By Gary Tasman
The year 2022 is one we won’t soon forget here in Southwest Florida. We started the year with record-breaking inflation, as supply chain issues, labor shortages, and the costs of materials all drove prices higher. At the time, we predicted a busy year for both land and development deals, thanks to record-low supply. We also predicted that the then-anticipated interest rate hikes by the Federal Reserve Bank would flatten prices and slow sales of both commercial and residential properties. What we didn’t predict was Hurricane Ian– or how the worst disaster in Southwest Florida history would impact our economy and our property market. As we look ahead to our commercial property predictions for 2023, it would be impossible to ignore Ian’s impact.
Unarguably, Hurricane Ian changed the course of development in Southwest Florida. With more than $5 billion in estimated damages in Lee County alone, our region is focused not just on building, but on rebuilding. In many ways, the hurricane will accelerate growth in our region, thanks to infrastructure funding that will bolster our emergency preparedness as a region.
Where will we see growth in 2023? Continue reading for our five commercial property trends to watch.
- Affordable Housing on the Fast Track
Affordable housing has been a concern across the state and particularly in Southwest Florida for years. The Florida Housing Coalition announced this year that there was a statewide deficit of close to half a million homes that are affordable to lower- and middle-income families. The agency estimates that in Lee County, one-quarter of homeowners are cost-burdened, meaning they spend more than 30% of their annual income on housing expenses. The numbers are similar in Collier (25.7%) and Charlotte (23.4%) counties. Renters carry an even larger burden. In Lee, 48.3% of renter households are cost-burdened, with Collier County renters at 50.2% and Charlotte renters at 52.3%.
Although we anticipate that rent growth and home prices will level off, we don’t foresee prices falling down to pre-pandemic levels. The demand erosion caused by the national economic slowdown will largely be offset by expansion in our area due to the hurricane. With more than 5,000 homes destroyed in Lee County alone (and countless others rendered with major damage), demand will remain high for both long-term and temporary housing.
Initiatives from Fannie Mae and Freddie Mac will work to alleviate some of our affordable housing woes, and new multifamily developments coming online will add much-needed supply to our housing stock. However, our community’s leaders know that to truly solve our region’s housing crisis, we need to increase supply, and create equilibrium between supply and demand.
Unfortunately, increasing our supply of housing and rental stock will take time, and 2023 is too soon to see relief. Construction costs are high due to shortages of both materials and labor, and the cost to borrow money for development also presents a challenge. However, Hurricane Ian has made our housing conundrum more urgent than ever, and we expect that local governments will be motivated to take action.
- The Reimagining of the Office
Part of the reason for our region’s housing woes is the population explosion we experienced during the pandemic in 2020 and 2021. Office workers with newly-remote positions were given the opportunity to work from anywhere in the world. Many chose to live in paradise and relocated to Southwest Florida.
As of 2022, 26% of American employees work entirely remotely, and nearly two-thirds of U.S. workers are at least partly remote. This creates a challenge for office-based employers, who will need to re-think their work model or face the possibility of losing employees to companies with more flexible policies.
Another, more local, factor will also force office occupiers to reconsider their model. Prior to the hurricane, our region’s supply of commercial real estate was already limited. The Southwest Florida office property vacancy rate was a shockingly low 4.8% entering the fourth quarter of 2022, according to our MarketBeats report for Q3 2022. In line with the low supply, office asking rent had climbed to $20.79 per square foot, an increase of nearly 12% from just 24 months earlier. With wages also growing by close to 8% over that same period, employers will need to find ways to cut costs.
While it’s unlikely that most employers will switch to a fully-remote workforce, the need for cost containment will encourage many businesses to switch to a hybrid model to reduce operating costs and satisfy employee desires for more freedom. And while hybrid work may reduce some demand for office space in our area, we predict that some of our more antiquated commercial stock will be redeveloped into industrial space or even multi-family properties to satisfy the region’s needs.
- Pent-Up Demand for Mega-Resorts
Hurricane Ian impacted more than just homes and offices– repairs are underway at numerous hotels and resorts across Southwest Florida. Three of the largest resorts in Collier County, the Ritz-Carlton Naples, Vanderbilt Beach Resort and LaPlaya Beach Resort, sustained major damage. Others in Lee County, especially those on vacation mecca Fort Myers Beach, are either closed for repairs or permanently shut down. As of early November, roughly 40% of Lee County’s hotel rooms still remained closed.
With little room for tourists this season, our region will see a substantial buildup of demand for lodging options. Yes, tourism numbers are likely down for at least the next year, but a number of new mega-resorts will alleviate the strain as vacationers and snowbirds begin to arrive in late 2023. Margaritaville in Fort Myers Beach and Sunseeker Resort in Punta Gorda will be joined by a Four Seasons resort in Naples, all in planning well before Hurricane Ian.
Once these resorts come online, we expect that they will produce outstanding occupancy and positive room rates, thanks to the pent-up demand for quality vacation spots. Once these resorts prove the concept, like-minded investors will want to join the party. With tourism still the region’s major economic driver, new resorts will not only bring in tourist dollars but also create jobs and growth.
We’ve already seen indications of this trend. Investors are flocking to Southwest Florida to purchase distressed properties. Just last month, a real estate investment group purchased the half-century-old Carousel Beach Inn on Fort Myers beach, to build a luxury condominium development. While many worry that deals like this will remove the quaint charm of locales like Fort Myers Beach, new development will also produce safer buildings, more tax revenue, and improved infrastructure.
- Record Breaking Demand for Industrial Space
2022 was the year of the industrial property in Southwest Florida, with Amazon, Uline, FedEx and other companies building or leasing millions of square feet of industrial space. However, available space for those looking for existing property is limited, to say the least. At the start of the fourth quarter of 2022, the vacancy rate for industrial property in our region was a record-breaking 0.7%, a 30 basis point decrease quarter over quarter. Compare that to our national industrial vacancy rate of 3.2%, and you can understand why industrial property is at a premium.
Hurricane Ian exacerbated this already substantial supply shortage, not only by damaging or destroying thousands of properties, but also by bringing an influx of disaster recovery companies that now occupy much of the limited available space. With power players like LaserShip and Sky Chef coming to the area, demand is anticipated to get even stronger.
Fortunately, there is relief on the horizon. About six million square feet of industrial space is currently in the planning stages. Considering the region’s entire existing inventory of industrial property is just over 45 million square feet, this new development will increase the amount of industrial space by more than 13%. While this will assuage some of the short supply, we expect that demand will remain high through 2023.
- Growth to the North and East
Future development, both residential and commercial, is clearly coming to Southwest Florida to alleviate high demand in our region. We expect that the vast majority of these properties will occur to the north and east.
Fort Myers, Naples, and the surrounding municipalities developed as coastal communities, first growing down the US-41 corridor and then later expanding eastward towards I-75. Today, the majority of the entitled land south of the Caloosahatchee and west of the interstate is developed to the point of saturation. As a result, we expect to see a concentrated effort on entitling more land for development near inland planned communities like Ave Maria and Babcock Ranch, as well as the Bayshore corridor in North Fort Myers and Southeastern Charlotte County near the Punta Gorda airport.
In particular, we anticipate what we call “path of growth” development. Investors want to build properties where infrastructure is in place– or at least will soon be in place. New roads, sewer and water access, schools, and other amenities make properties more desirable for owners and tenants. In other words, to find the next hot market, follow the municipal planners.
However, because of Hurricane Ian, builders have infill opportunities along the coast, something uncommon in our region. These properties are appealing for investors not only because of their location but also because the infrastructure is already established.
What’s Next?
Our region is changing, in part because of the onward march of progress, but also because Hurricane Ian has accelerated a number of real estate trends. While these changes won’t happen overnight, savvy investors will be prepared to reap the benefits our Southwest Florida’s evolution.
Do you have commercial real estate plans for 2023? The Commercial Property Experts at Cushman & Wakefield | Commercial Property Southwest Florida have the experience and in-depth market knowledge to help you turn your plans into reality. To learn more about how Cushman & Wakefield | Commercial Property Southwest Florida can assist you with your post-hurricane property needs, call 239-489-3600 or contact us.