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The Commercial Real Estate Market is Heading for a Recession

The commercial real estate market in South Florida has been degrading for quite some time. Last year, I predicted in a number of my previous Posts on Linkedin.com that this trend would start in 2017, and I also stated why I thought that very brisk and healthy market of last year was due for a slow down. Summarized here, we can point to the following factors for our current slowdown: rising interest rates, originating from a more motivated and aggressive Federal Reserve, a strong dollar, and a series of long term price appreciations of most properties here in South Florida since the last downturn in 2008. These were my main reasons for my previous prediction that our market was moving towards a top. Now, it is time to discuss what is likely to happen to the market in South Florida in the next year. We can begin our discussion by taking specific note of the current conditions in a number of sub markets within our overall commercial real estate market.

A Number of Sub Markets are topping:

While the inventory of good quality industrial, office, and multi family properties continues to remain low, and properties for sale in these sub markets are in great demand, the number of sales within these sub markets is slowing. The main reason for this phenomenon is the number of qualified buyers in the market is diminishing. The cause: the triple whammy of a strong US dollar, (which practically eliminates international buyers because our dollars cost too much in their currencies), higher asking prices for the properties available for sale, and an unusually strong lender reluctance to finance investment properties. Don't get me wrong; overall finance rates are still low for most commercial lending, but lenders are still awfully cautious, and this fact dramatically effects the market of financed buyers, ready, willing and able to make a purchase.

Some commercial sub real estate markets in South Florida are in a state of dire flux, caused mainly by an entire rehab of their traditional market structures. The retail commercial market is a great example of this transition. That market is going through a severe change as owners of smaller retail properties begin to realize that the value of their buildings is truly under a general threat from online retailing and the Amazons of the World. Customers, who generally in the past got in their cars and came to these retail centers from neighborhoods nearby, are less interested in driving to their favorite retailer these days. Why should they, when they can simply go online and start clicking for a shipment that arrives at their front door in two days? And to make things worse, most local retailers are far behind in their preparations for this new online shopping phenomenon. The result is that some retail property owners are panicking and simply dumping their properties on the South Florida commercial market, taking whatever buyers will pay. This is a wonderful opportunity for any smart and creative investor who is willing to buy and then take that retail property in a different direction in terms of zoning and use.

The hotel market is another sub market that has seen its finest days in this cycle. Hotel prices have risen faster in the last five years than any other property group in South Florida. The hotel market is now ready for a significant pullback. While I do not see a fall in prices for hotel related properties this year, next year is going to be a different story, as travel in most of the US slows, and the dollar continues to strengthen. This change spells only one thing for South Florida hotel owners: a difficult time is coming in South Florida.

Planning and Zoning Regulation in South Florida has started to become what can only be described as a "War of the Worlds," as policy makers deal with voters who are strongly opposed to new commercial development. The result has been a tightening of regulation and a strong play on the part of City and County planners to reduce proposed commercial developments to sizes that make hardly any economic sense. The result is that new permits for commercial building is starting to slow, and commercial projects are being put off in almost every jurisdiction. The result: lower numbers of projects, less construction employment, lower demand for construction materials, and a easing of labor shortages is on its way.

Rates are Rising too Fast:

The Federal Reserve is being far too aggressive in its attempt to return to a normal policy of money flow and expansion. This fact has already shown itself to be the case in certain pockets of our economy. Right now, the US Bond Market is giving both the Stock and Real Estate market in the US an important signal, and that sign is pretty darn ominous: The Fed is going into its tightening mode too fast, and our economy is more fragile than the Fed seems to know or recognize. Ten years of loose money has made an impact on the World economy in a way that most observers still do not completely understand. Money has poured into the World economy from Central Banks in Europe, the US and in Asia intent on battling deflation, but where has all that money actually gone to work? The answer is sadly that most of the excess money in the World economy has gone into a strong built up of our World Stock Markets, and into propping up our international banking systems. Unfortunately, most of the World's economies are still quite weak, while the World Stock Markets are generally quite strong. So as the Fed raises rates over and over again into next year, we are going to see Stock Markets around the World react negatively, and strongly.

The Results are clear:

All of these factors, and more I cannot discuss here, spell trouble for the commercial real estate market in South Florida next year. THEREFORE,

HOLDERS OF COMMERCIAL REAL ESTATE NEED TO START PLANNING FOR A MARKET RECESSION, STARTING IN THE LATE FALL OF 2018. PRICES FOR PROPERTY ARE GOING TO DROP. TENANTS ARE GOING TO WANT TO LEAVE OR DOWNSIZE OUT OF MANY OF THEIR LEASED SPACES. DOWNSIZING IS GOING TO BECOME THE MODE OF SURVIVAL.

I recommend all property owners start now and review their property leases. Start making plans for a recession period ahead. Make yourselves ready, and prepare now by raising cash, and making yourself as liquid as you can. Be prepared to take advantage of the coming price pullbacks. There are going to be some good opportunities to acquire commercial real estate property in 2018 and 2019.

John K Brackett, Ph.D.

Principal Broker, John K Brackett Real Estate