How Would a Recession Impact Southwest Florida?

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

By Gary Tasman Earlier this month, the World Health Organization declared an official end to the coronavirus public health emergency. Although most traces of the pandemic have faded, its societal impact still lingers. COVID-19 has irreversibly changed the way we shop, communicate, visit the doctor, and even enjoy our meals. We are spending more time at home and online than ever before—and this trend is certainly also reflected in our workspaces. Three years ago, as the majority of offices across the country remained shuttered because of the coronavirus pandemic, analysts and property owners began pondering the long-term fate of the commercial office. Prior to the pandemic, fewer than 6% of the American workforce primarily worked from home, according to the U.S. Census Bureau.  In May 2020, two months into the coronavirus shutdowns, the U.S Bureau of Labor Statistics found that 35% of employees were completing their job duties from home, proving that remote work models could indeed be productive, while also providing a glimpse into the future of the changing American office. At the time, Cushman & Wakefield |Commercial Property Southwest Florida (CPSWFL) predicted how workspaces would change, not only as the product of ongoing pandemic-related caution, but also as a result of employees’ embrace of the work-from-home model. In a July 2020  News-Press article, CPSWFL forecasted that the change in work trends would ultimately lead businesses to utilize less private space for individual offices and instead dedicate more room to public and social spaces. The Importance of Collaborative Workspace Why are open, collaborative workspaces important in a time when many of us complete our job responsibilities away from the office? There are two primary reasons: social capital and company culture. While technology affords us many opportunities to remain connected, our chat rooms, virtual meetings, and cloud-based collaboration deprives us of cultural connections. A 2022 report by Microsoft noted that our social connections are suffering because of hybrid and remote work. Employees who feel connected with their teammates report higher productivity, lower stress, stronger wellbeing and job fulfillment, and have less interest in pursuing jobs with other employers. While it’s certainly possible for remote and hybrid team members to feel connected with their coworkers, it is an uphill battle. The same report notes that the majority of remote and hybrid employees have fewer work friendships, and feel more lonely than they did as in-office workers. Maintaining a cultural connection is also challenging in remote and hybrid work environments. Harvard Business Review notes that “…just 25% of remote and hybrid knowledge workers feel connected to their company’s culture.” However, that same article notes that mandating team members to return to work has an even more negative impact on cultural connectedness. One way to promote connectedness to both teammates and company culture is providing collaborative workspace where employees aren’t forced to meet, but instead want to meet. Social space should provide enough room for your whole team, and ideally is used not only for meetings but for special events and activities that promote cultural connection. An increase in public and social space also offers another benefit to employers: a reduced need for total office area, and decreased facility costs. But there may be a hitch in that theory. Hybrid Work and Office Productivity From a business perspective, remote and hybrid work can afford businesses the ability to lease less space, offering potential savings. However, many fear that those savings will be offset by a reduction in productivity. Although remote office workers regularly report that they feel more productive without workplace interruptions, supervisors are growing increasingly skeptical. The term “productivity paranoia” is an apt description for this emerging trend. In a Microsoft survey, 87% of employees report that they are productive at work, and productivity signals produced by Microsoft 365 use indicate this is indeed the case.  The number of hours worked are on the rise, as are virtual meetings and other activity metrics. However, hybrid managers say they are struggling to trust their employees because of less visibility into their team members’ day-to-day work. In many ways, providing collaborative workspaces can help solve this dilemma. Employees receive the benefit of increased connectivity and managers can maintain their desired touchpoints with their teams, all while still reducing their organization’s total space needs. Post-Pandemic Office Trends The report Obsolescence Equals Opportunity, produced by Cushman & Wakefield, observes that “the office sector is facing a critical chapter of necessary adaptation, evolution, and recalibration.” As offices work to either relocate or reconfigure to adapt to the needs of a hybrid work model, employers are discovering the need for newer, or higher-quality space that offers more adaptable structure and a stronger in-person experience for employees. This creates a rift between supply and demand. Entering the pandemic, Southwest Florida had balance in the commercial office market. With few employers in the region offering remote or hybrid work opportunities, the office real estate sector was right-sized.  Coming out of the pandemic, however, the balance has skewed.  While business in our region is booming thanks to a population explosion, the need for space is shrinking because employers now need less space per employee. This trend is evident when looking at leasing data in the Southwest Florida office market.  Vacancy rates in leased office space have climbed by 130 basis points, from 13.6% to 14.9% year over year. This comes despite a 4.7% increase locally in non-farm employment, and a 6.3% jump in professional and business services employment over the same period, according to the Florida Department of Economic Opportunity. Southwest Florida is not alone in this trend. Nationally, the once-common equilibrium between job growth and office demand has disappeared. Cushman & Wakefield data notes that for the first two decades of the 2000s, office demand and employment growth had an 85% correlation. However, since Q2 of 2020, the economy added 1.4 million office workers, while the amount of commercial office space in use has dropped more than 180 million square feet. Could this shift be long term or even

By Gary Tasman If you’ve ever attended a ceremonial groundbreaking for a school, restaurant, corporate headquarters or other new building, you understand the symbolism of that first turn of the dirt. The groundbreaking ceremony signifies the start of that construction project. In most cases, however, months or even years have already been spent preparing the land for future growth, as planners and developers work behind the scenes to make the property “shovel ready.” Attempting to market a property that is not shovel ready can be a significant barrier to making a commercial property sale. In fact, it’s hindered some significant transactions right here in Southwest Florida. But what does it mean to have a shovel ready property, and why is it so important? What Does Shovel Ready Mean? The term shovel ready became popular during the Great Recession, as part of the American Recovery and Reinvestment Act of 2009. The legislation placed funding priority on projects that could begin construction rapidly, in hopes of jumpstarting the economy by providing investment and employment opportunities quickly. The term “shovel ready” became an important buzzword, and an even more important strategy, in commercial real estate. Although there’s no standard definition for shovel readiness, the term typically refers to commercial sites that are entitled/permitted and ready to be developed. All of the front-end planning and due diligence has been completed: Environmental studies and soil analysis have been conducted and approved environmental permits are in hand, infrastructure is in place (or at least in process), and planning and zoning processes have been completed. In other words, the site is compliant with local, state, and federal regulations and prepared for the quick start of construction. A shovel ready site also has a clear title, with no questions as to its ownership to make the transfer of ownership simple. Many states and municipalities support shovel readiness through a site certification program—in fact, more than two-thirds of U.S. states have a site readiness certification, although there are inconsistencies between them and no national standard to follow. While Florida does not have such a program, some public-private partnerships are working to fill the gap. Utility providers Duke Energy and Florida Power & Light both partner with Enterprise Florida on site readiness initiatives. Enterprise Florida also offers site preparedness grants to rural communities looking to expand and attract business. While getting a large property shovel ready can require a significant investment in both capital and time, the benefits to the seller and the buyer both outweigh the disadvantages. Why is it Important for Land to be Shovel Ready? Having a shovel ready site offers differentiation for property owners seeking to market their land for sale, particularly in a hot market like Southwest Florida. While a shovel ready site is not exactly turnkey for a buyer, it will reduce their start-up costs, risk and the time it takes them to get to market.  Businesses and builders looking to ramp up quickly and establish their presence in the market will seek out shovel ready sites in order to hit the ground running. Consider this: In Southwest Florida, it is not out of the ordinary for a commercial project to take up to two years to obtain all of the necessary land use and civil engineering permits. While permitting requirements and other regulations obviously vary from county to county, similar timelines can be expected in many metropolitan areas. For a business seeking to relocate its headquarters quickly, a two-year wait on top of the actual construction timeframe can make even the most desirable location unattractive. In addition to reducing time-to-business, prospective buyers also want to reduce up-front costs and mitigate risk.  Having all of the entitlements completed in a shovel ready site creates less chance of a surprise that will delay construction or require additional financial outlay. When sites are targeted, selected, and prepared for economic development before going to market, they are more attractive opportunities for buyers. Those that attempt to sell a site without first making it shovel ready may struggle, particularly in a competitive commercial real estate market. Case Study: Lee County Port Authority’s Skyplex An excellent example of this can be found in Lee County, with the property designated for Skyplex. Skyplex is a 1,800 -acre property located on the north side of Southwest Florida International Airport property, that includes more than 900 acres targeted primarily for office sites: corporate headquarters, office complexes, and science and technology companies. The remaining land will be targeted for aviation-related uses, open/green space, wetland preservation and storm water management.  The Port Authority-owned Skyplex property is ideally located for commercial development. Situated at one of the nation’s largest airports in terms of land mass, Skyplex is convenient to Interstate 75, Daniels Parkway, Alico Road, and Colonial Boulevard. The site is located within a Foreign Trade Zone, which offers numerous cost-saving benefits. Finally, a large workforce is located within a short distance, as recent development and transportation corridor improvements have shortened the commute for those in Lehigh Acres, Fort Myers, and South Lee County. The first tenant to move into Skyplex was Sky Walk, a Publix-anchored shopping center that opened in 2017 and proved the site’s value to builders. That same year, one of Lee County’s largest employers, Gartner, announced that it would build a new 143,000 square foot campus on a 19-acre Skyplex parcel. Since then, Alta Resources has constructed a $21 million dollar facility at the Port Authority-owned commercial property. Neither Alta nor Gartner were strangers to the area– both already had a large footprint in the Gateway area, so Skyplex was a natural progression for them. The key to continuing this momentum at Skyplex is shovel readiness, according to Don Schrotenboer, real estate consultant and managing partner of Realvizory. “Headquarters wanting to relocate don’t want to wait two to three years that it takes sometimes to get through the entitlement process to reposition a property,” Schrotenboer told us on our most recent episode of the “What’s Developing in Southwest Florida” podcast.