Looking ahead for 2023 — the state of commercial real estate following Hurricane Ian
With 2022 behind us, it is time to look ahead at how the commercial real estate market is trending for 2023.
One thing is obvious – it is difficult to get a great deal right now on the acquisition side. Prices are at an all-time high, interest rates are rising and costs continue to go up. Meanwhile, inventory is low.
Sellers, on the other hand, are seeing 100% returns from just within the last 24 months and many multiples of that for properties purchased in the last 12 years.
As always, tax liability is a variable to consider. Investors from high tax states can still benefit from paying a premium for real estate in the Southwest Florida market because of taxes they are legally deferring and, in some cases, avoiding by reinvesting and properly completing a 1031 exchange. By completing a 1031 exchange in Florida and becoming a Florida resident, you can reinvest capital and avoid taking a major tax hit.
For industrial or flex space properties, the local market is still hovering near 1% vacancy, but it will be important to keep an eye on the millions of square feet of new construction slated for the near future. Labor, material and site work costs are prohibiting projects for smaller or more conservative investors and developers. However, large corporate partners continue to pour money into our local market, so development is currently booming and is expected to remain so.
Over the past two years, sale leasebacks have become an increasingly popular option. Sellers are getting a premium for real estate and can avoid having to move. They can structure the lease and sale whichever way pleases them and works for the buyer. Sellers have different motivations to participate in a sale leaseback: needing capital, avoiding ownership duties, cashing out with a gain, and even retirement to name a few.
Over the past few months, Southwest Florida has been starting the recovery process following Hurricane Ian. The combination of property destruction and importing a new labor force has strained an already tight real estate market. Our team receives many calls from businesses looking to rent space, and oftentimes there is nowhere to put them, which is frustrating for everyone, ourselves included.
Supply chain issues that existed before the hurricane are being magnified. Skilled laborers across all trades are now much more expensive, driving up all project costs. Both of these factors are greatly impacting timelines on repairs and construction. Property insurance rates are rising 50-100% across the board and look to continue to rise into the next year or two.
One of the most talked about concerns heading into 2023 is rising interest rates and how rates will play a role in the state of the market.
With so much going on, increased interest rates have not yet played an impactful role in the Southwest Florida market specifically. The number of cash buyers is at a record high. These buyers are less affected by interest rates and will benefit, like all of us, if these rates help stabilize inflation. Real estate, by its nature, is a historical hedge against inflation, so many clients are still putting money into bricks and mortar despite prices or interest rates.
When making your investment plans for the new year, there is no quick advice or one-size-fits-all approach. There are many aspects to consider when investing in commercial real estate. It is critical to team up with a highly experienced, accredited, and educated commercial real estate advisor.
Chase Mayhugh, SIOR, CCIM, is a broker and senior associate at Mayhugh Commercial Advisors with over 20 years of experience. For more information, please visit MayhughCommercial.com or call 239-278-4945 for a free consultation.