In the past four years, rapid inflation, labor shortages, and rising interest rates have strained the U.S. economy. While recent trends indicate recovery is here, conditions may never return to pre-COVID levels. In partnership with Fifth Third Commercial Bank and Franklin Street, the Jacksonville Business Journal hosted presentations from two respected local finance and real estate voices. These experts met at WJCT Soundstage on Wednesday, Jan. 24, 2024 to discuss the ongoing recovery, the likelihood of a recession, the new normal going forward, and what it all means for enterprise and real estate in Jacksonville. Panelists were Jeff Korzenik, chief economist at Fifth Third Commercial Bank and Tony DeSisto, COO, at Franklin Street.
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The state of real estate
Tony DeSisto is COO at Franklin Street, a national, full-service commercial real estate company focused on delivering comprehensive solutions to meet the evolving needs of clients. His presentation concerned how the prosperity Korzenik predicted for Florida will benefit the local real estate industry, as well as which sectors are the most promising for investment and construction.
The good news: Jacksonville continues to benefit from ongoing growth and positive conditions throughout Florida. “Jacksonville remains one of the best regions in the country. Several factors really shielded us in many ways from the downturn,” DeSisto said.
But the downturn is still in effect, and new projects are feeling the impact. “New construction is slowing down,” said DeSisto. “Even if Jacksonville had more new construction development than many of the other markets in Florida.”
“Last year the title of the talk was ‘Into the Storm’. Now, we’re in the storm,” said DeSisto, stressing the need to be careful in a fragile market. “Personal debt is up, savings are down, inflation is stabilizing, but still above the Fed’s 2% target.”
Money on the move
DeSisto joined Korzenik in highlighting the positive impact that new arrivals have had on the Florida economy. “Everyone is moving here. And that’s not a new phenomenon. It’s been going on for the last four years. You’d have to combine the next 17 states to match Florida and Texas’s population growth. Jacksonville is second in the state with 2.1% growth this year.”
Not only are more people moving to Florida, but those who come are more affluent than in previous years. “In the last three to four years, we have had wealth migration,” DeSisto said. “Florida leads the nation in attracting Americans aged 26 to 35 who make over $200,000. Texas is number two nationwide. Jacksonville is number three in the state for individuals making over $75,000. So it’s not just new people coming in, but people who can spend, which has a long-term positive effect on the state and Jacksonville.
Cash is king
Investors looking to overcome the real estate slowdown may need to focus on hard currency payments. “For all the Wu-Tang fans out there, ‘cash rules everything around me,’” DeSisto said. “Those with cash to spend are in a much better position than those without.”
“Interest rates are now steady, but we’re coming off the largest percentage increase in history, and that has a significant negative effect,” he explained. “Without cash, it becomes harder and harder to finance projects. Those with cash are going to be in a much better position.”
Which sector is strongest?
“Multifamily is going to continue to be the hardest hit,” said DeSisto, contrasting the multi-family sector with industrial construction. “Here in Florida particularly, there is a lot of demand for industrial projects.” Multi-family had the most pronounced overbuild and lower absorption cycle of all the asset classes.
While office rents are down in major urban centers, the office sector is thriving in markets like Jacksonville. “We take more of a positive view than the conventional wisdom when it comes to office development. The narrative is largely driven by the large markets like New York, Los Angeles, or Chicago, where people are not going back to work.”
With fewer densely packed urban areas, Florida has had an easier time encouraging workers to return to their offices. “We really lead the nation in back-to-work recovery. People are working in the office here in Florida, and that trend is going to continue. Federal employees are coming back to work, which is usually a good harbinger of what’s going to happen nationally, and we’re on the forefront of that.”
“There is more vacancy in the city of New York than the entire inventory in Jacksonville — Frankly, more than the entire inventory in Tampa and Orlando as well,” he continued. “In our markets where our vacancy rate is and will continue to be much lower, offices are actually an asset class that offers a lot of opportunity. Rent is still going up.”
“Retail remains the strongest nationally and particularly in Florida. During COVID, a lot of the weaker players were pulled out of the market,” said DeSisto. “There was not a ton of development at that time, so for the last three years, we’ve had increased demand, particularly in the markets that stayed open.”
In a nutshell
With recovery still slow and a recession far from out of the question, DeSisto stressed there won’t be a soft landing as he summed up the real estate market in Florida. “Rents are down, insurance and other expenses are up, interest rates are up, construction costs are up. What does that mean? When the development math doesn’t work, it becomes very hard to price projects out.” Even amid the recovery, pitfalls threaten unwary investors, and established best practices may need to change. “Operating fundamentals are going to continue to erode. Rents are going to continue to flatten. Insurance rates will continue to increase, although there will be improvements in coverage, and construction costs will flatten but not go down, so you’ll still have that pressure on expenses.”
DeSisto reminded real estate professionals with ready cash to focus on resilient markets, especially in the commercial sectors. “Office is going to do a little bit better than what you’re hearing nationally, and retail will continue to be strong. Ultimately, for those who have cash and access to capital, it’s going to be the greatest buying potential for commercial real estate in Florida since 2009. The opportunity is immense.”
