Renowned economist Hugh F. Kelly, Ph.D., CRE, who is also the national chair of The Counselors of Real Estate, led a discussion at a CREW-Miami luncheon about the top five issues affecting the commercial real estate market in 2014 and gave his annual economic predictions.
Issue #5 – Infrastructure: South Florida has a very poor infrastructure system in place which will require more funding to prevent further economic loss.
The American Society of Civil Engineers rates Florida’s infrastructure a “C-”, with statewide scores ranging from Bridges (“B”) and Aviation (“B-”), through “C” for Ports, Highways, Water & Sewer, down to “D+” for Flood Control, “D” for Energy and “D-” for Coastal Areas.
In Miami, a water & sewer moratorium is preventing the funding and closings of certain commercial real estate deals, however, there are several success stories such as Doral’s Green Design Master Plan, the new Port of Miami Tunnel and the 95 Express Project.
Issue #4 – Generational Stresses: There is a big concern that kids of this generation will not live as well as their parents.
36% of Millenials are living with their parents. Of those aged 25-31 years of age, 17% are living with their parents. With high unemployment rates, tighter financing restrictions and rising housing costs, this raises issues on the quality of jobs, amount of debt and housing options for the Millenial generation.
Issue #3 – Bubble-Phobia – Have we created a bubble that is ready to pop?
Stock market was up between 27% (Dow) and 38% (Nasdaq)
Housing prices again rose at double-digit rates (13.6% in Case-Shiller Index)
RCA CPPI for offices up 13.9% year-over-year
Cap rates roughly at 2006 levels
Apartment and hotel price-per-unit now higher than in 2007; office and retail approaching prior peaks
The 2013 statistics are at or above levels from 2007. Hugh suggested that we be more disciplined, have less leverage and a good plan and structure in place so we do not experience another economic collapse and repeat the same mistakes.
Issue #2 – Reliance on education and medical institutions: On a positive note, educational and medical institutions have been the most steeply rising employment cluster for the last seven decades.
Brookings Institution asserts this cluster brings income to MSAs, boosts local earnings per capita and creates numerous spin-off entrepreneurial ventures.
Many cities have seen substantial real estate demand, both direct and indirect, for housing, office and even retail space stemming from educational and medical institutional growth.
Miami is seeing educational and medical expansions at the University of Miami, Florida International University, Baptist Hospital of Miami and Larkin Community Hospital.
Issue #1 – Income inequality: Economists from Alan Greenspan to Paul Krugman see income inequality as an incipient threat to democratic society.
U.S ranks behind Cameroon and the Philippines, and just ahead of Uruguay and Bulgaria, in income distribution according to the CIA.
Income mobility is found in certain major cities, but not suburban areas or many southern cities. Miami has very high income inequality; however, it also provides promise and good opportunities for income mobility.
Where are we going in 2014? For 2014, Hugh Kelly predicted the following:
Job Creation in 2014: 2.5 million jobs
Unemployment at year end: 6.4%
10 year Treasury at year end: 3.5-3.75%
Dow Jones at year end: 17,400
Housing starts in 2014: 125,000
Existing home sales: 5.4 million with prices up 10%
Commercial Real Estate Sales Volume: 330 billion (mostly due to Europeans investing in U.S. CRE)
Overall, 2014 looks like a bright year for commercial real estate.