Thanks to the second quarter’s positive momentum, the markets were able to recover despite a surge in Covid cases caused by the Delta variant. While Florida’s mask and vaccine mandates for residents and businesses have been criticized by some, this policy has been proven beneficial for our local business community.
As you may be aware, a new $1 trillion spending package and a tax bill that includes increasing both corporate and personal taxes for high income earners, as well as a capital gains tax increase, is why Florida has become such an attractive destination for new-to-market companies seeking to take advantage of tax incentives and relief opportunities offered here in the Sunshine State. The shift is real, and according to move.org Florida was the number one destination for Americans relocating in 2020 through April 2021. This trend is expected to continue through 2025.
|On the FED front, the quarter began with the July meeting, where Chairman Powel reiterated that it still wasn’t time to reduce soft policies despite the economic recovery, which ensured market participants kept financial aid through 2021. Later in the quarter during a panel discussion, the tone shifted slightly and he suggested inflation could run well into 2022. It is important to highlight that current inflation levels are at its hottest pace in about 30 years, running close to 4% as of September. A large part of the inflation issue, aside from both liquidity and a diminuished workforce, is coming from the supply chain bottlenecks which are forcing disruptions in shipping, chip manufacturing, electronics, food suppliers and household products. |
The Labor Market
|The labor market has been experiencing some challenges as we have 10 million job openings but approximately 8.4% of Americans remain unemployed. This is in part due to a massive reallocation taking place both by employers and employees, which is creating unbalances within industries. The pandemic has changed the way we think about work and what we want out of it. According to an article in The Washington Post, resignations were up 13 percent over pre-pandemic levels, 4.9 million people aren’t working or looking for work, 3.6 million have decided to retire and entrepreneurship has had its biggest jump in years with new business applications.|
The 3rd Quarter report showcased that the surge of the Delta variant had a notable impact on employment as well. The employment rate declined to 4.8% in September, however both August and September job figures were lower than expected. Wages had a major jump growing by 4.6% in September, the biggest increase since February, which translated to upward pressure on inflation. We expect a rebound in hiring in the 4th quarter, now that it appears the Delta Variant is under control and unemployment benefits have come to an end in the month of September. This will force many back into the workforce and should reflect in the 4th quarter.
Source: The Federal Reserve
|If you recall, back in August of 2020, the Fed announced a major policy shift, which was to allow inflation to run hotter than normal in order to support the labor market and push the economic recovery. A 2% average inflation goal was set and they hinted that they would be less inclined to hike interest rates if the unemployment rate fell, and wether inflation where not to go up. |
A recent article on MarketWatch (published by Jeffery Bartash), includes an image highlighting the 10-Year Average vs. Recent Peaks on Consumer Price Index (CPI) and Personal Consumption (PCE), over last 12-months.
Fast forward to today, and as we can see, in just a short period of time, inflation is running at almost double its initial target.
The Housing Market
|With inflation pressure and interest rates relatively low, there is still a very strong demand for single-family homes and condominiums. Single-family home inventory is currently at 2.2 months of supply, and has been since April, whereas inventories were closer to 5.5 to 6 months pre-pandemic. Condo inventory has also dropped to 4.3 months from the 12 and 15 months of inventory, just a few months ago.|
Source: Florida Realtors
|With that being said, even with the strong demand for residential properties, median sale prices of homes have begun to stagnate in some markets. Perhaps a slight decline in prices is affecting both condos and single-family homes. The recent move in yields will have an impact on a market that has moved fairly quickly over the last 12 months, which leads to the 30-year mortgage, currently floating around 3.10%, the highest level since April of this year when it hit a low of 2.875%. |
|Apartment demand continues to remain strong with rents soaring in the third quarter, driven by growth pressures. The influx of companies and their sophisticated workforce from northern states moving to Florida are changing the dynamics of the larger cities in the state. Rents continue to rise with annual growth between 15% to 25% in larger cities like Miami (15.5%), Orlando (22%), and Tampa (25%). Other cities in the Southwest are experiencing above average annual growth in rents by 39.9% in Naples and 35.5% in Sarasota. To put things into context, the U.S. annual rent growth has been approximately 10.7%, and 21 out of 24 markets in Florida are seeing annual rent growth above that average.|
Market rate apartment development has picked up in South Florida following the pandemic, with developers taking advantage of the improved market conditions. In Miami, more than 7,000 units have broken ground so far this year.
|The ease of restrictions in Florida and employment growth has allowed the retail market to navigate through the pandemic better than expected in a state that historically depends heavily on tourism. Vacancy rates have returned to pre-pandemic levels with rates between 2.7 to 5% across the state, and annual rents have grown between 2.5 to 4.3%, with outliers like Palm Beach, where rent has grown at 5.5%, and Jacksonville, where rents grew 6.9%.|
There is very limited new construction in the retail space with most markets reporting less than 1% for new construction, except for Miami, which currently has 2.8% of its inventory under construction. Still, even with the large percentage of units under construction, Miami shows healthy numbers with a vacancy rate of 3.7% and annual rent growth of 3.5%
|When we read that companies like Amazon will allow some employees to work from home indefinitely, we certainly have to accept that there will be a new shift on how offices will be used. Even when most of the nation eases restrictions, office usage is far from normal. Even Miami, a market that has seen growth in white-collar employment, still has office foot traffic considerably lower than pre-pandemic levels.|
|Vacancy rates remain high with most metro areas in the state reporting vacancy rate over 8%, and availability rates over 10%. Currently, Miami has a vacancy rate of 10.6% and availability rate of 14.2%, with Fort Lauderdale having very similar numbers (11.6% vacancy rate and 14.9% availability rate). Tampa, Orlando and Palm Beach have vacancy rates between 8 and 9.5% and availability rate of around 11.6%. Still, most markets show positive absorption rates and rents rising, with markets like Miami (3.9% annual rent growth), Sarasota (4.2% annual rent growth), Fort Myers (4.6% annual rent growth) and Naples (5% annual rent growth) seeing strong numbers. Numbers in Florida contrast national levels, where vacancy rate is at 12.3% and rent growth is -0.3%.|
|While some C-suite and executive workers are staying home, logistics and manufacturer workers are showing up. A boom for space in the logistics sector has pushed industrial demand in cities like Orlando, Tampa and Lakeland, with companies like Amazon increasing their footprint on the mid and last mile. Vacancy rates are historically low between 2% and 4% across the state, and previous spec construction projects are now going under contract while under construction. Rent growth is high across the state with annual rent growth between 6.3% in Vero Beach and 12.9% in Miami, with an average on the mid 7’s across the state. Still, construction is under 2% of the inventory, which should signal the trend of rents rising to continue. |
|Although 30% below 2019 levels, air travel has improved over the last three quarters, which goes in tandem with the hotel occupancies.|
Hospitality is an industry that has two very different customers: those who travel for business and those who travel for leisure. Most of the lack of demand in the industry is due to the decline of business travel, as online meetings have become increasingly normalized and adopted through all industries. Thus, we see an improvement in Florida with occupancy in the mid to low 60’s in most markets, with two outliers being two tourism-dedicated markets, including Orlando at 50.9% and the Florida Keys at 75.4%. This could be explained as Orlando has one of the largest number of rooms in the state and capacity of growth (with 3,561 rooms under construction), while the Keys has no capacity to expand the number of units due to its geographical resources.
|The 3rd quarter GDP will most likely give us a glimpse into the economy’s worst quarter since the recovery began, but there are many reasons for optimism in the fourth quarter and beyond. Real estate continues to perform well despite the challenges with inventory and higher prices, and we believe that supply chain issues that are part of the price pressure, will begin to normalize.|
Without question, the U.S. economy has challenges ahead, and it will be difficult for the growth we have been experiencing in the first two quarters to continue at such rapid pace. Nevertheless, the economy should grow more than 5%, which would be the strongest growth since 1984.
As the year advances, we have and continue to see the reactivation of the economy and its favoring on the real estate industry, and therefore Linkvest Capital. We currently have three co-investment platforms in the real estate market available: bridge financing through LV Lending, the acquisition of commercial properties through Linkvest Properties and our newly conformed joint venture, Milenio; and finally, development of multi-family and mixed-used projects through LV Development.
As we enter into 2022, we are confident there will be many more exciting investment opportunities, and that together with our co-investors, business partners, borrowers, business providers and team, we will continue growing.
Commercial Director at LV Lending