The National Association of Realtors recently held their annual conference in Orlando, and as the 2022 President of the Realtor Association of Sarasota and Manatee, I was able to attend and represent our 8,500 members. This conference is five days packed full of governance meetings, educational opportunities, and networking.
My favorite session is always the Commercial Real Estate Market Update by NAR’s Chief Economist Dr. Lawrence Yun. Dr. Yun is a no-nonsense type of guy who calls it like he sees it. He provides very practical and direct observations and advice.
Dr. Yun indicated that nationwide we are beginning to see some decline in commercial real estate values in that capitalization rates, net income divided by purchase price, does not match up with the higher interest rates on loans. This is particularly a problem with commercial real estate investors who need to refinance their properties. There has to be an appropriate spread between interest rates and cap rates, and because that has been reduced, it is pushing values down. However, in certain markets like Manatee and Sarasota counties, strong job growth is continuing to support our prices.
In commercial real estate you have five major “food groups”; office, multifamily, industrial, retail and land.
Dr. Yun indicated that nationwide, office properties are seeing the greatest decline in prices as vacancy rates are escalating. San Francisco for example went from 6% office vacancy before the pandemic to more than 15% today. This is caused in part due to the COVID work-from-home changes that have occurred in the office market since 2020.
However, due to the high cost of land and construction in our area, coupled with the fact that no one is constructing office buildings on speculation, along with our strong job market, the Manatee/Sarasota region has a shortage of office space in certain areas. We are seeing rents begin to escalate and sale prices hitting an all-time high in price per square foot.
Conversely, it is well-known that multifamily rental apartments are a very hot segment of the market. Multifamily was noted as the best inflation hedge and most stable sector in the commercial real estate market over the past 40-50 years. Consequently, finding a project to purchase is very difficult. This is true in our market and throughout the United States.
Industrial is another strong sector both locally and nationwide. Rent and sale prices have almost doubled over the past few years and there are many new projects under construction throughout Florida. But with inflation expected to cause a reduction in e-commerce, and the large number of projects under development, this segment could see an oversupply in 2023.
One segment that Dr. Yun and the panel agreed was currently undervalued is the retail sector. They felt there was great opportunity in buying up older, but well-located strip centers to rehab them for a new generation of retail stores and personal services sector.
No matter what your preferred commercial investment type; retail, office, industrial, multifamily or land, the fundamentals of the market in Southwest Florida remain very strong. We have continued growth with the influx of new residents, our residential home prices are continuing to climb and we don’t have enough supply.
The commercial real estate sector has a lot of catching up to do with the all the residential growth we’ve experienced over the past 10 years. So, while we may see some commercial real estate sectors take a pause this year due to the higher interest rates, once interest rates stabilize next year we are poised for some great opportunities in our market. The question is, what flavor do you like?
Tony Veldkamp is president of the Realtor Association of Sarasota and Manatee.