Foreign Investment Spurs Next Boom

The following is an HTML version of the Real Estate Florida feature that ran in the April 2012 issue of Real Estate Forum. REFL is part of the magazine's ForumLocal series of features. Click here to view this story in its original format. 

Miami has long billed itself as the Gateway to Latin America. Now, the city—and, to a lesser extent, all of Florida—appears to be the gateway for international real estate developers and investors looking for a safe place for their dollars (or euros or ringgits) to land.

Indeed, as the next wave of commercial real estate development gets underway in Florida, Miami is leading the charge, and international investors are fueling the impending boom. From multibillion-dollar mixed-use developments currently in the planning phases and condo towers rising from the dirt to trophy and triple-net assets trading hands, global investors have pegged Florida, and specifically Miami, as a refuge for their currency.

"We have been approached by investors from Brazil, Chile, Venezuela and other Latin American countries," says Jeff Bartel, chairman of Benworth Capital, a hard equity lender in Coral Gables. "We're also seeing a great deal of interest from East Asia, in light of the massive Genting and Swire projects planned in Miami's CBD. International interest will trend up even more through next year with emerging Latin American markets."

Late last year Bayfront 2011, a subsidiary of Genting Malaysia Berhad, snapped up 13.9 acres of prime land in Downtown Miami for $236 million. The company is planning Resorts World Miami, a $3-billion mixed-use project that will include hotel, convention, entertainment, restaurant, retail, residential and commercial facilities.

"Resorts World Miami will be a landmark mixed-use development," says KT Lim, chairman and CEO of the firm, part of the Genting Group, an Asian conglomerate. "Downtown Miami has experienced dramatic residential and commercial growth in recent years, and we believe the addition of a large-scale mixeduse and entertainment complex will be a welcome addition, further elevating the area's status as a global destination."

The Genting Group has a 20-year track record of investing in the US. The firm entered Florida 11 years ago when it acquired Miami-based Norwegian Cruise Line; today, it owns 50% of NCL.

"This deal is not only a testament to Downtown Miami's emergence as a destination, it's also a strong indicator of its viability as a solid long-term investment," says Alyce Robertson, executive director of the Miami Downtown Development Authority. "Projects such as this can have a significant economic impact on our region, enhancing Downtown Miami's standing as a world-class global city that will continue to attract national and international visitors and commerce."

But developments breaking ground don't stop with Genting. Swire Properties is laying the groundwork for Brickell CitiCentre, a nine-acre mixed-use development in the heart of Miami's Brickell Financial District. A total of six towers will sit atop a substantial retail complex.

When it's completed in late 2015, the first phase of BCC will offer about 4.3 million square feet, including 520,000 feet of retail shops, 800 condo units in two towers, 243 hotel rooms, 93 serviced apartments and two small office towers of 110,000 square feet each. HSBC Bank USA closed on a $140-million loan for the project this past March.

According to an independent study by Miami Economic Associates, BCC is expected to generate $1 billion in overall economic impact. The project is expected to create an average of 1,700 jobs per year during a four-year construction phase and roughly 3,800 permanent positions upon completion.

"Brickell CitiCentre will be a game changer for Downtown Miami, enhancing its emergence as a vibrant urban core," says Swire president Stephen Owens. "The project will bring significant retail opportunities to the area and activate our streets with a pedestrian-friendly experience."

THE NEXT CONDO BOOM

Despite predictions that Downtown Miami's condo inventory—inflated due to the last boom—would sit dark for years to come, condo demand outpaces supply in the urban core. And residential developers are once again coming off the sidelines to build.

Newgard Development Group is planning the $170-million BrickellHouse condo. The project sold half of its 374 units less than four months after launching the sales program. Construction on the building, which will include street-level office, restaurant and retail space, is set to get underway in the third quarter of 2012.

"International buyers, especially those from Latin America, are driving the condo market turnaround in Miami," says Harvey Hernandez, chairman and managing director of Newgard Development. "These buyers pay cash and put down as much as 70%, which is a welcome change from the days of the real estate boom when people were overleveraging their properties."

The Related Group has more than 20 new Miami projects in condos, marketrate apartments and affordable housing. It recently started construction on the mid-priced MyBrickell condos and has announced plans for another neighborhood project, Millecento.

Why the rush to break ground? Downtown Miami is now officially one of the most active residential real estate scenes in the nation. A market-defying 93% of the 22,785 condo units built since 2003 are now occupied, primarily with fulltime residents, according to an independent Residential Closings & Occupancy study commissioned by the MDDA.

"Miami is a unique market," says John Chassen, a partner in Bilzin Sumberg's Real Estate and Distressed Property Groups. "Foreign investors aren't looking for opportunities just anywhere in the US. They're putting money specifically into South Florida. That's the kind of movement that causes developers like the Gentings and Swires to decide Miami is a more resilient city than others—one that snaps back faster."

Related Group CEO Jorge Perez says the desire of international buyers to purchase in Miami has created a mini-boom, increasing land values close to the prices realized during the top of the market. The international investors are helping to fund the construction of the next wave of condos.

"We're requiring much more cash upfront for all our new condo developments," he says. "In the two where sales have already been launched, we require 40% of the total purchase price at construction start and the balance to be paid over the construction period. The high equity requirements should eliminate speculation, which was the main factor in the collapse of the housing market in 2008 and 2009."

FILLING UP OFFICE TOWERS

International dollars are also helping to backfill Miami's office glut. More than 1.2 million square feet has been delivered in the past two years, but it hasn't been absorbed as quickly as urbancore condos. Still, the occupancy rate is steadily rising and international companies are among those taking down significant blocks of space.

"South Americans and Europeans are buying residential real estate and then deciding to open a business here," says Christian Driussi, VP for Brickell Bay Office Tower. "In most cases, they start with a small office ranging from 700 to 3,000 square feet. More than 30% of the 100,000 feet of office space we signed last year went to companies based outside the US."

International tenants have also helped 1450 Brickell reach 77% occupancy in just 21 months on the market during one of the worst commercial real estate environments that Downtown Miami has ever experienced. International tenants include global reinsurer Swiss Re America Holding Corp., London-based insurance provider Catlin Insurance Co. and Spanish banking institution BBVA Compass.

"Miami has become an urban city that is attractive because of its globalization, infrastructure and amenities," says Tere Blanca, president and CEO of Blanca Commercial Real Estate. "Miami is still the most comfortable and secure environment for any company in the world that wants to be active in Latin American and Caribbean economies, including European companies looking to enter new growth markets."

Beyond Downtown Miami, 396 Alhambra Circle is getting a multinational tenant boost as the two-tower class A office and retail complex approaches 50% occupancy. In late December 2011, HBO Latin America signed on for three full floors of the 15-story North Tower and two adjoining full floors of the seven-story South Tower. International architecture firm RTKL and Madrid-based multinational Internet company Terra Networks are also among the project's newest tenants.

SURE THINGS AND RISKY BETS

But those with capital aren't looking for just any investment opportunity. They're generally looking for safety—be it in trophy assets or net-leased properties. Others are trading in safety for opportunities to get higher yields.

"Many foreign investors are looking at trophy properties because they want safety," says Ross Manella, a real estate attorney at Hinshaw & Culbertson. "They want a property that will not be subject to the vagaries of a recession. I've done transactions where my clients have been one of 40 bidders. There are many cash buyers chasing the same marquee assets. But it's a bifurcated market. There's not much going on at the low end."

Calkain Cos. just set up an office in Ft. Lauderdale to complement its Tampa office. The Reston, VA-based triple-net lease specialist is also responding to demand from internationals for safe investments on marquee properties. Patrick Nutt, managing director of the new office, says international players see net-leased property as an easy, passive way to maintain an investment in the US. "We've seen a significant uptick in dollars coming from companies in Colombia and Venezuela in the past couple of years," he says. "They still look at the US as a safe haven."

Espacio USA, the American arm of Madrid-based real estate firm Inmobiliaria Espacio, snapped up 1400 Biscayne Center nearly two years ago. The mixed-use office and retail complex in Downtown Miami offers a dramatic turnaround story. Espacio came in with about $1.5 million in tenant improvements to spark new interest in the complex. In less than two years, it's brought occupancy from 11% to 70%.

"Miami has a very powerful future," says Maribel Goldar, director of leasing and marketing for Espacio USA. "The opportunities right now in Spain are not good. Miami has development opportunities, so it's a must for us to be here."

On the other end are distressed assets, which are still in the picture here. According to Real Capital Analytics, South Florida has $996 in distressed commercial real estate value per capita. That's second to Manhattan, which posts $2,455. But international investors are clearing out their fair share of Florida distressed commercial assets.

One of the most visible deals involved the Omni Center. Local real estate investors Perez, Sergio Rok and Jimmy Tate scooped up the $161-million bank note for the center and Hilton Miami Downtown, a mixed-use office, retail and hotel complex on Biscayne Blvd. But Genting swooped in four months later and bought them out for the Resorts World project, leaving the original investors with a significant—and quick—profit.

"There are numerous foreign investors looking for distressed assets as well as strong core assets," says Warren Weiser, chairman of Continental Real Estate Cos. in Miami. "It's an interesting and eclectic group of investors coming from Israel, Russia, Hong Kong, Malaysia and South America."

TOO MUCH FOREIGN MONEY?

With so much foreign investment in Miami, the question becomes, is there an inherent risk in having so many international dollars putting a shot in the arm of Florida's commercial real estate economy? That depends on whom you ask.

"If there's an external shock to the system, it could definitely throw a kink into the works and cause investors and developers to become more cautious," Chassen says. Given the economic situation in Europe, Driussi adds, there is a chance that if the markets don't perform, Europeans will not come to Miami.

Always the optimist, Blanca sees no risk—only opportunity. In fact, she points to a greater diversity in international investment into Florida. "We've seen infrastructure-related investments by Spanish companies into our ports and highways," she says. "I imagine there will be other opportunities in industries beyond the obvious sectors like financial services and hospitality."

Next question: With so much new development going on, is South Florida setting itself up for the next real estate bubble? Boom-bust cycles are inevitable. But developers are going in with both eyes open.

"Real estate is an imperfect market where people don't have full knowledge of what others are doing," Perez says. "There could be new supply that exceeds these demands, as in the past. We're hoping that we've learned the lessons of the past and that developments aren't started until real buyers, with substantial equity, have committed to the jobs."

Hernandez says the activity taking place today is not the same that occurred during the last real estate cycle. Developers are taking more time to create quality projects that respond to user demands, target diverse markets and ensure that buyers are in it for the long haul. "Although we can't predict exactly what we will happen in the next five to 10 years," he says, the new approach to development "will help hedge some of the risk inherently involved in real estate and will help us avoid the mistakes that occurred during the boom."