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Florida May Be Hot, But Competition Is Compressing Cap Rates

The Florida commercial real estate market is as hot as ever.

“There’s an abundance of capital, throughout the capital stack, pursuing every kind of deal imaginable," said Aztec Group Managing Director Jason Shapiro, speaking at Bisnow's Deal Flow & Investment Strategies event in Miami on Wednesday.

His firm has been involved with financing everything from shopping centers to land for a townhome development in Homestead.

While there's activity across all sectors, event panelists generally agreed that multifamily and industrial are the hottest, retail and office have their challenges, and hospitality is still struggling as the coronavirus lingers. Furthermore, as companies eye Florida for its low taxes, ever-growing population and business-friendly policies, competition has been driving land prices up and cap rates down.

Juniper Square Senior Director of Partnerships & Alliances Ron Rosii, Carroll Organization founder and CEO Patrick Carroll, Property Tax Alliance Group Managing Partner Jeff Nelson, Steelbridge founder and Managing Principal Gavin Campbell and Nuveen Real Estate Southeast Regional Head Charles Russo

Steelbridge founder and Managing Principal Gavin Campbell said that his boutique private equity firm began investing in Florida as a diversification strategy. The firm is based in Chicago.

“Taxes are really through the roof there,” he said. “We have dysfunctional state government.”

“Our warehouse properties have done extraordinarily well, though retail tenants have been struggling terribly," said Campbell, addressing specific investments. "Last year, we gave all our retail tenants free rent for 18 months and said, ‘Hope you can survive!’ I'd say half did, half didn’t. Even with free rent, you cannot survive without customers, so that has been tough. We have a national portfolio. Things have been better in Florida because the lockdown was less severe, but the real tragedy has been how tough it's been on mom-and-pop retail.”

Counterpointe Executive Director Adam Lipkin, Trez Capital Managing Director Ben Jacobson, Aztec Group Managing Director Jason Shapiro, Mast Capital Senior Vice President of Acquisitions Cassie Resnick and Money360 Managing Director for the Southeast Brian McChesney

Trez Capital Managing Director for Florida Ben Jacobson said the state benefited from having less stringent lockdowns than others. Trez Capital was founded in Canada and has an office in Palm Beach. Having a team on the ground in Florida that's familiar with key neighborhoods has been important, he said. 

That's won the company a lot of business and enabled it to move quickly on deals, he said.

Amid growing competition, cap rate compression has become a concern.

“I’m about to bring a deal to market in Broward [County, near Fort Lauderdale],” Jacobson said. “I’m a little concerned about a three-cap. Maybe a 3.99 would be acceptable.”

Investors have turned to previously overlooked geographical areas. Last month, Trez Capital closed a $64M deal in Dania Beach, which is between Miami and Fort Lauderdale, Jacobson said. Just a few years ago, “Institutional buyers weren’t really looking in Kissimmee, Florida.”

Cassie Resnick, senior vice president of acquisitions for Miami-based Mast Capital, pointed to Waterline Miami, her firm’s recently completed multifamily project in Miami’s Health District, as evidence of the sector’s strength.

“It’s about 350 units," she said. "We’re about 100% leased up, and we’ve raised rents three times in lease-up.”

Summarizing the market, she said that cookie-cutter, ground-up, garden-style multifamily deals are easy to capitalize and — in spite of the collapse of the Champlain Towers South condominium in Surfside — it's easier now to capitalize condos than it has been for years. However, retail is harder to finance unless it is stabilized, and many lenders still have no appetite for hotels. 

The residential market can't get much hotter, the panelists said. Carroll Organization founder and CEO Patrick Carroll warned, however, that “things don’t go up forever.”

Any adjustment to interest rates could stifle the market, he said. People who moved from New York and California could leave, especially if the coronavirus pandemic winds down or a hurricane hits.

"The other major impact's going to be insurance," Property Tax Alliance Group Managing Partner Jeff Nelson said. "The people who come down here are used to paying pennies for insurance. They come down and find out it's three times what they're budgeting."

CORRECTION, JULY 29, 2:50 P.M. ET: An earlier version of this story misstated the leased percentage of Waterline Miami. The story has been updated.