By Gay Cororaton, Chief Economist, MIAMI Realtors®
One potential effect arising from the takeover by regulators of two regional banks is credit tightening and more selective lending as banks seek safer investments to prevent any impairment in their financial condition. Increased allocation towards less risky investments will tend to favor geographic markets with strong economic and real estate fundamentals like South Florida.
While the current banking distress is still unfolding, the impact of the two bank failures appears to be contained through the swift action of the Federal Reserve, the Treasury, and the FDIC to calm depositors by compensating the depositors of Silicon Valley Bank and Signature Bank for all losses. The regulators also established a $250 billion fund for depository institutions to borrow from to meet withdrawals. Thus, the current distress is not likely to lead to the same seismic impact as during the Great Recession when real estate lending contracted. Loans held by commercial banks fell by 18% from December 2008 ($1.7 trillion) to December 2011 ($ 1.4 trillion).
How strong is South Florida’s economy compared to other markets? In a study of 25 selected major markets, I looked at 10 economic and commercial real estate indicators: job growth, wage growth, and vacancy rates and rent growth in the multifamily, office, industrial, and retail markets. The selected markets are associated with 20 cities included in the Case Shiller Price Index and five secondary markets that have experienced strong housing demand, namely, Austin, Boise, Salt Lake City, Houston, and Orlando. I then ranked these 25 selected markets on the 10 categories. Compared to the traditional gateway markets of New York, Boston, Chicago, Washington DC, San Francisco, and Los Angeles, the Miami metro area experienced faster job and wage growth. Miami-Dade County also had lower vacancy rates and higher rent growth in most instances. Overall, the Miami-Dade market emerged as the strongest commercial real estate market among 25 selected markets based on the 10 indicators.
- Sustained net migration from movers from New York, New Jersey and California
Since the pandemic, Florida has experienced the highest migration of people from other states and from abroad. From April 2020-July 2022, Florida saw the largest net increase in migration of 797,809 people, outpacing Texas (639,314), North Carolina (248,898) and Arizona (212,851). On the other hand, California had the largest net outmigration (699,9040) followed by New York (-556,885).
MIAMI Realtors® research shows that New York, New Jersey, and California accounted for 42% of out-of-state households who moved to South Florida in 2021. The median income of households who moved from other states was higher than the median income for that county in about half of the states where households came from. In Miami-Dade, the median income of households who moved into their own home purchased with a mortgage was $97,300. The presence of high-income movers increases the resiliency of South Florida’s housing market to the impact of higher mortgage rates.
Migration is continuing in 2022. According to a NAR study of USPS data, the Miami metro area experienced the largest inbound moves since the pandemic through 2021, with inbound moves up nearly 60% in 2022 compared to 2019.
Driver’s license exchange data from Florida Department of Highway Safety and Motor Vehicles database shows that more than 583,200 people exchanged their licenses for a Florida license, 28% more than the average of the previous six years and 36,200 more than the pandemic-triggered migration of 2021. New York drivers surrendered the highest number of licenses (61,205, + 35% from the 6-year average), followed by New Jersey (30,837, +28%), and California (28,957, + 57%).
- Job growth (3.9%) outpaces national rate (3.3%) as of January 2023
The Miami metro area is creating jobs faster than the pace nationally. Stronger job growth means more demand for housing and commercial real estate space for new businesses. In January 2023, Miami-Ft. Lauderdale-West Palm Beach’s total employment in the private sector measured on a seasonally adjusted basis rose 3.9% compared to 3.3% nationally. Except for the New York-Newark-Jersey City metro area where jobs rose at a faster pace (4.1%), the Miami metro area’s job growth outpaced that of the other gateway markets: San Francisco-Oakland-Hayward metro area (3.3%), Los Angeles-Long Beach-Anaheim (3.4%), Chicago-Naperville-Elgin (2.8%), Boston-Cambridge-Nashua (3.1%), and Washington DC-Arlington-Alexandria (2.5%).
- Wage growth (9.7%) outpaces national rate (4.1%) as of 2022 Q3
Another measure of the robustness of an economy is wage growth. With strong job growth, the average weekly wage of in private establishments in the Miami metro area rose 9.7% year-over-year as of 2022 Q3 (latest data available) compared 4.1% nationally. Average weekly wages rose at below 5% in the other gateway markets: Boston metro area (2.8%), New York metro area (3.4%), Chicago metro area (3.8%), Los Angeles metro area (4.1%), and Washington DC metro area (6.3%), and in San Francisco, the average weekly wage fell 9%, likely due to the job cutbacks in the tech sector where wages are relatively higher.
However, while wages rose strongly, wage growth still slightly fell behind the rent growth during 2022 Q3 (11%) as well as the price appreciation of single-family homes (16%) and condos/townhomes (17%).
- Apartment rent growth (4.8%) outpaces national rate (2.7%) as of February 2023
The sustained migration into South Florida and sustained job growth is a strong driver of apartment demand. Rent data from ApartmentList.com shows that rent growth in the Miami metro area is generally outpacing rent growth the gateway cities. As of February 2022, the median rent on a 2-bedroom apartment was up 4.9% in the Miami metro area compared to the New York metro area (4.8%), San Francisco (1%), and Los Angeles metro area (2.3%), and Washington, DC (3.2%). Meanwhile, apartment rents have contracted in Boise (-1%), Phoenix (-2.7%), and Las Vegas (-3.5%).
Rising interest rates will tend to raise cap rates, which in turn puts downward pressure on commercial real estate prices unless the cap rate increase occurs through an increase in rent. Thus, markets with higher rent growth like South Florida are better positioned to see an increase in cap rates through higher net operating income growth (rent increases) rather than through a decrease in commercial prices.
- Miami-Dade office vacancy rate (16.1%) is lower than nationally (18.2%) as of 2022 Q4, with low sublet space
Due to its business-friendly environment and low tax rates, South Florida has attracted tech, finance, legal, and medical companies such as Citadel, Kirkland and Ellis, Thoma Bravo, and recently, Kaseya.
With its strong job growth and relatively lower fraction of workers working from home, Miami-Dade County’s office vacancy rate as of 2022 Q4 stood at 16.1% compared to 18.2% nationally, according to Cushman and Wakefield’s office market report covering 90 markets. Except for Boston (12.5%), Miami-Dade’s office vacancy rate was below that in the Los Angeles CBD (24.5%), San Francisco (24.1%), New York Downtown (22.7%), Chicago (23.1%), and Washington DC (19.5%). Miami-Dade’s office vacancy rate is also lower than in Houston (26%), Dallas (21.6%) , Austin (21.8%), Phoenix (24.3%) and Atlanta (22.4%).
Moreover, Miami-Dade does not suffer from a high fraction of office space being sublet by tenants. More than 5% of office space is being sublet in New York (7.1%) and in San Francisco (6.5%) compared to just 0.6% in Miami-Dade. Sublet space poses greater revenue risk for landlords because tenants who are subletting the space may ultimately not renew the lease or may reduce their leased space if they are not able to sublease the space to short-term occupiers.
Office rent rose 3.4% while office rents fell in Washington, DC (-1.9%), San Francisco (-2.5%), and New York (-3.4%).
- Miami-Dade industrial vacancy rate (2.1%) is lower than nationally (3.3%) as of 2022 Q4
The industrial commercial real estate market has continued to benefit from sustained e-commerce shopping and to provide efficient and quick last-mile delivery services to online shoppers. Traditional brick-and-mortars are also creating a seamless online and in-store shopping experience, increasing the demand for fulfillment and distribution centers closer to where customers live to reduce transportation costs.
Nationally, the industrial vacancy rate stood at 3.3% , according to Cushman and Wakefield’s industrial report. Except for Los Angeles (1.3%), Miami-Dade’s industrial vacancy rate (2.1%) was lower compared to that in Suburban Maryland (2.9%), New Jersey Central area (3.2%), New Jersey Northern area (2.4%), New York Outer Boroughs (4.2%), Boston (3.8%), Chicago (3.9%), and San Francisco North Bay area (5.7%).
With a low vacancy rate, industrial asking rent in Miami-Dade increased a searing rate of 42% as of 2022 Q4 to nearly $14/sq.ft. per year, practically about the same rate as Los Angeles (43.9%) and Phoenix (42.5%).
- Miami-Dade retail vacancy rate (3.1%) is lower than nationally (5.3%) as of 2022 Q4
Nationally, retail vacancy rate in shopping centers (excluding malls, outlet centers, airport department stores) stood at 5.7% nationally as of 2022 Q4, according to Cushman and Wakefield shopping center report, a decline from the 6.5% vacancy rate in the prior year. With increased job growth and migration, Miami-Dade County posted the lowest retail vacancy rate at 3.1% compared to the gateway markets and across the 25 selected markets: San Francisco (6.5%), Los Angeles (5.7%), Chicago (8.4%), Boston (4%), and Washington DC (4.8%). Rents were up 8.4% year-over-year compared to San Francisco’s decline in rents (-4.8%).
 While the current banking distress is still unfolding, the impact of the two bank failures has been contained thus far through swift action by the Fed, the Treasury, and the FDIC to compensate depositors for all losses and to create a $250 billion liquidity fund that depository institutions can tap into.
 Federal Reserve Board – Joint Statement by Treasury, Federal Reserve, and FDIC
 Total non-farm employees and seasonally adjusted average weekly wages at the metro area level are from US Bureau of Labor Statistics. Apartment rent growth for 2-bedroom units is from ApartmentList.com. Quarterly rental vacancy rates are from US Census Bureau. Office, industrial, and shopping center retail vacancy rates and rent growth are from Cushman and Wakefield market reports. The geographic data coverage of Cushman and Wakefield differs from US Census Bureau, BLS, and ApartmentList.com. For example, Cushman and Wakefield reports data for Miami-Dade County, which I associated to the job growth and wage growth data for the Miami-Ft. Lauderdale-West Palm Beach metro area.
 I got the ranking for each of the 10 categories and then got the median rank. I used the median because a high ranking in one category can pull the overall ranking upwards or downwards. I then ranked the median rank.