3 min read August 2023 — The outlook for the real estate market is not the best, according to David Duckworth, principal at Avison Young. In an interview with Invest:, he said the market is going to struggle for the next 12 to 18 months. “One fear that I have is further tightening of liquidity and lack of quality debt options for commercial real estate assets. The primary reason that the great recession of 2008 was so deep was the lack of available debt,” he said.
Where do you see the opportunities for your clients and how are you advising them around these opportunities?
In today’s low cap rate and high interest rate environment it is a challenge to buy properties with positive leverage. Many investors are shifting their focus to more value-add opportunities where they can reach an acceptable rate of return upon stabilization. The highest quality assets are still trading at historically low cap rates but everything else will have to reset pricing and provide investors with a proper risk adjusted return or it won’t trade.
How are the investors reacting to the change in the economic environment?
There’s a bit more fear in the market particularly among office investors. Leasing activity is inconsistent; there is strong demand for small tenant space, but the larger blocks are hard to fill. The tenant improvement costs have gone through the roof and tenants are demanding shorter term leases. Additionally, debt for suburban office buildings is expensive and scarce.
There is not enough pain in the market for there to be significant distress yet but there’s more fear today than there was in the middle of COVID, because investors at that time felt that work from home was temporary. Now, we’re starting to have strategy calls with our clients surrounding a potential exit or if they should ride it out.
Multifamily development has been on fire until just recently. The combination of skyrocketing construction costs, tightening in the debt markets, and fears of overbuilding has many developers rethinking their plans. There are thousands of units planned, approved, or under construction in Fort Lauderdale today. Projects that don’t have a shovel in the ground yet are probably going to get tabled for a while.
Are there any regulations that you are following closely?
The governor signed in the new Live Local Act that’s aimed at increasing affordable housing. The bill will help in cities/counties that want to see increased affordable housing; it will allow them to cut through the red tape and get projects approved faster administratively. However, some cities will push back and not allow projects that contradict their zoning. The city of Weston has already passed an ordinance that will require a public hearing for any affordable housing projects.
What are the most promising areas now in your region?
The Las Olas area is golden. Tourism has exploded since 2019 and the level of quality of the office buildings, restaurants, and luxury apartments located in this condensed area is very impressive. The core of Las Olas has so much to offer; it is a great place to live, work, and play which has been an aspiration for many years. To see it become reality is just awesome.
What is your outlook for the next two to three years?
It’s hard to predict right now in this environment. I believe just generally speaking, the real estate market is going to struggle for the next 12 to 18 months. Transaction volume is going to be low as we go through the price discovery process with the new reality of debt markets. Property values are a function of the debt market in many respects. If interest rates remain high for an extended period and liquidity tightens values will come down.
Unlike the Great Recession, demand remains strong and the economy is moving but these continued interest rate hikes and tightening of liquidity is troubling.
Broward County specifically will outperform most of the country due to the continued migration of people from other states as well as the natural migration of people that come up from Miami-Dade County.
For more information, visit:
