, other markets that aren't Miami are a very compelling story.
RESNICK: Other than multi-family, what's interesting in the market?
MATZ: That's a good question. You know, there's an incredible amount of investment activity across all property types in South Florida. I think it's really interesting what's happening in some of these emerging asset classes, like truck parking, industrial outdoor storage, cold storage, marinas, car washes. You know, five, seven, ten years ago they weren't really recognized as a legitimate asset class, but not only are they attracting a significant amount of investment activity, it's coming from institutional equity. Opportunity funds, high net worth family offices, sovereign wealth funds and especially in the truck parking, marinas, car washes, it's kind of being viewed as the next, like private equity roll up opportunity. So it's really incredible how much capital is chasing these deals in South Florida right now.
RESNICK: So do you see this as more of a covered land play?
MATZ: That's a good question also. The truck parking, I look at it as kind of case-by-case, but that's how you kind of underwrite the downside. The rents they're getting from truck parking operators, you know, sometimes right now is exceeding that of industrial rents, which is crazy because industrial in South Florida is white hot, but the land is so expensive, but in the long run an investor or a lender, it's good to have optionality.
RESNICK: So you mentioned that multi-family industrial, commercial, all these different asset classes are finding ways into South Florida. Is there a particular order in which they come online? For instance, does multi-family come first followed by commercial followed by industrial?
MATZ: Yes, so it's a very good question. I think it's dependent on which neighborhood we're talking about. In Wynwood, the residential has come first and there's a ton of residential under construction, and now there's plenty of office that's right behind it, and that office market is very well leased, which is a new kind of burgeoning office market. Everyone knows Brickell and Downtown and the little sub markets within Miami Beach, but Wynwood as an office market is really starting, I'd say, to mature.
PricewaterhouseCoopers recently just signed a lease there, which isn't a tenant you would think would necessarily want to be in Wynwood, which we kind of identify with more startups, tech firms, entrepreneur firms, but, PWC realizing they need to be where a lot of their client base is.
So that's what's interesting with what's going on with Wynwood. It's kind of the opposite in Downtown, in Brickell, which historically have been big office districts, but as of the last five, ten years, more multi-family, more condo developments, have come out of the ground, delivered, leased up, sold extremely well.
It's obvious why people are attracted to Brickell and Downtown, you have the amenities. In Downtown in particular, it's a huge pipeline of multi-family development, of office development. In the next five years, it's going to be transformed similar to the way that Brickell has been transformed over the last ten years.
And then what's happening with Miami World center is incredible. This huge area of land five years ago, was pretty barren, is being developed by a variety of uses. Multi-family rental, apartment, condo, office, retail - it's pretty incredible.
RESNICK: While talking about the industrial asset class, you mentioned that money is coming from a lot of different markets. How are you seeing investors change their strategy on the multi-family side with increased rents?
MATZ: Multi-family has a wild ride the last few years. From an asset appreciation standpoint we're seeing fifty to a hundred percent increases in value over a twelve, twenty-four month period. Which is really unprecedented. And coupled with that, or what's happening at the same time, is rent growth, ten, twenty, fifty percent in some markets in South Florida and drilling down into each property, the lease trade-outs are remarkable. We're seeing that in properties that just delivered and are leasing up at a very fast clip, in addition to older properties where investors are going in and renovating units and increasing rents. Value-add multi-family has changed a lot in the last ten years. Ten years ago, a value-add investor could expect to see a twenty plus IRR return. Where cap rates are today, that's probably closer in the low teens, so the landscape has definitely changed.
There's a variety of investors that are looking for multi-family investment opportunities in South Florida. From pension funds, pure play REITs, opportunity funds and just your run-of-the-mill value-add investors. It's been extremely competitive to buy multifamily the last few years in South Florida, especially the last 12 months. I have a very interesting seat working at Newmark because the Newmark multi-family investment sales team is the number one multi-family investment sales team in Florida and I work very closely on a lot of the sales and the financings. And what's been an interesting trend over the last month, is how investors are adapting to rising interest rates.
So we have a few things happening, Interest rates are going up, cap rates don't really seem to be moving. So how do investors adapt?
I'd say the last twelve months on any deal, call it, garden mid-rise, high rise, anywhere in South Florida, the broker markets the deal, calls for best and final. They've got ten to fifteen very strong offers from institutional groups to value-add groups, good, good variety there. And over that twelve month period, the broker's been achieving a sales price anywhere from ten to twenty percent above, like the guidance. Above the strike price that they were guiding the borrower to or the seller to prior to taking on the deal.
That's just because there's so much demand, so much capital, just chasing opportunity. This was the same for seventies, eighties value ideals, as it is for 2021, kind of core deals that are just delivering. It was just crazy the yields that investors were going to accept. That has changed very fast in the last three to four weeks. What was ten to fifteen best and final offers is more like three to four.
Tours are very light. Investors don't quite know what to make of the new debt markets, Whereas a borrower might be able to borrow seventy-five percent at like 275 over. That's more like seventy-five percent at 350 over and the forward curve is very steep and it just doesn't make some of these deals palatable anymore. So what does that actually mean? Like how do investors actually get deals done?
What we're seeing is kind of a thinning of the buyer pool. It's not such a interesting mix anymore. You've got like the institutional guys that can buy all cash. Like Blackstone's, Brookfield's where interest rates aren't really affecting them. You also have some core plus buyers like TPG for example, who can use low leverage fifty to fifty-five percent LTC. And that pricing is in the low to mid one hundreds. So it still makes sense to buy a three cap in place if you really believe in the rents. So the rents is the real story here because they've been growing very fast and who's to say that they're not going to still grow, you know, four and a half dollar rents in Miami that's three-thousand dollars for a six hundred fifty square foot, one bedroom apartment.
That's a lot of money for a one bedroom apartment. Does that go to thirty-five hundred, I don't know. It will be interesting to see if rents can be sustained, if they're going to grow with the current demand from the tenant base.
RESNICK: So as a hedge to the increasing rents, and I guess the unpredictability of the multifamily market with these rents increasing, are you seeing any push towards workforce and affordable housing?
MATZ: I think everybody knows that there's an affordability crisis in Miami. I think the question is, how do you build affordable housing with government incentives and also what is really affordable?
RESNICK: So you spoke a little bit about increased rents. A lot of residents from out-of-state are moving in. What impact is that having on the multifamily market?
MATZ: Yeah, there's a lot of new tenants in the market. Whether it's COVID or lifestyle or a mix, people moving in from New York, Chicago, LA all over the country for a variety of reasons are really driving rents up both for multifamily, for single family residences, for condos and we're seeing that all across Miami. And it feels like that's here to stay. People are wondering, oh, are people going to go back to New York. I don't particularly think so, that's a huge factor in what's been driving rents the last twelve to eighteen months, and it doesn't seem like that trend is slowing down.
RESNICK: Danny, thanks so much for joining us. You've gone a long way in educating our viewers and providing them with different tips or different things to think about before investing in the South Florida market.
To our audience, thank you for tuning in. We look forward to providing you with future podcasts on new and exciting areas in the real estate market.
All of our podcasts can be found on our website, www.bilzin.com.