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Post Pandemic Future of South Florida Commercial Real Estate

The Post Pandemic Future of South Florida Commercial Real Estate

For 40 years, GSD Contracting has been reshaping South Florida’s commercial real estate landscape. Over that time, we’ve weathered bubbles and busts. Like many of the seasoned professionals in this article, we thought we’ve seen it all. Prepared for anything. Well, almost anything. The impact of the 2020 pandemic has had and will continue to have an enduring effect on South Florida’s commercial real estate industry.

We’ve been fortunate to have developed relationships with a deep and wide network of industry leaders who have their finger on the pulse of South Florida’s commercial real estate market. We spoke with a handful of influential industry leaders to understand the pandemic’s impact in each of their industry sectors. From retail to industrial and multi-family to office, we share below what some of the region’s top commercial brokers, developers, architects, and attorneys had to say about what they (and their clients) are doing now to recover, plan and grow in 2021.

Doug Okun
Managing Director
JLL

Rick Slazyk
Principal and Founder
Arcwerks
E:: rick@arcwerks.com

Aaron S. Adler
Adler Wellikoff
E: aadler@adwellgroup.com

Doug Mandel
Executive Managing Director Investments
E: dmandel@marcusmillichap.com

George Braeunig
Director of Business Development
GSD Contracting
E: georgeb@gsdcontracting.com

Christina Stine Jolley
Senior Associate, Tenant Advisory Group
Cushman Wakefield
E: Christina.jolley@cushwake.com

Michael C. Noll
AIA MBA
M3 Design + Development, Principal
E: michael@m3concepts.com

How has COVID-19 impacted your business?

The Architects

Rick Slazyk: “For architects, closeness is critical. But we’re learning how to do business differently. Our team uses WhatsApp and other platforms to communicate, and so far, it’s working well. We’re also likely going to downsize the physical office and allow our team to continue working remotely. We’ll rent a smaller office and have a meeting space. But we’ll also have satellites.

In the future, it will be hard to bring people back in-house with a sense of flexibility. Hiring will also be a challenge in this new, socially distanced world. From Zoom interviews to virtual training–it will be difficult. But we will adapt.”

The Commercial Broker/Investor 

Doug Mandel: “In times of uncertainty, commercial real estate is a very polarizing industry. Volume in Q2 was off across all product types. A lot of that was largely due to lenders being more focused on Paycheck Protection Program loan processing. They were unable to work on any traditional commercial financing. We started seeing volume coming back in Q3. Now in the 4th quarter, deals will continue to move slowly. Not all lenders and vendors are back in the office. We expect business to start returning to pre-COVID normal by the end of Q1 2021.”

The Lawyer

Aaron S. Adler: “Early on in March, we saw a lot of real estate sales contract work take a pause. In the ensuing months, we spent more time litigating and fighting for commercial real estate sales deposit money.

How have your clients pivoted as a result of the pandemic?

The Architects

Rick Slazyk: “Our range is retail, restaurants, and medical. On the medical side, the volume has been healthy. However, retail and restaurant work is less than normal. Clients in this space are keeping an eye on the economy before beginning construction. For example, we’re currently preparing drawings for a ground-up restaurant client. But they may delay breaking ground until they receive a convincing bid.”

Michael C. Noll: “Our clients are quite diverse in the nature of their businesses. Some stopped in their tracks as of March. Others are in overdrive:

  • Investment and opportunity funds are amassing cash and resources to move on the wave of foreclosures in commercial real estate they expect in the coming year.
  • Medical clients cannot get their projects done fast enough. Many are looking at new spaces and improving their existing capacities to meet the increasing and obvious demands on their business at this moment.
  • Office clients are slowly migrating back towards the office. But that is not likely to gain momentum until the first quarter. On the other hand, we have seen an uptick in the desire for private offices–particularly with co-working spaces. Such clients have asked us to create plans with more private offices vs. open desks.
  • Restaurants and retailers most do not show signs of restarting except for strong brands with resources to pick up new locations in the downturn. Overall these two sectors are lagging.” 

The Commercial Broker/Investor

Doug Mandel: “I think COVID is accelerating a trend that has been going on for years with our clients. More rapidly than ever, we’re seeing clients retreating from buying hospitality and retail properties and moving more into the suburban office, industrial and multifamily. Why? There have been marginal deliveries of new construction. But industrial is in short supply. As a result, rental rates have doubled over the last 10-years.”

The Lawyer

Aaron S. Adler: “Many of our commercial real estate clients are taking a wait and see approach because price discovery is a challenge. Sellers want 2019 pricing while buyers want to pay distressed rates.

  • Retailers like strip centers are struggling the most. Commercial tenants are falling behind on rent or forgoing paying altogether. This is not just a South Florida problem but other areas of the country as well. Commercial real estate landlords are showing a willingness to share in the pain. However, lenders don’t always have the flexibility that landlords do.We’re dealing with a shopping center landlord who given reduced rental payments from its tenants had their lockbox triggered and now the rental payments are being trapped in the lockbox account being managed by the landlord’s lender.
  • Residential development is booming. Sizeable residential development like multifamily buildings has been hot throughout the pandemic. Refinancing is way up. Although there has been a dip in residential rental payments, tenants are generally paying on time. As a result, our multifamily residential investment clients are conserving cash versus investing in new properties.
  • Banks are shifting how they prioritize purchase and sales transactions. They’re more focused on shoring up the distress in their existing portfolios vs. making new loans. We have a restaurant client in Pittsburgh who wanted to lease the ground floor of an office building. But our client couldn’t get a loan from any bank despite their proven track record. Pre-pandemic, five lenders would have begged our client to take their loans.”

The Property Leasing Agent

Doug Okun: “At first, our clients thought the pandemic would be a short-term challenge. But as time went on, they recognized the need to offer more flexible terms. Since then, they’ve been offering aggressive incentives on abatement, tenant improvement, deal securitization, expansion, and termination options in exchange for longer-term leases.

Flexible lease terms work great for small business tenants who are asking for short-term lease options. They’re unsure where their business is going and how often they plan to use the office space.

Larger tenants are more cautious due to the potential liabilities of bringing employees back into the office amid a pandemic. Right now, they’re evaluating options.”

The Tenant Leasing Advisor

Christina Stine Jolley: “Before COVID, companies focused on the employee experience inside the office. Over the last couple of years, many businesses have added amenities such as collaborative work areas and upgraded kitchens with snacks, craft coffee, and beer.

But when the pandemic hit, companies prioritized how their employees operated outside of the office and ensured they were equipped to be productive and safe. Several months later, organizations are focused on how to get their employees back into the office safely.”

The General Contractor

George Braeunig:

“In terms of the way we’re interacting with clients, we’ve pivoted from in-person meetings to Zoom meetings as most organizations are working from home. While not ideal, we’ve made it work under this new normal.

Our office-building clients are making very different requests, such as floor plans that accommodate private, segregated offices as well as acrylic partitions. Restaurants, which are struggling the most, have shifted to ghost kitchens–cooking facilities created for the preparation of pick-up or delivery-only meals.”

Which trends will outlast the pandemic? 

The Architects

Rick Slazyk: “I expect more office and retail space to become available in the future. Thanks to the pandemic, traditional retail may finally be dead. Many of the big players have gone bankrupt, and the little guys can’t compete. Moving forward, medium-range retailers will need to step up and capitalize on the surplus of open buildings. Fortunately, most creative developers will know how to convert it, market it, and fill it.”

Michael C. Noll: “When there are large sums of money involved, new development projects will likely proceed uninterrupted. However, smaller-scale developers, investors, and business owners may not be able to take on the risk associated with the debts they will incur. Moreover, they will have a much harder time getting loans because lender criteria have gotten more stringent.

Design trends for offices are all focused around private spaces and distancing, which I see continuing beyond the pandemic. The same goes for restaurants, which will need to survive with fewer tables–at least for some time. People will continue to invest in homes with office spaces.

The rise in e-commerce shopping has cemented the existing trend of readapting retail space into fulfillment centers. Amazon has been leading the way on this trend by purchasing large areas and repurposing them for their distribution network. Companies will need creative, development-minded architects to execute these projects.”

The Commercial Broker/Investor

Doug Mandel: “The current trends are irreversible. I don’t think retail will return to its former state. Instead, traditional enclosed malls will likely transform into family entertainment centers. Retail strip centers will still provide services like hair and nail salons, but they probably won’t contain physical merchandise stores.

Discount retailers are the exception to the rule. Stores like Dollar Store, Ross, and Target will survive while large department stores will have to evolve. A 200,000 square foot Bloomingdales or Neiman Marcus will need to reduce their physical footprint and offer services like next-day local delivery. Restoration Hardware is a perfect example of a showroom that has survived with onsite and online ordering, along with quick last-mile delivery.”

The Lawyer

Aaron S. Adler: “Traditional retail is going through an accelerated decline that will continue beyond the pandemic. The long-term play for brick and mortar retailers will be to stop trying to increase foot traffic and start reinventing their spaces for local distribution.

Office space is changing, but the need is not going away. We expect small businesses to move to smaller workspaces when leases end.

We expect to see a continuation of growth in the secondary home market among those who live in urban centers. South Florida will continue to benefit from the migration of retirees, empty nesters, and those who want a second home with more space.”

The Property Leasing Agent 

Doug Okun: “Tenants are having a hard time realizing now is the time to negotiate favorable long-term lease deals. As more effective therapeutics come to market along with a potential vaccine in Q2 of 2021, we anticipate South Florida commercial real estate returning to a landlord’s market in the second half of 2021.

The pandemic will likely have a more significant and positive effect on South Florida’s office leasing space in the long run. We’re seeing an acceleration of large companies and family offices coming to South Florida from New York, Chicago, and California. Carl Icahn is moving his hedge fund Icahn Enterprises to Miami this spring. Blackstone is investing up to $25 million in downtown Miami. Goldman Sachs is in the market for office space in South Florida. This is not just a trend but a migration of high-net wealth.”

The Tenant Leasing Advisor

Christina Stine Jolley: “Trying to predict lasting impacts is purely speculative at this point. From what we see today, decisions regarding office space are being made much more slowly. And most companies want to retain flexibility until they know what their long-term needs will be. Early indications hint that some companies will proceed with less space in the future.”

The General Contractor

George Braeunig: “I predict office clients will function with less space than they have had in the past and will continue to provide more work from home options post-pandemic. Social distancing-inspired renovations will also likely continue far into the future.”

Key Insights

  • Hospitality is struggling during the pandemic, but its future outlook is unclear.
  • Retail as we know it appears to be dead. Developers will need to creatively repurpose malls into entertainment and distribution centers.
  • The need for human interaction will drive a return to office life. But the size and scope will be much different.
  • Commercial renovations and ground-up builds may forever be influenced by the need to preserve social distancing.
  • Commercial development is struggling, but experts predict a return to normalcy by the end of 2021.
  • South Florida’s economy will come back stronger than ever as people flock to the south from older, more expensive cities.

Got comments or questions for any one of the industry leaders interviewed? Look for their email address in their profiles above. Want to engage in a conversation or share your thoughts on this article? Please share this post on social media and mention #gsdcontracting.