Six Critical Questions Part 1: Is Southwest Florida Headed for a “ Doom Loop?

The Urban Land Institute’s inaugural Southwest Florida Focus Real Estate Forum recently shone a spotlight on responsible land use and sustainable community development in our region. I was honored to be a featured speaker at this event, which brought together industry leaders, professionals and stakeholders to discuss development trends in Southwest Florida. This article is part one of a six-part series discussing some of the most important points from that presentation, which focused on the six most critical questions about development and commercial property in Southwest Florida for the remainder of 2024 and beyond. As property values, interest rates, and inflation have all spiked over the past few years, skeptics have worried about a seemingly inevitable downturn like the one we experienced during the Great Recession. This brings us to our first critical question: Is Southwest Florida headed for a “doom loop?” The term “doom loop” might be new to some, but its implications are clear: it describes a cycle of events that spirals downward into an economic slump. While some national economic indicators may offer reason for concern on the surface, the prospect of a doom loop is not likely on the horizon for our region because of our regional strengths. Regional Economic Indicators Southwest Florida continues to show robust job growth with the addition of more than 11,000 jobs in 2023, keeping our unemployment rate below the national trend. In Lee County alone, there has been a four percent surge in new businesses, and projections show every sector growing by one to three percent annually over the next five years. Tourist tax revenues are climbing as well, thanks to our successful and ongoing rebound from Hurricane Ian. As consumer confidence improves, residents appear willing to increase their spending levels, with consumer sentiment numbers also on the rise from 2023. Regional Commercial Development Trends Although other parts of the country are plagued with commercial vacancies, Southwest Florida’s rapid residential and business growth have kept vacancy numbers very low. Nationally, nearly one in five (19.7%) offices sit vacant, but our region’s office vacancy rate stands at a paltry 4.1 percent. Local industrial and retail vacancy rates are also well below the national level. Although FGCU’s Southwest Florida Real Estate Report indicates that commercial property sales may have plateaued, our limited supply and robust demand suggest that the cost of renting commercial space will likely continue to grow in Southwest Florida. This differs greatly from what our region experienced in the early 2000s. At that time, speculative investments overwhelmed the real estate and construction markets, producing excess inventory and paving the way for economic collapse. Southwest Florida’s Resiliency Although our region has certainly faced challenges over the past two years, current economic indicators show that Southwest Florida should continue to be resilient, even as other parts of the country may begin faltering. However, economic cycles are natural and what goes up must inevitably go down. When our region does eventually face a downturn, we anticipate a soft landing, not a recession, in Southwest Florida. Do you have questions about Southwest Florida, its economy, or our commercial development landscape? Cushman & Wakefield | Commercial Property Southwest Florida (CPSWFL) has the data, analytics, and local experience to help you understand the dynamics of our region’s economic potential.  If you’re a business owner, developer, or investor looking for an opportunity in our current market, reach out to the Commercial Property Experts at CPSWFL are ready to answer your questions. Complete our online contact form or call us at 239-489-3600 to speak with an expert.  

By Gary Tasman Rarely a week passes without a financial publication speculating about the potential for a recession. While some experts believe that the red-hot job market is far too strong to precipitate a downturn in this calendar year, others point to traditional factors such as rising interest rates, high inflation and an inverted yield curve as signs that a recession could be just around the corner. In such uncertain economic times, it’s certainly difficult to know how to manage our investments, particularly when it comes to substantial ventures like commercial property. On the June episode of the “What’s Developing in Southwest Florida?” podcast, I had the pleasure of talking with JP Bacariza, Vice President and Tampa Market Leader at Ryan Companies. Ryan Companies is a national commercial developer with investments across the country. Despite the troubling economic indicators above, Bacariza says he believes that if a recession were to take hold in the coming year, our region could face minimal impacts. Regional Impacts During a Recession During times like these, we need to remind ourselves that a recession can bring varying effects to different sectors of the economy, as well as to different geographical regions. Our area was one of the hardest-hit in the country during the Great Recession, so it’s understandable for Southwest Floridians to be anxious about the prospect of another economic downturn. While we’re once again seeing a real estate boom in our area, the circumstances today are very different from those we experienced prior to the Great Recession. In the early 2000s, speculative investment dominated our local real estate and construction markets, producing too much inventory and setting the stage for failure. An oversupply of residential properties, coupled with the collapse of the housing market, caused property values to plummet and plunged tens of thousands of area homeowners into foreclosure. Unemployment soared when Southwest Florida’s tourism and construction industries stalled, creating a perfect storm of misfortune in our area. This time, however, demand—not speculation—is sparking our development boom. “There is a huge amount of housing need in this area,” said Bacariza. “I’m very bullish on the region because of that.” How exactly does our development boom translate into a less drastic economic downturn in Southwest Florida? The answer can be found by examining two key variables: net migration and infrastructure investment. The Impact of Net Migration In 2022, Florida was the fastest-growing state in the nation, with an increase of nearly 319,000 new residents in just one year. Here in Southwest Florida, our quality of life, abundant sunshine, convenient location to major metropolitan areas, ample recreational opportunities, relative affordability, and tax advantages have made our state, and particularly our region, a major draw for both residents and businesses. When more people move to Florida, the result is more opportunity, and not only in real estate and construction. As we’ve discussed in previous articles, growth creates a sustainable cycle of economic activity and opportunity. An influx of new residents creates demand for grocery stores, entertainment, schools, medical facilities, utilities, and other services. Easing this increase in demand requires staffing, which creates additional job opportunities and lures even more residents to the area. In an economic downturn, that cycle makes our region even more appealing. “The recession hits and you can’t find a job,” says Bacariza. “You look around the globe and you say, ‘where are people hiring?’ If I want a job, I might have to come down to Fort Myers. There’s a lot of jobs there because there’s a lot of demand.” The Role of Infrastructure Investment For those of us who endured Hurricane Ian, it’s difficult to say that one of the deadliest hurricanes in our history has a silver lining. However, the 2022 storm could be one of the keys to our region’s survival during a potential recession, thanks to federal infrastructure dollars. In March, the U.S. Department of Housing and Urban Development announced $1.1 billion in assistance for Lee County in the form of a Community Development Block Grant for disaster recovery. In addition to infrastructure repair, these funds can be used for activities including housing redevelopment, economic revitalization, and long-term planning. Charlotte and Collier counties will see a smaller cut of these dollars, as part of an additional $728 million disaster funding grant that will be split between fourteen counties. “When the checks come through, that’s going to be stimulating the local economy, purely the local economy, in what might be a recession,” said Bacariza. “Having the rebuilding of Ian, that might be something that draws people in.” While infrastructure investment creates short-term employment opportunities, it also produces long-term growth. When businesses are able to operate more efficiently and become more productive, they can create even more jobs and stimulate further economic growth in the region, even during a time when the economy is stalled elsewhere. One Potential Pitfall: Insurance Rates While hurricane recovery funds will be essential to keeping Southwest Florida’s economic engine running, rising insurance rates could lead to a potential slowdown in development. Across the nation, the price of commercial property insurance is reaching a crisis point, with premiums increasing an average of 9.4% between 2021 and 2022. That number, however, pales in comparison to the skyrocketing insurance rates in the Sunshine State. Thanks in large part to Hurricanes Ian and Nicole, commercial insurance rates in Florida are expected to increase by as much as 50%. The rising cost of insurance can be an impediment to developers and investors, Bacariza told us. “If you want to insure a multifamily project, you’re not looking at $600 a unit now, you’re talking about $1600 a unit,” he said. “Someone that is still using last year’s numbers goes to get their insurance in place and finds that all of a sudden, the deal doesn’t pencil any more.” In addition to being burdensome for potential commercial investors, skyrocketing insurance rates can increase the cost of starting new businesses and place financial strain on existing enterprises. For industries heavily reliant on property

By Gary Tasman When NOAA predicted a “near normal” Atlantic hurricane season for 2023, many Southwest Floridians breathed a cautious sigh of relief. However, long-time Florida residents know not to put much stock into these predictions, as a catastrophic storm can occur even in the mildest of years. Hurricane Andrew, after all, devastated South Florida in a “below normal” season. If June’s active tropics are any indication of the coming months, we could be in for another nerve-wracking summer and fall in Southwest Florida. When most of us discuss hurricane preparation, we initially think of protecting our families and our homes, including our collective annual tradition of stocking up on bottled water and hand sanitizer. For commercial property owners, emergency planning is also an essential duty, to protect their assets and ensure the safety of tenants and employees. Too often, however, property owners rely on the same pre-fabricated hurricane checklists we use at home, and overlook one of the most important parts of the emergency planning process: risk assessment. What is a Risk Assessment? Conducting a risk assessment helps property owners identify possible hazards, vulnerabilities or areas of concern that may make a site susceptible to damage. Although we will discuss hurricane-related risk primarily in this article, there are numerous other potential risks to consider in a truly comprehensive assessment. Data breaches, supply chain disruption, financial volatility, occupational safety, crime and civil unrest can all make a business or property vulnerable. For commercial property owners in areas susceptible to natural disasters like hurricanes, earthquakes, fires, or floods, determining the risk related to these hazards should be completed regularly, and the results used to fortify a physical structure and the operations within it. While none of us can change the track of a hurricane, we can certainly mitigate the impact of that storm once it arrives. Risk assessments are important for protecting physical property, ensuring the safety of occupants, and ease potential financial losses. A risk assessment can also help owners better comply with required safety standards, reduce your legal liability, and potentially even reduce your insurance rates. How do I Conduct a Hurricane Risk Assessment? Review your history. While none of us want to dwell on Hurricane Ian, looking back on the impact of past storms is an excellent start to conducting a risk assessment.  With your tenants, property managers, and facilities staff, review how your property held up during recent storms. Each of the pain points that you or your tenants experienced is a potential area of concern for a future tropical event. Conduct a threat assessment. Storm surge, high winds, and flying debris are some of the most obvious hazards during a hurricane. However, these hazards can produce other risks, such as downed power lines or inoperable communication systems. These threats not only threaten the safety of tenants, employees, and visitors, they can also disrupt the vital operations conducted within your facility. Search for structural vulnerabilities. Evaluating your physical property’s structural integrity will help you reveal any potential weaknesses. Depending on the size of your facility, when it was built, or where it’s located, you may want to employ professionals such as structural engineers, building inspectors, construction contractors or architects with experience in building assessments. These consultants can help conduct a detailed evaluation of the property’s foundation, walls, roofs, windows, and other structural components. Assess surrounding properties. In addition to evaluating the structure itself, consider the area surrounding it. Carports, fences, outdoor furniture, trees, and even signage can become hazards during high winds. Neighboring buildings or nearby construction sites may also have equipment or structural features that could pose a threat during a storm. Audit the mechanical systems. HVAC, plumbing, electrical, and other mechanical systems experience daily wear and tear that may not be obvious or of concern until a hurricane or other emergency. While regular inspections should already be part of your protocol, a risk assessment should review whether these mechanical elements are properly secured and protected from the elements. You may want to consult with mechanical engineers, HVAC specialists, plumbers or other technicians to provide insights into potential vulnerabilities. Test and evaluate emergency systems. You’re likely already regularly testing your fire alarms and fire suppression systems, emergency lighting, and backup generators. However, few of us take the time to evaluate whether these systems are still appropriate for our needs. Although they may still be compliant with local safety codes and regulations, relying on outdated systems may hinder your emergency response or ability to return to business quickly. Understand your tenants. Some businesses and organizations are considered to be essential services during a hurricane and will remain on site. Media organizations, for example, will typically require their teams to “ride out” the storm while producing radio programming, newscasts, or newspapers to keep the public informed. Other businesses may need to return to the facility quickly after a storm to assist in recovery efforts. As you assess risk for your facility, it’s important to understand your tenants’ needs and their emergency plans. Review your insurance coverage. Once you’re familiar with the potential risks to your property, consult with your insurance provider to ensure your policy provides adequate coverage with no potential gaps or redundancies. Identifying your unique vulnerabilities allows your insurer to offer more tailored coverage options that align with your risk profile and potentially reduce your financial losses after a hurricane. Prioritize risks and mitigation activities. Once you’ve documented the potential risks to your property, taking action is the next vital step. Rank each risk based on its likelihood and potential impact, then focus on producing mitigation strategies for each vulnerability. Prioritize those that represent the most significant threats to your property, its tenants, and your business operations. The Role of a Property Management Team Conducting a hurricane risk assessment is a valuable tool—one that is integral to the emergency planning process. Unfortunately, it can also be a time-consuming activity for busy commercial property owners, especially those who have invested in multiple properties or own large