As South Florida’s real estate market experiences robust growth across a wide range of asset classes, Bilzin Sumberg’s Anthony De Yurre, Partner in the Land Development & Government Relations Group, sits down with Melissa Rose, Managing Director at JLL Capital Markets, Americas, to dissect the capital flows powering the local market. They combine their decades-long experience facilitating deals in South Florida real estate to offer insightful observations on new capital entering the market and where these investment dollars are headed.
DE YURRE: Hello everybody. My name is Anthony De Yurre. I'm a partner in Bilzin Sumberg's Land Development and Government Relations Practice Group and thank you for joining us for another episode.
Today, I'm joined by Melissa Rose. She's an incredible capital markets expert and Managing Director at JLL's Miami office. Herself, a New York transplant, and Exhibit A for the Miami movement that's going on now.
ROSE: Thank you for having me, Anthony.
DE YURRE: Fantastic. So, tell us a little bit about yourself beyond the fact that you're fantastic at finding debt and equity for projects.
ROSE: Well, I've been in Miami now for about seven years, gratefully, so I was ahead of the whole wave. And I've been doing debt equity placement between New York and Miami since then, and I love the beach and the ocean and love living in Miami.
DE YURRE: Fantastic. Melissa, everybody knows South Florida is ground zero for the hottest real estate market in the United States right now. What does the mix of capital look like right now? Is it different than it used to be? Give us your insight on that.
ROSE: So, the exciting part about being in a market that's just growing so quickly and has so much excitement is that we're seeing capital come from all over the world. So, I mean, there's certainly been a huge influx of capital from the Northeast and domestic capital that's transacting here, but we've also seen, you know, new limited partners and groups that are foreign coming into our market as well.
So, it's a pretty large mix. I'd say as a specific group that family offices have probably taken a large focus in the Miami market, and we've seen a lot of family office, private capital flood to Miami.
DE YURRE: You mentioned domestic versus international capital. Traditionally Miami has relied on the ebbs and flows of international investment. Can you speak a little more on that, the domestic component versus the international one?
ROSE: We have seen a bunch of European family offices transacting here and we've also seen some Asian capital come to this market, and of course there's the influx of domestic capital that's come here as well. So I think there was a time where there was a lot of money from Latin America that was really bolstering our market, but it's a much more diversified pool of capital today.
DE YURRE: How would you compare the strength of the capital today? How well healed are they today versus the capital when you first came down from New York here in Miami?
ROSE: Well, I think that there's a ton of liquidity in the market today. There's obviously been some volatility in the overall market and a huge change in the cost of borrowing that's happened of late, but I think that well capitalized institutional investors, family offices and capital from all over the globe has looked at Miami as a major growth destination that's attractive to place and pursue acquisitions.
DE YURRE: Here we are on the other side of COVID, and things are very different than they used to be. In particular, interest rates are rising. How is the market responding to that?
ROSE: I think one of the things that's great about being here in a time where there's volatility in the market is that, you know, we're still seeing a tremendous amount of growth - and between the population growth that we're experiencing, which has bolstered very low vacancies and industrial properties - and rent growth, and we've seen that in the multi-family sector as well. So there's some insulation, I think, in that investors are still viewing this market as immature and having an opportunity to have growing rising rates on rents.
DE YURRE: Follow up on that question. How is demand for certain types of financing? What is that capital stack looking like right now?
ROSE: I think that as we see the cost of borrowing increase that lenders are, you know, changing their underwriting criteria and leverage for senior financing is dropping. So one thing that I think we're going to see a greater necessity for going forward, is probably subordinate capital in the capital stack, where a borrower is seeking, you know, senior financing, but we'll also need to sort of utilize either preferred equity or mezzanine financing to fulfill an acquisition or refinance their property.
DE YURRE: So you're seeing some erosion in the capital markets?
ROSE: The cost of borrowing is higher now. So that obviously has impacted the way people are underwriting exit metrics on financing. So leverage has dropped slightly, but there's still a ton of liquidity in the market and we certainly see that capital sources are still eagerly trying to get dollars out of the door.
DE YURRE: Pretty much all asset classes have benefited from the post-COVID environment Miami finds itself in, but which one in particular are you most bullish on?
ROSE: Well, I'm slightly biased since I spend a lot of my time on it, but I certainly feel best about the industrial sector. Miami still has an incredibly low vacancy rate, And I think some of the geographic barriers to development here, just between the Everglades and the ocean, and that massive amount of population growth have really increased the amount of demand for space.
We certainly haven't seen any delay or, you know, any tenant demand has not slowed down. There's still a tremendous amount of interest on the tenant side that I think can support the construction that's in the pipeline. And I think that the growth in rents is supportable based on these businesses only having a small portion of their P&L going towards rent, whereas a multifamily tenant has a large part of their income going towards their rent for where they live.
DE YURRE: And continuing with that theme, do you see opportunities, geographically, in terms of redevelopment? Are there existing areas that have older industrial stock, for example, or new areas that never had industrial stock that some of your clients are exploring?
ROSE: So, you know, I think Hialeah as a market has a lot of historical stock and very high occupancy and very high demand. We're seeing the highest rents in new product. We don't have as much new product in the overall square footage of the market. And I think that's changing with some of the new development, but I think some of the older product in our market will always remain occupied and has great, you know, sticky tendency and there's a demand for the smaller mom and pop tenant, which is most of our market.
DE YURRE: So to that point, in which particular portion of the industrial do you see the strongest rents?
ROSE: Well, I think the airport really supports the strongest rents. So proximity to our airport is probably the factor that supports the largest rents in our market. I mean, we obviously have a strong port as well, but the airport surrounding area of the airport is where we see the highest rents.
DE YURRE: Tell us about cold storage. I know it's something that is near and dear to your heart.
ROSE: I love freezers. It's a very small portion percentage wise of the entire industrial market. It's incredibly interesting the way our consumer behavior has really changed the industrial demand, and so with cold storage, specifically, most of the stock of our entire market across the country is older vintage products. So it's very hard to build cold storage. It's expensive. It does command higher rent but it's complicated to build and needs skilled operators. So it's an interesting asset class where there's just a large percentage of the existing square footage is eighties vintage, for example, and we're now starting to see some newer product come to market that's, you know, 60 foot clear and has automated racking systems and is really designing to appeal to a more modern tenant.
DE YURRE: In terms of industrial, how has inflation or inflationary pressures, impacted that market?
ROSE: I think the inflationary environment has obviously impacted the overall economy in all of real estate, but I think the one note that we've sort of taken as, you know, industrial leases oftentimes can be 10-year terms with minimal escalations. So we are finding that investors are more interested in development opportunities or opportunities where there's shorter WAULTs so that they can benefit from the appreciation in rents rather than being stuck in a lease where there's minimal escalations annually, like two or 3%. And I think new leases are being negotiated with shorter terms and higher escalations to try and fight some of that.
DE YURRE: As a New York transplant yourself, what do you really believe and, if you can pinpoint some of the factors that are most attributable for your success, to come down to this market, as many people are considering coming down here from places such as New York.
ROSE: I think when you're moving into any market, the most important thing is to find the right diverse team for you to be a part of so you can sort of play what your talents are off of a bigger group. And I think I embraced that there were things about this market I didn't know, and that I had a lot to learn and I came in with a humility, but also kind of brought my New York edge and hustle.
I think whenever you find the right groups of people to work with, that's when all the magic happens.
DE YURRE: Fantastic. And to our audience, thank you very much for tuning in again, watching another episode. Of course, this episode, and all our episodes, are available at our website - bilzin.com.
And have a great day from sunny Miami, as you can tell.