A Global Guide for In-House Counsel: Doing business in a rapidly changing world

Real Estate – Inflation

How is the real estate market in your jurisdiction being affected by inflation?

Florida is a large state with over 25 million residents, separated into very distinct economic environments: South Florida (Miami, Fort Lauderdale and Palm Beach); Tampa/West Coast; and the rest of the state. Though the populated markets in South Florida and Tampa/West Coast can be treated similarly, the remainder of the state is far more rural and should be treated separately.

So far, the data demonstrates that higher inflation has had little or no impact on the residential real estate market in the more populated and wealthy areas. Recent surveys of title companies reveal that a significant portion of real estate purchasers for properties in excess of $1 million do so without lenders and that that percentage has been increasing. These markets are also driving Florida’s continued population growth. According to data from the U.S. Census Bureau, Florida’s population grew by 14.6% from 2010 to 2020, but the number of housing units increased by just 9.7%. Since Covid-19, for example, these markets have seen a greater influx of financial service and technology companies, all with well-paid employees looking for luxury residential real estate. Also, without a personal state or local income tax, Florida residents often have ten percent of their income to spend on other expenses, such as real estate.

For working class families, and more rural areas, the outlook may not be as rosy. Residential real estate prices have increased significantly at an energetic pace. Although they are predicted to “soften” in 2023, there is no indication of any drastic decrease in prices. Add that to increased interest rates and cost of living inflation, working class families in Florida are limited in new home purchases. Construction industry data for new residential homes in this price range (i.e., $250,000-$700,000) will continue at a healthy pace through 2023, but are expected to slow at the end of the year. Existing owners can sell their homes at a profit, but cannot afford the replacement. Rather than holding out hope that prices will suddenly return to where they were pre-pandemic, many buyers and sellers are exploring alternative options like “rent-to-own” programs.

Renovation at all levels, rather than new purchases, is robust and will continue to be very strong. Contractors have a back log of work, and often are more selective in choosing projects.

Contractors are not willing to negotiate prices and not agreeable to commit to a completion date. Currently, a contractor’s entitlement to additional monies for the increased cost of materials between the time of contract execution and delivery is often an area of intense contract negotiation. Compromises and protections are available to both the owner and contractor if each party is willing to take some risk.

“Residential real estate prices have increased significantly at an energetic pace. Although they are predicted to “soften” in 2023, there is no indication of any drastic decrease in prices”

Are there opportunities that real estate investors should be aware of, particularly in the rental market?

In the last two years, residential rental rates have rapidly increased to levels never seen before, at all price points. Rental offerings are open for only a few days, with landlords only accepting tenants with the best credit, no pets and, sometimes, those that can pay a greater portion of rent up-front. It is not uncommon for rental rates during the rental season to range from $15,000-$30,000 per month for above-average properties.

The greatest opportunity for investment may be purchasing a home that is outdated and devote the time and money to modernise. Expect to invest in a new kitchen, bathrooms, flooring and wall coverings. Easier said than done – renovation costs (and longer construction times) have increased significantly. Expect to pay a contractor the costs of the renovation, plus a fee of 20-25%. But, once the property is available to rent, obtaining a tenant should not be difficult, especially if you are contemplating renting only for the winter season. Investors often recoup all their annual costs for a winter seasonal rental, and then use the property for their own use or pure profit for the remainder of the year.

On the commercial side, investment in the development and construction of 55 + and assisted living facilities has been strong and has no indication of slowing. Florida’s population is older and often wealthy. The demand for high-end assisted living facilities and people willing to pay that cost will not decrease. Anecdotally, there is a strong demand for “mid-level” assisted living facilities. In other words, facilities that are clean, safe and offer some of the same services, but at a less expensive cost.

Does your jurisdiction pose any significant risk of real estate prices stagnating due to rising inflation vs declining GDP? If so, how can investors protect themselves against these risks?

For the residential market, the influx of buyers moving from out of state is expected to prevent prices from any significant decrease, as opposed to places with stagnant or shrinking populations. If an investor has purchased at the height of the market and cannot sell at a profit, the rental option or rent-toown option is often used to hold the property until prices start to rise. Rental markets are strong for investors.

The significant risk lies in the ownership and rental of office space. With more employees working remotely, businesses have less need for large office space and are opting, instead, for smaller rentals with office hoteling or “hot desking.” Hoteling is reservation-based unassigned seating, whereas hot desking is reservation-less unassigned seating. Both are popular. Office building owners are expected to create smaller rental premises to accommodate this increased demand.

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